Excess Goodwill and Corporate Performance – Based on the Adjustment Effect of Corporate Market Power

Abstract

The amount of M&A transactions in China's A-share market has been increasing in recent years and goodwill has been accumulating accordingly. Affected by the slowdown in macroeconomic growth and the impact of market environment, the business performance of many M&A targets has declined, frequently triggering goodwill impairment risk. We define goodwill above the industry average as excess goodwill and examine relationship between excess goodwill and corporate performance based on the data consisting of Chinese listed non-financial companies from 2012 to 2018. We further examines the role of corporate market power in adjusting the relationship between excess goodwill and corporate performance. Our tests find that: first, excess goodwill has no positive impact on corporate market performance, but has a significant negative impact on corporate financial performance. Second, the stronger the market power, the more positive the effect of excess goodwill on corporate performance.