Essays on SFAS 142: Adoption timing motives, market reaction and relation between impairment and overpayment in acquisitions

This thesis examines several issues related to the Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangibles ", which changes the accounting for goodwill from an amortization method to an impairment-only approach.; First, I examine whether managers' adoption timing choice is associated with various managerial motives. The empirical evidence is consistent with adoption timing strategies being associated with incentives to reveal low impairment losses as early as possible, to reduce the likelihood of violation of debt covenants, and to smooth income. Second, I examine investors' reactions to the announcement of transitional goodwill impairment losses, and demonstrate that three-day cumulative abnormal returns surrounding the impairment announcements are significantly negative. The stock price reaction is related to adoption timing and cause of the goodwill impairment. Late adopters have more negative stock price responses than early adopters. Firms whose impairment arises primarily from adjustment for accounting measures experience no significant stock price reaction, whereas firms whose impairment results from unfavorable economic conditions experience a negative stock price reaction. Finally, I examine the relation between goodwill impairment and the overpayment in the original acquisitions. The results suggest that transitional goodwill impairment losses capture about two-thirds of the overpayment cumulated over the past 5 years.; My thesis makes three important contributions. First, this thesis expands our understanding of managers' opportunistic behaviors in adoption timing decisions associated with accounting standards. By focusing on the two-year adoption period, I demonstrate that shortening the adoption window does not prevent earnings management. Second, I examine the implications of adoption timing and causes of impairment for stock price reaction to the impairment announcement, which has not been studied in prior research. Third, this thesis represents one of the first attempts in accounting literature to investigate the relation between goodwill impairment and overpayment in business acquisitions.