Busy Directors and Monitoring: Evidence From Goodwill Impairments

Abstract

Prior research has shown that the adoption of SFAS 142 resulted in inflated goodwill levels and untimely impairments by managers. One possible cause is that directors are simply too busy to properly monitor the managers, and accordingly, we explore whether busy directors impact managers’ decisions to impair goodwill. We find that firms with busy directors, with less time to perform monitoring duties, recognize fewer and smaller goodwill impairment losses. For instance, the likelihood of recognizing goodwill impairment losses is around 10% lower in firms with busy directors. Our results are confirmed using an exogenous shock to director busyness from the termination of board seats in merged firms. We also find that managers with busy directors tend to recognize goodwill impairment losses in a less timely manner. Finally, these effects are more evident in firms with weaker internal and external monitoring mechanisms and are driven by busy directors who are independent or members of the audit committee. Overall, our results suggest that effective monitoring by less busy directors, especially independent and audit committee members, can restrict management's discretion afforded by SFAS 142 in recognizing goodwill impairments.