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Does the value relevance of managers’ goodwill accounting choices depend on economic uncertainty?

Författare och institution:
Peter Frii (Företagsekonomiska institutionen, Redovisning)
Publicerad i:
Nordic Accounting Conference in Copenhagen 15-16 November 2012,
Konferensbidrag, refereegranskat
Sammanfattning (abstract):
In this study, I intend to explore how the value relevance of unverifiable accounting information is affected by economic uncertainty, defined as abnormal widening credit default swaps (CDS) spreads. Specifically, I will utilize the periods prior to and following the eruption of the financial crisis in 2007 to test whether the stock responsiveness to goodwill accounting is altered for companies relatively more affected by the new uncertain economic environment than for relatively unaffected industries. The underlying logic, elaborating on the reasoning of Povel et al. (2004), is that managers of industries severely affected by the macroeconomic environment (i.e. financial crisis) are more prone to align accounting information to its underlying economics, than are industries relatively unaffected. Thus, I identify two disparate industries that are at least theoretically, due to sensitivity to the market fluctuations, incentivized to value goodwill diametrically different from each other. That is, I will compare the value relevance of the banking industries’ and the pharmaceutical industries’ valuation of the unverifiable accounting item goodwill in the periods prior to and after the eruption of the financial crisis to test whether the value relevance of unverifiable accounting items is associated with industries severely affected by economic uncertainty. While a number of studies have documented long-term value irrelevance of goodwill accounting (e.g., Li et al., 2005; Chen et al, 2004), some recent studies have found that the economic environment might be associated with temporal variations in the value relevance of unverifiable accounting items (e.g., Hamberg and Beisland, 2009; Hamberg et al., 2011). For instance, Hamberg and Beisland (2009) find that some industries’ accounting information is value relevant during periods of economic slowdowns and value irrelevant during periods of economic growth, implying that investors at least find accounting information under certain conditions to be value relevant. Based on the above reasoning, I hypothesize that before the eruption of the financial crisis banks and pharmaceuticals valuation of goodwill was value irrelevant, but as of its inception banks valuation altered into becoming value relevant. An additional conjecture of this study is that bank managers in response to the financial crisis altered their valuation of goodwill, and, thus, significantly impaired goodwill in the period following the eruption of the financial crisis. To test the hypotheses of this study I intend to use an association test based on the association between abnormal stock returns with return and goodwill impairments. In addition, in order to make sure that results of the value-relevance test are driven by managements’ accounting choices, and not by other noise such as media coverage, I intend to test whether banks in relation to pharmaceutical industry have significantly altered their impairments of goodwill. To do so, I intend to apply a probit model to test whether banks as of the financial crisis are more likely to impair goodwill. Results consistent with the hypotheses of this study would imply that banks are as of the financial crisis more prone to impair goodwill than relatively unaffected industries, and as a result of this change of impairment policy in conjunction with the economic uncertainty, investors will be more sensitive to the valuation of goodwill, which improves the value relevance of banks’ goodwill accounting.
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2013-03-27 14:35

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