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Goodwill or “No-will”: The effect of CEO hubris on accounting outcomes

Conference contribution
Authors Emmeli Runesson
Niuosha Samani
Published in Nationell Redovisningskonferens (NRK) i Göteborg, 5-6 November 2015: http://fek.handels.gu.se/sektioner/redovisning/abstracts
Publication year 2015
Published at Department of Business Administration
Language en
Keywords CEO letter, hubris hypothesis, CEO profile, textual analysis, goodwill impairment, M&A
Subject categories Business Administration

Abstract

Purpose – This paper aims to examine the effect of CEO hubris on mergers and acquisitions (M&A) as well as goodwill accounting. Provided that hubristic CEOs pay an exaggerated premium for the target firms in M&A deals, a greater incidence of goodwill is expected to arise, which subsequently leads to future goodwill impairments. Design/methodology/approach – To identify CEO hubris, textual analysis using DICTION is applied to a sample of CEO letters to shareholders from firms listed on the Stockholm Stock Exchange. The tone in the CEO letter is expected to provide an at-a-distance assessment technique to identify a leader’s personality traits. Findings – Hubristic tone in CEO letters is found to be positively associated with the probability of engaging in M&A, the amount of goodwill, and the probability of making goodwill impairments. These findings are consistent with the hypothesis that hubristic CEOs overestimate the future prospects of M&A, which in turn leads to impairment losses when conditions deteriorate. Originality/value – This paper contributes to the literature on CEO attributes, accounting narratives and corporate decision-making by providing evidence that CEO letters carry information about “tone at the top” and can be used to predict strategic choices by management and future accounting outcomes.

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