This study examines factors that influence managers? choice to recognizegoodwill impairment under Statement of Financial Accounting Standards No. 142(SFAS 142). The debate surrounding SFAS 142?s effectiveness centered on whether themanagerial discretion allowed by the standard could lead to biased decisions inmanagers? determination of goodwill impairment.I use a conditional logistic regression to compare 130 firms that did recognize theexisting impairment losses (write-off firms) to a control sample of 130 matching firmsthat did not recognize the existing impairment losses (no write-off firms). I find that thelikelihood of recognizing the existing impairment losses significantly decreases whenthe managers have sizable holdings of in-the-money stock options. On the other hand,the likelihood of recognizing the existing impairment losses significantly increases whenfirms have stronger corporate governance, as measured by percentage of outsidedirectors, percentage of outside directors? ownership, number of busy directors, andseparation of CEO and Chair titles. Additionally, I find that during the period leading up to the SFAS 142 write-off,there have been more favorable changes in corporate governance structures of the writeofffirms, compared to that of no write-off firms. These favorable changes in governancestructures occurred to a greater extent in firms that have delayed the recognition ofexisting impairment losses to the sample period compared to the firms that have beenrecognizing the write-offs on a timely basis. These results are consistent with the notionthat favorable changes in corporate governance induce firms to take SFAS 142impairment losses, which managers have avoided taking in the prior period.Overall, the results imply that managerial incentives do affect the implementationof standards that expand managerial discretion and highlight the importance of corporateboards in the monitoring of discretion allowed by such standards.
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