Is Predicting Goodwill Impairment Rolling a Loaded Dice? : An Examination of Goodwill Impairment Prediction Models

Abstract: This study examines the predictability of goodwill impairments in a U.S. GAAP setting. Using the methodology developed by Hayn and Hughes (2006), we first analyze whether the predictability of goodwill impairments has increased since the implementation of SFAS 141 and SFAS 142. We then proceed to integrate corporate governance variables to investigate their potential contribution in detecting these events. Our results suggest that the predictability of goodwill impairments using accounting information has improved since Hayn and Hughes' (2006) original study. However, we do not discern a better performance of previously developed prediction models when extending them with new independent variables related to boards of directors and CEOs. Our study contributes to previous literature assessing the reliability of goodwill accounting and the effects of corporate governance mechanisms on goodwill impairment decisions.