Segment Management to Delay Goodwill Write-downs

Managers can use the flexibility inherent in the accounting standards for segment reporting to delay or avoid goodwill write-downs. Goodwill is tested for impairment at the reporting unit level and the accounting standards define reporting units as operating segments or components of operating segments. Since operating segments are defined according to the management approach, or how the chief operating decision maker chooses to view the firm's operations, a firm can manage its segment boundaries to allocate acquired goodwill in a way that delays or avoids impairments. We find that in acquisition years, firms with higher book-to-market ratios are more likely to increase the number of reported segments, and that these high book-to-market, segment-increasing firms are associated with delayed goodwill impairments.