Working Papers

Learning from Peers? The Spillover Effect of Goodwill Impairment on Peers’ Investment Behavior

Job Market Paper

This paper examines whether the reporting of significant goodwill impairment by a firm (impairment firm, hereafter) affects the corporate investment behavior of other firms in the same industry (peer firms, hereafter). I contend that peer firms learn from the impairment firm’s admissions of failure to extract value from past investments and improve the quality of their corporate acquisitions. Employing a difference-in-differences design on a sample of European acquirers over the period 2003-2016, I find that in the three-year window after the impairment firm’s reporting, acquirers’ cumulative abnormal returns surrounding acquisition announcements are higher if they are peer firms. In addition, when I distinguish between the reasons that led to goodwill impairments loss recognition by the impairment firms, I find that the learning effect on peers’ subsequent investment decisions exists only when the impairment firms provide an external reason for goodwill impairment, as opposed to an internal reason. Further, I find that after the impairment firm’s announcement, peer firms adjust their over-investments to the level predicted by their growth opportunities. In the wake of standard setters’ plans to revise the rules for goodwill and goodwill impairment, these results provide important empirical insights into how goodwill impairment signals valuable information that extends beyond the boundaries of the firm.

The Effect of Disclosure Transparency on Disagreement among Economic Agents: The Case of Goodwill Impairment

With Anne Jeny (ESSEC Business School) and Daphne Lui (ESSEC Business School)

We examine the effect of disclosure transparency on disagreement among analysts, and disagreement between analysts and managers, in the context of goodwill impairment. We contend that more transparent disclosure about goodwill impairment tests conveys to analysts useful information about the parameters used in the complex and often opaque impairment testing process. Drawing on a sample of European companies during 2006-2014, we construct a unique dataset on the transparency of goodwill impairment disclosure and develop two measures of disagreement using textual analysis of analysts’ reports to extract analysts’ opinions about firms’ impairment actions. We show that the level of disclosure transparency is negatively associated with both disagreement among analysts, a proxy for information uncertainty, and disagreement between analysts and managers, a proxy for information asymmetry. Further, we find that only cash-flow-related, but not discount-rate-related, disclosure transparency is significantly associated with both metrics of disagreement, suggesting that disclosure transparency is more relevant when the verifiability of the underlying information is low. This paper contributes to the debate about accounting for goodwill and its related disclosure. It also brings important empirical insights into how textual information in analysts’ reports can be quantified and used to construct new measures of disagreements among economic agents.


Do Managers Respond to Auditors’ Red Flags?


Earnings Management and Labour Dismissals. A Balance Between Political Costs and Ethics

With Nava Cohen (ESSEC Business School), Silvia Ferramosca (University of Pisa), and Alessandro Ghio (Monash University)


Disclosure versus Recognition of Fair Values and Analysts Forecast Accuracy