Motivation of discretionary goodwill impairments

Abstract

With the recent wave of mergers and acquisitions (M&As), the total amount of goodwill balances has significantly increased in the Chinese capital market. Meanwhile, high accounting standards have become crucial in subsequent goodwill measurements. Thus, this study determines whether goodwill book value is consistent with corporate performance and examines the motivation of discretionary goodwill impairments. Based on the panel data of A-share listed companies from 2007 to 2020, the fix-effect regression results indicate that beginning goodwill balance is negatively associated with corporate performance, whereas acquired goodwill is positively associated with such performance. In addition, the interactive effect shows a significant negative correlation between the initial goodwill balance and corporate performance. Overall, this study reveals that goodwill balance continuously damages corporate performance, and that the motivation of discretionary goodwill impairments should focus on decreasing goodwill balance by withdrawing goodwill impairments.