How Does the Subsequent Accounting for Goodwill Affect Managers’ Acquisition Decisions?

Accounting standard setters are considering abandoning the impairment testing model for goodwill and returning to an amortization-based standard. Proponents of impairment testing argue that the threat of future impairments causes managers to feel more accountable for their acquisitions, which in turn can lead to better acquisition decisions. I perform an experiment to test whether the subsequent accounting for goodwill impacts managers’ felt accountability and acquisition decisions. I find that an impairment testing regime increases managers’ feelings of accountability, but can also cause managers to pursue acquisitions with lower expected returns. Interestingly, I find that managers subject to amortization plus impairment testing (i.e., a “hybrid” method) feel as accountable as those subject to impairment testing only, but are less likely to choose acquisitions with lower expected returns. My findings support the notion that an impairment testing model makes managers feel more accountable, but highlights the potential unintended consequences of an impairment testing regime.