Impair Me to Heaven: Big Bath Accounting and Market Reactions - A Quantitative Study on Goodwill Impairments and Stock Price Effects in the Swedish Stock Market

Abstract

This study investigates whether newly appointed Chief Executive Officers (CEOs) in Swedish publicly listed firms engage in big bath accounting by strategically timing goodwill impairments, and how such events influence stock market reactions. Utilizing a panel dataset of 3,354 firm-year observations from 2005 to 2020, we employ a logit model to assess the probability of impairment following CEO turnover, and an event study framework to evaluate cumulative abnormal returns (CARs) around annual report disclosures. The findings reveal that the likelihood of goodwill impairment increases significantly in the first fiscal year after a CEO transition, suggesting managerial discretion persists under IFRS standards. Furthermore, while standalone impairments result in negative abnormal returns, the market reaction is neutral when they coincide with CEO turnover. This interaction is statistically significant in wider event windows, indicating that investors perceive impairments by new CEOs less as opportunistic earnings management and more as credible signals of strategic renewal. These findings offer insights into the application of impairment rules and the interpretation of earnings management in the Swedish institutional setting.