McNair, Frances E.
Spencer, Barbara A.
Blair, Benjamin F.
Rigsby, Jr., John T.
Other Advisors or Committee Members
Campbell, Randall C.
Date of Degree
Dissertation - Open Access
Doctor of Philosophy
College of Agriculture and Life Sciences
Goodwill, for financial accounting purposes, is an intangible asset on the balance sheet that represents the excess of the amount paid for an acquired entity over the net fair value of the assets acquired. The Financial Accounting Standards Board has recently issued a new mandate. This new guideline eliminates annual amortization of goodwill and requires annual valuation for potential goodwill impairment and consequent writedown. Determining the amount of impairment requires management estimation, thus, allowing managerial discretion in developing the impairment amounts. Managerial discretion may then be used to manage earnings. Earnings management occurs when managers exercise their professional judgment in financial reporting to manipulate earnings. Prior literature documents that managers have strong motivations to manage earnings. Managers sometimes respond to these motivations by managing earnings to exceed key earnings thresholds. The new goodwill guideline might be used as an earnings management tool. Thus, this dissertation examines whether earnings management results from the judgmental latitude allowed in estimating goodwill when earnings will otherwise just miss key earnings benchmarks. Specifically, this study tests goodwill impairment writedowns in a cross-sectional distributional analysis for the year 2002, the first year following the effective date of the new goodwill standards. The sample is taken from the financial information of publicly-traded companies tracked in the Compustat and CRSP databases. To identify firms that are likely to have managed earnings to exceed key benchmarks, earnings per share, both before and after goodwill impairment writedowns, is compared with two thresholds established in prior research. The first, is a positive earnings per share; and the second is the prior year’s earnings per share. Results from applying both tobit and logistic regression models suggest that managers are exploiting their discretion in recognizing goodwill impairments to manage earnings. Thus, this project contributes to the earnings management literature in that it highlights the exploitation of increased judgmental latitude for earnings management purposes.
Swanson, Nancy Jewel, "The new guideline for goodwill impairment" (2011). Theses and Dissertations MSU. 4575.