Determinants of Exercising Discretion in Goodwill Impairment Decisions by Listed Companies

Abstract:

This study examines the determinants of goodwill impairment decisions， focusing on the exercising of discretion in goodwill impairment decisions by Chinese listed companies. Fixed-effect logistical regression findings indicate that incidence of goodwill impairment is negatively associated with a company’s operating cash-flow volatility， and the companies with stable profitability have higher incidence of goodwill impairment. In addition， goodwill impairment decisions in high goodwill balance companies or non-state-owned companies tend to be more responsive to operating cash-flow volatility and stability of profitability； Compared with the first 6 years after the adaption of the Accounting Standards for Enterprises No.8—Impairment of Assets， the incidences of goodwill impairment are more significantly associated with operating cash-flow volatility and stability of profitability in the second 6 years. These evidences suggest that discretion is exercised opportunistically by listed companies according to their operating and profitable status when making goodwill impairment decisions.

Key words:goodwill impairment;discretion;goodwill;accounting standard