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This paper examines whether financial disclosures on acquired entities allow investors to effectively predict goodwill impairment, a task that has become more important following the recent abolishment of goodwill amortization. In predicting goodwill impairment, we use variables relating to the postacquisition performance of the operating segment(s) to which the acquired company's assets are allocated as well as to the characteristics of the acquisition. We find that available disclosures do not provide financial statement users with information to adequately predict future write-offs of goodwill. In fact, the characteristics of the original acquisitions are more powerful predictors of eventual goodwill write-offs than those based on segment disclosures of the acquired entities' performance. We also find that goodwill write-offs lag behind the economic impairment of goodwill by an average of three to four years. For one-third of the companies examined, the delay can extend up to ten years. Although most of our analyses are conducted on goodwill generated before the introduction of Statement of Financial Accounting Standards No. 142 (SFAS 142), certain features of the sample and the analysis suggest that the results are generalizable to the current reporting regime. Sensitivity tests on a smaller sample of goodwill write-offs made upon the adoption of SFAS 142 confirm this expectation. [ABSTRACT FROM AUTHOR]

We present a model of managerial discretionary disclosure under litigation risk. In our model, the manager bears a personal cost of litigation in addition to the costs prescribed by the legal system. Investors share litigation damages with their attorneys and therefore are less than fully insured against market losses. We find that the interaction between the manager's level of aversion to litigation and investors' degree of insurance determines the quality of the manager's disclosure. This is a "cheap-talk" model similar to that of Crawford and Sobel [1982]. Like C&S, we find that, in general, the manager's and investors' preferences do not coincide and that there is a partition equilibrium that is consistent with managers providing a range forecast of earnings. In our setting, we are able to extend C&S and determine what condition is necessary for congruence of preferences resulting in full disclosure and informationally efficient security prices, consistent with managers providing point estimates of earnings. We also address a suggestion of C&S to test the robustness of the partition equilibrium by relaxing the assumption that investors have complete knowledge of the manager's preferences, and we find that, in general, the partition equilibrium is robust. We also show that under restrictive conditions, when the preferences of the manager are not known, a biasing equilibrium exists, consistent with managers providing biased forecasts of earnings. [ABSTRACT FROM AUTHOR]

This paper considers a setting in which managers have private information about the values of their firms and can communicate it to uninformed investors through the use of two signals: capital structure and inventory accounting method. We show conditions under which a separating equilibrium with debt alone does not exist. The two-signal equilibrium involves a partitioned separation in which the highest quality firms choose FIFO and the lower quality firms choose LIFO, and all firms then distinguish themselves within these two partitions through capital structure choices. The analysis helps to explain the many observed empirical regularities about firms' capital structure choices and LIFO/FIFO choices and, in addition, produces numerous testable predictions about the relation between capital structure and inventory accounting method. [ABSTRACT FROM AUTHOR]