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Using Real Activities to Avoid Goodwill Impairment Losses: Evidence and Effect on Future Performance

Journal of business finance & accounting, 2015-04, Vol.42 (3-4), p.515-554 [Peer Reviewed Journal]

2015 John Wiley & Sons Ltd ;Copyright Blackwell Publishing Ltd. Apr-May 2015 ;ISSN: 0306-686X ;EISSN: 1468-5957 ;DOI: 10.1111/jbfa.12107

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  • Title:
    Using Real Activities to Avoid Goodwill Impairment Losses: Evidence and Effect on Future Performance
  • Author: Filip, Andrei ; Jeanjean, Thomas ; Paugam, Luc
  • Subjects: Accounting theory ; Cash flow ; Cash flow forecasting ; cash flow management ; Control groups ; Decision making ; Earnings ; earnings management ; Economic performance ; Financial reporting ; Goodwill ; goodwill impairment ; Impaired assets ; Loss recognition ; real activities ; Studies ; U.S.A
  • Is Part Of: Journal of business finance & accounting, 2015-04, Vol.42 (3-4), p.515-554
  • Description: We examine whether managers postpone the recognition of goodwill impairment by manipulating cash flows and the consequences of such a strategy on future performance. According to SFAS 142, an impairment loss must be recognized if the reporting unit's total fair value to which goodwill has been allocated is less than its book value. A growing body of empirical evidence shows that managers delay the recognition of goodwill impairment in accounting books. However, past literature is silent on how managers convince various gatekeepers (e.g., auditors, financial analysts) that recognizing an impairment loss is unnecessary although it seems economically justified. SFAS 142 requires managers to forecast future cash flows to justify the decision to recognize, or not, an impairment loss. Therefore, we predict that managers manipulate upward current cash flows to support their choice to avoid reporting an impairment loss. We also test whether or not this real earnings management is detrimental to future performance. Based on a sample of US firms over the period 2003–2011, we document that firms suspected of postponing goodwill impairment losses exhibit significantly positive discretionary cash flows compared to various control groups. We also find that this real activities manipulation is detrimental to future performance.
  • Publisher: Oxford: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0306-686X
    EISSN: 1468-5957
    DOI: 10.1111/jbfa.12107
  • Source: Alma/SFX Local Collection
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