Power needs knowledge: CEO knowledge background and goodwill impairment

Abstract

ABSTRACT We investigate whether and how CEO knowledge background affects goodwill impairment and whether it mitigates investors’ risk assessment of goodwill impairment. We employ CEOs’ educational, financial, and overseas backgrounds to represent their knowledge background. The results, based on a sample of Chinese firms, show that CEOs with a higher level of knowledge background are more likely to test and record a goodwill impairment in a timely manner. In addition, we find that the negative effect of goodwill impairment on abnormal stock returns exists only in firms whose CEOs have a weaker knowledge background. The results of our cross-sectional tests and additional analyses are consistent with our main inference that a higher level of CEO knowledge background facilitates a deeper understanding of goodwill, which mitigates cognitive bias and thereby increases CEOs’ willingness to record a goodwill impairment in a timely manner and ensure investors’ trust.