The Effect of SFAS No.142 on Predicting Future Cash Flows

This study investigates the effect of the unverified managerial discretion added by the new goodwill accounting standard (SFAS No.142) on goodwill's ability to predict future cash flows. Using firms affected by SFAS No.142, I find that goodwill's ability to predict the future cash flows has decreased from the pre- to the post-adoption of SFAS No.142 period. Further analysis indicates that the decrease in goodwill's ability to predict future cash flows is more significant for the sample firms that I identify as the potential manipulators. The overall results lead evidence to Richardson et al. (2005, 2006) and Watts's (2003a, 2003b) view that the FASB's push for fair value accounting causes to a decline in the reliability of financial reports and a deterioration in their quality.