Does writing down goodwill imperil a CEO’s job?

• Published in: Journal of accounting and public policy 2023-01, Vol.42 (1), p.107015, Article 107015
• Main Authors: Cowan, Arnold R., Jeffrey, Cynthia, Wang, Qian
• Format: Article
• Language: English
• Subjects: Appointments & personnel changes; CEO turnover; Chief executive officers; Chief executives; Deterioration; Goodwill; Goodwill impairment; Impaired assets; Market value; Mergers and acquisitions; Organizational performance; Reliability; Value
• ISSN: 0278-4254; 1873-2070
• DOI: 10.1016/j.jaccpubpol.2022.107015

•Goodwill impairment charges are positively associated with subsequent forced CEO turnovers.•Goodwill impairment does not predict voluntary CEO turnovers.•Only unexpected goodwill impairment predicts forced turnovers.•Audit quality affects the association between impairment and forced turnover.•The results inform FASB and IASB policy debates on retaining impairment testing. We find that accounting charges for goodwill impairment, which imply a deterioration in the capabilities of acquired assets to generate expected cash flows, provide useful indicators of CEO underperformance. The results show that the size and presence of a goodwill impairment charge are positively associated with forced, but not voluntary, CEO turnovers. This implies that goodwill impairment provides information before CEO changes occur. We also find that goodwill impairment has incremental power to predict forced turnover when it is unexpected based on book value relative to market value of equity and when it runs counter to overall firm performance. The association between goodwill impairment and forced CEO turnover varies with audit quality, consistent with the importance of the perceived reliability of accounting information for its effect on CEO retention decisions. Given that the FASB recently considered eliminating annual goodwill impairment testing (FASB, 2022) whereas the IASB not only prefers impairment testing but is considering requiring additional related disclosures (IASB, 2020), our evidence on the informativeness of goodwill impairment charges is timely.