Goodwill Impairment, Loss Avoidance Effects and Subsequent Corporate M&A Decisions

Abstract

ABSTRACT Against the background of increasingly serious goodwill impairment, it is important to explore the comprehensive effects triggered by goodwill impairment. This paper explores the economic consequences of goodwill impairment from the perspective of subsequent merging and acquisition (M&A) decision, and attempts to interpret it from the psychological theory of loss aversion effects. The empirical results show that: (1) the firms with goodwill impairment experience decreasing significantly M&A scale and frequency in the future; (2) the results above are more pronounced for the corporates with those managers who are not over-confident, and have more defensive strategies, and higher financing constraints; (3) goodwill impairment improves firm’s investment efficiency by reducing over-investment, and improves subsequent M&A performance. Above results imply that goodwill impairment may prompt managers to be more cautious in M&A activities, and make more value-added subsequent acquisitions. Our findings have important implications for understanding the comprehensive impact of goodwill impairment on corporate M&A decision-making.