Trigger Warnings: When Is Goodwill Impairment Disclosure Informative?

Trigger Warnings: When Is Goodwill Impairment Disclosure Informative? Public Deposited

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This paper examines the information content of financial statement disclosures related to goodwill impairment testing after the implementation of the Statement of Financial Accounting Standards (SFAS) 142. I hand-collect a sample of triggering events that firms disclose at the time of a goodwill impairment announcement. Factor analysis reveals that impairment reasons group into three categories: firm-, industry- or economy-related. I find significant price and volume market reactions to a firm's decision to impair goodwill, but only if a firm discloses firm-specific triggering events. This result may explain previous mixed evidence on market reactions to goodwill impairment announcements that do not account for the triggering event cited by the firm. Additional findings indicate that consistent with the predictions of \\cite{Kim1994}, firm-specific triggering events increase the post-announcement information asymmetry, and predict future goodwill impairments when a firm records multiple impairments. Overall, these results indicate that financial statement users require more detailed firm-specific disclosures related to goodwill impairment testing. The SEC and FASB might consider this finding while developing future disclosure guidance for financial statement filers.

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