Earnings Management through Goodwill Impairment: CEO and CFO tenure impact

Executive summary This paper examines the relationship between the extent of goodwill impairment and the properties of CEOs and CFOs of a selection of FTSE Eurotop 100 Index companies. Prior research indicated that it is likely that CEOs tend to take earnings baths early in their tenure, as the losses can then still easily be blamed on their predecessors, as well as creating a lower benchmark for measuring their own future financial performance. Also, the nature of a specific turnover process and the prior employment of the incoming CEO (hired from within or outside the company) have been considered as an explanatory variable by some studies. The outcomes of this study indicate that the tenure and prior employment of the CEO are significantly associated with a company’s financial reporting behavior in relation to the magnitude of goodwill impairment. However, contrary to expectations, goodwill impairment charges are likely to increase as the tenure of a CEO increases. CEOs promoted from inside the same company are likely to impair goodwill by larger amounts, compared to CEOs hired from outside the company. A significant association between the CFO tenure and prior employment variables and the magnitude of impairment charges was not established in this study.

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