Earnings Management, Goodwill Impairments, and Long‐Run Stock Performance

This study examines whether earnings management (EM) by acquirers and targets is associated with subsequent goodwill impairments and post‐merger stock performance. Recognizing that goodwill impairments may reflect both economic losses and managerial discretion, we document three findings. First, aggressive accrual‐ and real‐based EM, particularly in stock‐financed mergers, is positively associated with the likelihood of subsequent goodwill impairments. Second, among firms recognizing impairments, pre‐merger EM is associated with weaker stock performance before impairment recognition. Third, targets' real‐based EM is associated with persistent underperformance following impairment recognition. Overall, the findings are consistent with the view that goodwill impairments reflect both economic losses and managerial discretion and suggest that goodwill impairments do not fully reflect the long‐run consequences associated with targets' real‐based EM.