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Aalto University School of Business Master's Theses are now in the Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Accounting | Accounting | 2016
Thesis number: 14375
Executive equity incentives and conditional conservatism: Evidence from SFAS 142 goodwill write-offs
Author: Saloniemi, Sami
Title: Executive equity incentives and conditional conservatism: Evidence from SFAS 142 goodwill write-offs
Year: 2016  Language: eng
Department: Department of Accounting
Academic subject: Accounting
Index terms: laskentatoimi; accounting; liikearvo; goodwill; johtajat; managers; johtaminen; management; kannustaminen; incentives
Pages: 56
Key terms: accounting; laskentatoimi
Abstract:
Objectives of the study

Following Basu's (1997) pioneering research, I adopted the Basu coefficient to measure conditional conservatism (among others, Ball et al., 2003; Ball et al., 2000; Ball et al., 2005; Ball and Shivakumar 2005; Jarva, 2009, 2014;). Basu uses "negative and positive unexpected annual stock returns to proxy for 'bad news' and 'good news'. More specifically, I use this measure to examine the roles of conditional conservatism and executive equity incentives in executives´ choice of recognizing goodwill write-offs. The motivation of this study comes from the debate surrounding goodwill write-offs, which centered on whether managerial discretion allowed by United States Generally Accepted Accounting Principles (US GAAP) could lead to biased decision making in goodwill write-offs. I contribute to existing research by investigating

Research method and data

Sample of firms include Standard & Poor's (S&P) 500 index, S&P Midcap 400 index, and S&P Smallcap 600 index constituents from 1992 to 2010. The initial data contains 59 200 observations. The data used to examine the conservatism, executive equity incentives and goodwill write-offs is sourced from several sources within the WRDS database. Asymmetric timeliness(AT) of the earnings are analyzed with OLS regressions and SFAS 142 goodwill write-offs are analyzed with logistic regression.

Findings of the study

The results provide some new support for the claim that that company holding lower sensitivity of executive wealth to stock price have greater AT than company having higher sensitivity of executive wealth to stock price. However, the result indicates that conservatism and executive equity incentives do not seem to play an active monitoring role in executives´ decisions to report SFAS 142 goodwill write-offs.
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