Goodwill Impairment, Securities Analysts, and Information Transparency

The transition from amortization to the impairment-only approach in IFRS 3 and CAS 8 (China's accounting standards) increased managerial discretion when estimating goodwill impairment write-offs, leading to potential earnings management. We assess whether and how managers manipulate goodwill impairment under the influence of analyst coverage in China. Securities analysts serve as external monitors, deterring managers from avoiding goodwill impairment recognition, but analysts might also pressure managers, resulting in understated goodwill impairment and inflated earnings. Using a unique sample of listed firms in China, we find that analyst coverage associates negatively with goodwill impairment, consistent with pressuring from securities analysts. Additionally, the pressure is driven by optimistic forecasts and is more likely to encourage impairment manipulation than real earnings management. We further find that the relationship is weakened in more transparent information environments, measured by firm size, audit quality, and disclosure ratings. Findings are consistent after controlling for potential endogeneity.