Causes and Consequences of Transitional Goodwill Impairment Losses

This dissertation investigates the causes and consequences of the goodwill reporting choices made by Canadian firms following the adoption of revised standards on purchased goodwill in 2002. Standard setters believed that by forcing firms to test goodwill for impairment every year, its economic value would be better reflected on the balance sheet, and its reliability and relevance improved. However, critics were worried that the fair value could not be measured reliably enough to warrant the move towards an impairment-only approach, they were concerned about the potential for management interpretation and bias, and they doubted that goodwill impairment losses would provide timely information to market participants. The empirical analyses contained in this dissertation are motivated by this debate. First, the dissertation shows that transitional goodwill impairment losses are associated with managers' incentives to both overstate and understate them, after controlling for economic impairment. Furthermore, independent board of directors and audit committees act as a constraint on Canadian managers' transitional goodwill reporting choices to ensure that the economic value of goodwill is better reflected in financial statements. Second, it is shown that investors perceive goodwill as an asset, and goodwill impairment losses as sufficiently reliable measurements of a reduction in the value of goodwill to incorporate them in their valuation assessments. Lower valuation weights are put on transitional goodwill impairment losses reported by firms with an independent board of directors while a higher valuation weight is put on transitional goodwill impairment losses recorded by firms with market value of equity lower than book value. Finally, the dissertation shows that transitional goodwill impairment losses were impounded in stock prices prior to the adoption of SFAS 142/Section 3062. Overall, the empirical evidence contained in the dissertation is consistent with SFAS 142/Section 3062 improving the quality of the financial information on goodwill provided in the financial statements.