This paper investigates whether family ownership affects decisions to take a writeoff
of the goodwill and the amount written off. This study is based on a panel of public
United States firms. Consistent with predictions based on agency theory and socioemotional wealth (SEW) theory, the findings demonstrate accounting discretion in
goodwill impairment is lower in family firms than non-family firms. The results also
show that first-generation family firms are more likely to exploit accounting discretion
in goodwill impairment decisions than second or later generation family firms, due to
greater concerns associated with the negative consequences of the write-off.
This paper contributes to previous research on accounting in the context of family
firms. Family firms cannot be considered a homogeneous group with the same
propensity to exploit the discretion allowed by accounting rules in highly subjective
fair value measurements. Generational change significantly influences firms’ accounting
choices, leading to more credible earnings and asset values for second or later generation family firms. This study also suggests the earnings management literature would benefit from additional in-depth investigation into how the generational stage of family businesses affects accounting discretion.
Keywords: agency theory, family ownership, goodwill, impairment, socio-emotional
wealth
