Benjamin Segal

The Information Content of Goodwill Impairments and SFAS 142

Accounting standard setters face a perpetual challenge in balancing relevance and reliability when establishing generally accepted accounting principles. This tension is especially heightened when the nature of the economic information concerns intangible assets. This article presents exploratory evidence about standard setters’ response to this challenge by examining whether Statement of Financial Accounting Standards No. 142 (SFAS 142): Goodwill and Other Intangible Assets altered the information content of goodwill write-offs. To more accurately capture the information of goodwill write-offs, the authors first create a model to estimate expected impairments. The difference between actual write-offs and expected write-offs represents write-off surprises or unexpected goodwill write-offs. The authors document a negative and significant stock market reaction to unexpected goodwill write-offs. On a cross-sectional basis, they find that the market reaction is attenuated for firms with low information asymmetry (their proxy is a high analyst following) and for firms that find it relatively costly to implement impairment tests (their proxy is the inverse of firm size). The authors find no variation in market reaction based on firm complexity (their proxy is the number of firm segments). The negative reaction for the high information asymmetry and larger firms weakens following the adoption of SFAS 142. The latter result is consistent with SFAS 142 critics’ claims that more relevant accounting information, captured by fair value methods, is difficult to implement reliably and thus can reduce the information content of accounting reports.

Enforcement and Disclosure Under Regulation Fair Disclosure: An Empirical Analysis

While Regulation Fair Disclosure (FD) was designed to benefit investors by curbing the selective disclosure of material non-public information to ‘covered’ investors, such as analysts and institutional investors, it can also impose costs. This paper finds that FD levies three kinds of enforcement and disclosure costs. First, investors cannot recover as part of an SEC enforcement action the gains to covered investors from their alleged use of the non-public information. Second, investors lose because the market responds negatively to an SEC enforcement announcement. Third, investors suffer because some companies post their FD filings well after the due date, without earlier public disclosure.

Oops, Our Earnings Were Indeed Preliminary

The market reacts to earnings surprises when firms report different earnings in SEC filings from earnings reported just a few weeks earlier in preliminary earnings announcements. This is a new finding. When SEC filings include material new information, investors incorporate this in pricing company shares. Market reactions are stronger in the case of downward earnings revisions than upward earnings revisions, but an inverse drift in abnormal returns occurs for upward earnings revisions after the SEC filing date. Finally, it is documented that security analysts revise their forecasts upon the preliminary earnings announcement, but ignore the new information in the SEC filings.

Earnings Revisions in SEC Filings from Prior Preliminary Announcements

This article investigates earnings revisions that occur between preliminary earnings announcements and the immediate subsequent Securities and Exchange Commission (SEC) filings. On average, the absolute value of the revision is 2.9% of the market value of equity where earnings were revised by more than US

Are Managers Strategic in Reporting Non-Earnings News? Evidence on Timing and News Bundling

100,000. The authors find that earnings revisions are more likely to occur for firms that are more complex, are more financially leveraged, have greater earnings volatility, have losses, and have switched auditors. They find that investors react to the new information in the earnings revisions but find mixed evidence about whether the act of revision itself indicates lower earnings quality to investors. The authors’ findings suggest that financial analysts, investors, and regulators alike should pay close attention not only to an earnings surprise at the preliminary earnings announcement date but also at the SEC filing date to determine whether a subsequent earnings surprise occurs.

Shorting Companies That Restate Previously Issued Financial Statements

Using a comprehensive sample of non-earnings 8-K filings from 1996 to 2011, we examine whether firms engage in opportunistic reporting of mandatory and voluntary news. We find strong evidence of opportunistic reporting of negative news, especially among public firms. Public firms are more likely to delay disclosure of negative news, report negative news after trading hours, and report on the last day of the week. We also find evidence of opportunistic bundling of news. Our findings support the notion that managers engage in strategic disclosure by delaying or obfuscating negative news in order to mitigate the potential market reaction. Factors such as the risk of litigation, information asymmetry, and corporate governance influence reporting behavior. Further analysis of the market reaction to opportunistic disclosure uncovers no evidence of investor inattention or under-reaction. JEL classifications: G14; G18; K22; M41; M48Using a comprehensive sample of non-earnings 8-K filings from 2005 to 2013, we examine whether firms strategically report mandatory and voluntary news. In particular, we examine whether firms report negative news when investor attention is low and whether they bundle positive and negative news. Our findings support the notion that managers believe in the existence of investor inattention and strategically report negative news after trading hours. These results particularly apply to public firms, where equity market pressures provide stronger incentives to mitigate market reaction to news by exploiting investor inattention. Further analysis of the market reaction to strategic disclosure uncovers no evidence of investor inattention, consistent with market efficiency. We also observe that public firms are more likely to strategically disclose through news bundling and that the likelihood of this increases with the likelihood of strategic disclosure through timing.

Do Firms Hedge Optimally? Evidence from an Exogenous Governance Change

A new disclosure in Form 8-K is required when a company needs to warn investors that they cannot rely on previously issued financial statements. Using such disclosures in 2005, the authors find that the initial stock market reaction to the filing of the Form 8-K is negative, with an average three-day abnormal return centered on the Form 8-K filing date of –1.5% for a sample of 182 such disclosures. There are even greater average negative initial market reactions to announcements of errors or misapplications of GAAP. The authors further find that abnormal returns continue to drift downward for a sample of errors and misapplication of GAAP and reach a cumulative abnormal return of –5.3% by (trading) day 43 after the initial disclosure of the Form 8-K. Thus, investors can take advantage of such non-reliance disclosures and short the underlying stock.

Management's Tone Change, Post Earnings Announcement Drift and Accruals

We ask whether firms hedge optimally by analyzing the impact the NYSE/NASDAQ listing rule changes have had, which exogenously imposed board composition changes on a subset of firms, on financial risk management. Using new proxies for the extent of financial risk management in non-financial firms we find that treated firms reduce their financial hedging, in a difference-in-difference framework. The reduction is concentrated in firms with higher conflicts of interests, such as a high CEO equity ownership level, which exposes them to more idiosyncratic risk, and a higher occurrence of option backdating. We reject the hypothesis that newly majority-independent boards reduce financial hedging due to a lack of knowledge. First, we find no difference in financial hedging for firms where SOX mandated the addition of a financial expert relative to those that already had such expertise. Second, shareholder value increases more during the period of time of the listing rule deliberations for treated firms that hedge prior to the treatment. We conclude that some firms hedge too much reducing shareholder value potentially to the benefit of under-diversified CEOs. We also show that board independence serves to reinforce monitoring which allows boards to cut back on excessive financial hedging.