Research On The Market Effect Of Goodwill Impairment Of Listed Firms

Mergers and acquisitions(M&A)are intimately linked to the creation of goodwill.In recent years,many publicly traded companies are acquired at a high premium to pursue market hotspots,speculate on concepts,and raise stock prices,resulting in rising goodwill.After the impairment test on the goodwill formed in the merger,goodwill impairment refers to recognizing the corresponding impairment loss.For example,if a company was purchased for 200 million RMB but only had 120 million RMB in net assets,would there be an 80 million RMB loss? No,in M&A transactions,these companies frequently claim to have stable output,so the extra 80 million RMB becomes a goodwill item.In most cases,companies hope that the lower the goodwill in an acquisition is better because it lowers acquisition costs.However,if the acquired company is in poor operating condition(not meeting standard performance commitments),a provision for goodwill impairment will be made,resulting in a reduction in corporate assets.An increase in a company’s asset-liability ratio lowers its credit rating,tightens corporate financing channels,and affects its ability to raise funds.As a result,the decrease in goodwill reflects the acquired company’s poor management,which put pressure on its cash inflow side,threatening its solvency.This thesis investigates the dynamic impact of goodwill formation,impairment,and impairment avoidance on a firm’s characteristics,such as information disclosure quality,stock performance,and contribution to systematic and systemic risks.The whole study is divided into seven chapters.Chapter 1 introduces the thesis work.Chapter 2 is the formation mechanism of the listed firm’s goodwill.This chapter aims to identify various determinants of goodwill formation mechanisms,including firm-specific and macroeconomic factors.In this chapter,we identify the factors that influence goodwill formation.The empirical analysis of this chapter shows that firm size,profitability,market-to-book ratio,institutional shareholdings,market risk,audit quality,discretionary accruals,and marketization index increase the goodwill formation,while tangibility,leverage,cash-holdings,accounting conservatism,and earning smoothing decrease it.This chapter also conducts a cross-sectional analysis and discovers that such determinants behave differently in cross-sections.Finally,we show that the firm’s geographic proximity to the capital city of the Chinese provinces acts as a mediating factor for the goodwill impairment formation mechanism.Chapter 3 analyses the factors affecting the impairment of goodwill of listed firms.This chapter aims to identify determinants of goodwill impairment at the firm and macroeconomic levels and identifies potential mechanisms.Initially,this chapter reveals the incidence of corporate goodwill impairment in different regions of China using a comprehensive measure of goodwill impairment(based on previous literature).Next,following the identification of goodwill impairment,we examine its determinants and find that goodwill impairment increases with firm size,profitability,institutional shareholdings,market risk,discretionary accruals,earning smoothing,and marketization index,while decreases with firm tangibility,leverage,market-tobook ratio,cash-holdings,audit quality,and accounting conservatism.In addition,we also tested the goodwill impairment determinant in different cross-sections and discovered that it behaves differently in different types of law enforcement.Finally,we investigate the role of analyst forecasting errors and optimism in mediating the relationship between goodwill impairment and its determinants,and we find that the coefficients of the mediated determinants differ significantly from the non-mediated determinants.Chapter 0 studies the market price effect of the value of goodwill of listed firms.This chapter investigates the impact of goodwill impairment and its avoidance on ex-ante stock price crash risk and its impact on a firm’s profitability and market value.Chapter 0 looks at the firm’s goodwill impairment and the avoidance of its stock performance.First,we examine the relationship between goodwill impairment and stock performance and find that current year goodwill impairment increases the stock price crash risk in the following year.Next,we measured goodwill impairment avoidance in two ways(consistent with previous research),tested their relationship with stock price crash risk,and discovered a positive relationship between them.Firms with more restated accounts,firms under law enforcement scrutiny,financially constrained firms,and operating in competitive markets show a positive relationship between goodwill impairment and ex-ante stock price crash risk.Finally,we use a 3SLS regression approach to show that the negative impact of goodwill impairment on a firm’s profitability results in a lower future market value.This chapter concludes that goodwill impairment and its avoidance increase a firm’s stock crash risk,which lowers its profitability and ex-ante market value.Chapter 0 investigates the market impact of goodwill impairment of listed firms.This chapter examines stock behavior during M&A asset restructuring events(particularly goodwill impairment events)and the market reaction(as an abnormal return and trading volatility)towards it.Specifically,this chapter examines M&A transactions as events,particularly when asset restructuring results in the company’s goodwill impairment.We first sketch the stock return during the days of the three events,taking into account the M&A announcement date,negative appreciation rate during the M&A,and major asset restructuring during the M&A.We discovered that after an M&A,a negative appreciation rate,or a major asset restructuring,the average normal stock return drops dramatically.Second,we compute Cumulative abnormal rate of return(CARR),abnormal return volatility(ARVOL),and abnormal trading volatility(ATVOL)and compare their mean differences between the sample of firms’ stocks ten days before and after the goodwill impairment decision during M&A assets restructuring.The mean value of CARR,ARVOL,and ATVOL in the after-event sample is significantly higher than in the before-event sample,implying that all M&A events impair the firm’s goodwill trigger its average stock returns volatility.We also draw the figures for CARR,ARVOL,and ATVOL and compare them and find consistent depictions.Finally,we test the predictive power of goodwill impairment incidents using the proportionate hazard model,and we find that the fore-mentioned event studies have significant predictive power for the firm’s goodwill impairment.Overall,this chapter concludes that the goodwill impairing M&A events causes reduced stock returns and induces volatility.The impact of a firm’s goodwill impairment on its risk contribution to the market is discussed in Chapter 6.We use the CAPM model to distinguish between the firm’s systematic and nonsystemic risk components.We also employ quantile-based Co Va R approaches to measure a firm’s systemic risk.The firm’s systematic,non-systematic,and systemic risk components are considered its risk contribution to the market to determine its relationship with goodwill impairment.First,we investigate the relationship between goodwill impairment and the firm’s exposure to systematic and non-systematic risk components and find a positive association.We discovered that a onestandard-deviation increase in goodwill impairment results in a 7.44% increase in the systematic risk component and a 3.83% increase in the non-systemic risk component of manufacturing samples.Second,we examine the impact of goodwill impairment on systemic risk components and find that the systematic risk component has consistent results.Third,we investigate the impact of goodwill impairment on ex-ante default probability and find that goodwill impairment increases corporate default probability.Finally,we discover that systematic,non-systematic,and systemic risk components function as transmission channels between goodwill impairment and the likelihood of a corporate default.In particular,systematic risk accounts for 35% of the mediation effects,while non-systematic risk accounts for 65%.Overall,these findings reveal that market participants proactively respond to the firm’s goodwill impairment activity in the shape of such a firm’s risk of default contribution to the stock market.The final Chapter 7 is the research conclusion and research prospects.All of the findings are discussed in this chapter regarding their economic significance,potential research prospects,and future directions.Our findings have several policy ramifications and consequences for the future.For instance,the determinants of goodwill formation and impairment serve as a guideline for policymakers to consider before addressing an operation contract containing the goodwill concept.Our research also demonstrates the negative impact of avoiding goodwill impairment on a company’s stock performance,which helps the company realize the risks of avoiding goodwill impairment,such as ex-ante stock price crash risks.Furthermore,when an acquirer buys a company whose market value is lower than its stated book value,the stock market reacts to such M&A transactions in the form of decreased stock returns.Finally,an increase in goodwill impairment raises the firm’s risk exposure to the systematic,non-systematic,and systemic risk components,indicating that inflated goodwill leads to increased goodwill impairment,a significant predictor of the firm’s overall risk exposure.