SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted that managers will, on average, use the fair-value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on management’s future actions (including managers’ conceptualization and implementation of firm strategy). Agency theory predicts managers will, on average, use the unverifiable discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory based predictions, does not confirm the private information hypothesis.

Tax audits are a necessary component of the tax system, but policymakers and others have expressed concerns about their potentially adverse real effects. Understanding the causal effects of tax audits has been hampered by lack of data and because typically tax audits are not randomly assigned. We use administrative data from random tax audits of small businesses to examine the real effects of being subject to a tax audit. We find that audited firms are more likely to go out of business following the audit. The effect is concentrated in firms that underreport their taxes, although we find some evidence that the administrative costs of an audit also negatively affect firm survival. Among firms that continue as going concerns, we find evidence that audits have adverse effects on future revenues but no effect on future wages, employment, or investment. Finally, we find that tax audits have side benefits, causing firms to make changes to improve their tax efficiency.