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Goodwill Impairment Charges under SFAS 142:Role of Executives’ Incentives and Corporate Governance
Lale Guler,
City University Of New York - Baruch College
ABSTRACT. I provide evidence on the roles of managers’ stock option holdings and corporate governance in managers’ choice to recognize goodwill impairment losses. I find that the likelihood of recognizing impairment losses significantly decreases when managers have sizable holdings of in-the-money stock options. On the other hand, the likelihood of recognizing impairment losses significantly increases when firms have stronger corporate governance, as measured by percentage of outside directors, percentage of outside directors’ ownership, number of busy directors, and separation of CEO and Chair titles. These inferences hold after controlling for firm-specific and industry variables as well as other determinants of write-offs. The results have implications for the debate surrounding SFAS 142’s effectiveness which centered on whether the level of managerial discretion allowed by the standard could lead to biased decisions in managers’ determination of goodwill impairments.
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