Goodwill Impairment, Securities Analysts, and Information Transparency

Abstract

The transition from amortization to the impairment-only approach in IFRS 3 and CAS 8 (China's accounting standards) increased managerial discretion when estimating goodwill impairment write-offs, leading to potential earnings management. We assess whether and how managers manipulate goodwill impairment under the influence of analyst coverage in China. Securities analysts serve as external monitors, deterring managers from avoiding goodwill impairment recognition, but analysts might also pressure managers, resulting in understated goodwill impairment and inflated earnings. Using a unique sample of listed firms in China, we find that analyst coverage associates negatively with goodwill impairment, consistent with pressuring from securities analysts. Additionally, the pressure is driven by optimistic forecasts and is more likely to encourage impairment manipulation than real earnings management. We further find that the relationship is weakened in more transparent information environments, measured by firm size, audit quality, and disclosure ratings. Findings are consistent after controlling for potential endogeneity.

Keywords:

• Goodwill impairment
• Securities analyst
• Information transparency
• Earnings management
• Emerging market

JEL codes:

• M4
• G2
• G3

Acknowledgements

We thank the editor, Yuan Ding, and two anonymous reviewers for their insightful comments, which greatly enhanced the theoretical development and contributions of this paper. We are also grateful to Lucy Chen and the participants at the 2019 AAA and 2019 EAA Annual Conferences. Their suggestions helped us develop valuable and in-depth content.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 Topics covered during each meeting can be found in the IASB Update, available at https://www.ifrs.org/news-and-events/updates/iasb-updates/.

2 We do not collect data on M&A transactions because firms can record goodwill impairment without the occurrence of M&A transactions in the current year. The sample selection should not rely on M&As to filter firms with goodwill accounts. Further, goodwill may require impairment long after the M&As, when there is little or no connection to the transaction terms. Since the main objective is to examine whether goodwill impairment is managed to meet analyst forecasts, the details on M&A transactions are not within our research scope.

Additional information

Funding

This work was supported by National Natural Science Foundation of China: [Project No. 71672204, 72002129].