Determinants and consequences of timely asset impairments during the financial crisis

Gunn, Joshua L.; Khurana, Inder K.; Stein, Sarah E.

doi:10.1111/jbfa.12287

Cited by 23 publications

(22 citation statements)

References 92 publications

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“…Furthermore, empirical evidence suggests that goodwill write‐offs tend to be delayed when debt covenants and earnings‐based bonus plans are affected by impairment charges and when public enforcement is weak (Beatty & Weber, 2006; Glaum, Landsman, & Wyrwa, 2018; Ramanna & Watts, 2012). On the contrary, Gunn, Khurana, and Stein (2018) suggest that firms with a conservative reporting strategy are inclined to record goodwill impairment in a timelier manner.…”

Section: Literature Reviewmentioning

confidence: 99%

Determinants of initial goodwill overstatement in affiliated and non‐affiliated mergers

Ahn

Cheon

Moonchul

2020

Business Fin & Account

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This study examines the determinants of goodwill overstatement at the time of mergers in a Korean setting. In the Korean M&A market, there are two types of mergers: mergers between independent companies (non‐affiliated mergers) and mergers between companies under common control (affiliated mergers). This study extends the literature by examining the factors likely to cause goodwill overstatement in both types of mergers. The results reveal that in affiliated mergers, goodwill at the time of a merger tends to be overstated when controlling owners have higher equity ownership in the target than in the acquirer. By contrast, information uncertainty in the target value causes initial goodwill overstatement in non‐affiliated mergers. We also find that monitoring of independent institutional investors with concentrated holdings against overpaying for the target is more pronounced when controlling owners in affiliated mergers have incentives to overpay for the target. In affiliated mergers, acquirers tend to write off goodwill more frequently when controlling owners have higher equity ownership in the target than in the acquirer. In non‐affiliated mergers, information uncertainty in the target value is significantly associated with subsequent goodwill write‐offs. These results suggest that the type of merger has important consequences for initial goodwill recognition and subsequent impairment.

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Section: Literature Reviewmentioning

confidence: 99%

Determinants of initial goodwill overstatement in affiliated and non‐affiliated mergers

Ahn

Cheon

Moonchul

2020

Business Fin & Account

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“…Gunn, Khurana and Stein [17] studied the quarterly reports and accounts of about 3,000 US companies during the years 2007 to 2010 and showed that companies reporting more accurately in the pre-crisis years, recording more assiduously impairments as a way of presenting the assets at their most correct value, were also those that presented impairments more consistently during the years of financial crisis (from 2007 to 2009). In the remaining companies, there was a delay in the recording of impairments, as a way to avoid transmitting bad news.…”

Section: Studies Analyzed About the Importance Of Impairmentsmentioning

confidence: 99%

Impairments: Materiality and Fiscal Impact on Cape Verde’ Major Contributors

Teixeira¹,

Lopes²,

Godinho³

2019

IJAFRM

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This study aims to evaluate the material level of impairment losses registered by the Cape Verdean companies, as well as to analyze its fiscal impact. For this purpose, we ran the Cape Verdean' accounting standards about this subject and studied the tax procedures on impairment registration in the country. In the empirical study, we performed an analysis of the annual report and accounts for 2012 and 2011 of fifty-seven large companies in Cape Verde. These were the benchmark years for establishing the country's major contributors and the normative framework on impairment' application. Evidences showed that, in its vast majority, companies registered impairment losses, namely on customer debts and inventories. We also found that, empirically, impairment value was materially relevant and had impact on tax level, giving the meaningful association between payed taxes (negative association) and turnover (positive association), and registered impairment. In a future work, already in progress, we intended to verify the impairment registration' during the period between 2013 and 2016. We will also try to understand if there is a greater social responsibility by Cape Verde' major contributors.

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“…However, the costs of violation are lower for firms that can obtain a waiver than for those that cannot. macroeconomic distress or questionable accounting quality (see, e.g., Amiram & Owens, 2017;Gunn, Khurana, & Stein, 2017). 12 Beneish and Press (1995a) investigate the stock price reaction to a DCV disclosure.…”

Section: Debt Covenants and The Costliness Of Covenant Violationsmentioning

confidence: 99%

The market response to implied debt covenant violations

Stice

2018

Business Fin & Account

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Previous research documents a negative stock price reaction to the announcement of a debt covenant violation (DCV). However, managers of firms that violate a covenant often obtain waivers and renegotiate debt contracts with lenders before the SEC requires them to disclose a violation. Firms therefore may not report some covenant violations, and prior research has not documented their cost to shareholders. Exploiting the fact that over half of all private debt contracts contain a debt covenant reliant on some variation of accounting earnings, I construct a sample of firms with debt contracts that contain at least one earnings‐based covenant. Combining earnings‐based‐covenant contract values from debt agreements with information publicly available at the earnings announcement date, I predict firms in violation of a debt covenant and provide evidence that equity investors react negatively to these implied violations, regardless of whether managers ever disclose that a violation occurred. In additional tests, I find no evidence of a negative stock price reaction to a firm disclosure of a DCV that market participants could infer from previously reported earnings, but I demonstrate that equity investors do react to the disclosure of a violation of a balance‐sheet covenant that would not have been inferable. This study complements previous research on DCVs by documenting the costliness to shareholders of violations subsequently resolved with lenders but not disclosed.

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Determinants and consequences of timely asset impairments during the financial crisis

Cited by 23 publications

References 92 publications

Determinants of initial goodwill overstatement in affiliated and non‐affiliated mergers

Determinants of initial goodwill overstatement in affiliated and non‐affiliated mergers

Impairments: Materiality and Fiscal Impact on Cape Verde’ Major Contributors

The market response to implied debt covenant violations

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