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

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.

KEYWORDS:

• Goodwill impairment
• M&A decisions
• M&A performance

JEL:

• G34
• M41
• G11

Disclosure statement

No potential conflict of interest was reported by the author(s). , and the National Social Science Foundation of China [18BJY018]

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2022.2088347

Notes

1. In China accounting standards, the recoverable amount is defined as the higher of the fair value net of disposal costs and the present value of estimated future cash flows.

2. Because of the limitation of space, the regression results of the control variables are omitted. The full regression results can be found in the supplemental material of the paper.

3. Following the way of calculating the company strategy scores in the literature, the existence of a sample of companies for the past five years is required, which leads to a certain degree of missing samples in this part of the regression.

4. The reason for setting the criterion at 2% is that the mean value of insider holding reduction in the research sample is 2%.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71962029].