Goodwill Impairment Losses and CEO Compensation

Abstract

Corporate acquisitions are arguably one of the most important and biggest decisions CEOs have to make; yet many acquisitions do not create value for shareholders. We examine whether CEO compensation is reduced when the fair values of the acquired business units are written down (i.e., goodwill impairment losses are recognized). We find that there is a significant reduction in cash-and option-based CEO compensation as firms recognize goodwill impairment losses. In particular, we find that the decrease in CEO option-based compensation is driven by firms that are not R&D intensive, while the decrease in CEO cash compensation is driven by firms that acquired larger targets in the recent past and have CEOs with a shorter tenure. Our results suggest that compensation committees make CEOs pay a price for non-value maximizing acquisitions and discourage them from further undertaking risky investments especially by reducing the risk-inducing component of their compensation packages.

Disclosure of Goodwill Impairment in the Baltic States

“…The analysis of scientific literature allowed discovering a great deal of research proving that company managers have the greatest influence on making decisions whether or not to disclose goodwill impairment and many reasons impact the decisions that are reached by company managers (Lemans, 2010;Ramana & Watts, 2011;Saastamoinen & Pajunen, 2012;Iatridi & Senftlechner, 2014;Darrough et al, 2014;Giner & Pardo, 2014;Jordan & Clark, 2015).…”

“…The binary logistic regression model, which was also applied by scientists Verriest & Gaeremynck (2009), Bepari et al (2011), Darrough et al (2014) in order to research goodwill impairment decisions, is written down in the following manner:…”

“…When amendments were introduced to goodwill accounting provisions, it was anticipated that financial statements would correspond to economic reality and their users would consider them more reliable. However, as scientific research shows, fair value-based goodwill impairment testing provides managers with a possibility to selfishly manipulate information (Lemans, 2010;Ramana and Watts, 2011;Saastamoinen & Pajunen, 2012;Iatridi & Senftlechner, 2014;Darrough et al, 2014;Giner & Pardo, 2014;Jordan & Clark, 2015). Hence, the main problem is that when the accounting method for goodwill amortization is replaced with the unpredictable testing for goodwill impairment, the external users of financial statements find it difficult to establish when goodwill impairment occurred and when goodwill impairment will occur.…”

Research on the Signal Effect of Performance Compensation Commitment on the Impairment of Goodwill in China

“…Due to the unverifiability of fair-value estimation, the new standard has increased the discretionary power of managers. Based on the unverifiable discretion of the goodwill impairment test, many scholars have conducted in-depth studies on the motivations of managers to recognize goodwill impairment (Beatty & Weber, 2006;Lapointe-Antunes et al, 2008;AbuGhazaleh et al, 2011;Hamberg et al, 2011;Onesti & Romano, 2012;Ramana & Watts, 2012;Giner & Pardo, 2015;Iatridi & Senftlechner, 2014;Filip et al, 2015;Li & Sloan, 2017;Glaum et al, 2018), information transmitted by goodwill impairment (Holthausen & Watts ;Bens et al, 2011;Bostwick et al, 2015;Knauer, 2016;Qu et al, 2017), and the consequences of recognizing goodwill impairment (Darrough et al, 2014;Rehman & Shahzad, 2014;Qu et al, 2017). Beatty & Weber (2006) specifically examined the motivations of managers to recognize goodwill impairment.…”

“…Less research has examined the consequences of goodwill impairment for companies. Darrough et al (2014) found that when a company recognizes the impairment of goodwill, the CEO's cash compensation and option salary will decrease. In addition, Carcello et al (2019) showed that the probability of auditor dismissal is associated with goodwill impairment, Ayres et al(2019) indicated that the non-audit fees a client pays are inversely related to the likelihood of impairment in settings where goodwill is likely to be impaired..…”