The Impact Of Goodwill Impairment On Debt Financing Costs

Currently,our economy is stepping onto a high-level development path and gradually stabilizing,in this process,enterprises as the main development engine,the biggest obstacle is financing difficult and expensive problem.Debt financing is currently the most primary financing method for Chinese companies.If the enterprise can continuously obtain debt at a low financing cost,it means that the enterprise has obtained an advantage beyond management,which in turn has a direct impact on its results and long-term growth capacity.The quantity and amount of domestic mergers and acquisitions deals in China have shown explosive growth in years,and resulting huge goodwill impairment losses are causing market stability.The 20 th Congress of the Party pointed out that the most important task of constructing a modern socialist country is to realize high quality economy.To study the detailed factors that may affect the cost of debt financing from the perspectives of goodwill impairment,and thus lower the cost of debt financing,is an essential way to drive the high-quality growth of China’s industry.It is of certain realistic interest to enhance the literature concerning debt financing costs and to help stakeholders appreciate the usefulness of goodwill impairment data from a new angle.Based on the above background,this paper takes the acquisition of Epic Pharma by Humanwell Healthcare at a high premium in 2016 and the provision of huge goodwill impairment at the end of 2018 as a case,and uses the methods of literature research and case study to study the specific impact of goodwill impairment on debt financing costs.First of all,This article makes a summary and analysis of the related documents on the impairment of company’s goodwill and debt financing cost,clarifies the incentives and effects of goodwill impairment accounting,and learns about the varying impact elements and approaches to measuring debt financing costs.Moreover,this paper builds on the available literature and identifies research gaps.The article is organized as six sections: the first one is based on the context of the current "M&A boom" in the capital market,the background of this case study is expounded from the large amount of goodwill impairment accrued by a large number of enterprises and the difficulty of financing faced by companies in general,followed by the analysis of the meaning of this paper,the overall thought process and the research approach used,and lastly,the points of creativity of this paper.In the next section,the current papers on the impairment of corporate goodwill and debt financing cost in domestic and foreign academic circles is carefully combed,and a relative gap is found in the current exploration of the impact of mergers and acquisitions goodwill impairment on debt financing costs.The third section establishes the conceptions around goodwill impairment and cost of debt financing,and sorts out the mechanism of goodwill impairment on the cost of loan financing as the foundation of this research.The fourth section provides the case parties,the rationale for selecting and the full proceedings of this piece of case.The fifth section aims to examine the debt financing level of humanwell healthcare,and then focuses on the impact mechanism of goodwill impairment on debt financing costs.The last division consists of findings and policy recommendations.The following results were obtained from the research and analysis of the case firm.Firstly,the existing approach to goodwill impairment measurement is too self-dependent for companies,which hides the true value of enterprises to some extent and deepens the information asymmetry.Second,the impairment of consolidated goodwill will significantly increase the cost of corporate debt financing.Market investors regard the impairment of goodwill as a negative corporate signal,and demand higher risk premium compensation for companies with impaired goodwill.Third,the impact of goodwill impairment on debt financing costs is lagging behind.Information on impairment of goodwill may often be disclosed in an enterprise’s annual financial report at the start of the second year,so the market will not react obviously in the year when the impairment occurs,and the impact of goodwill impairment on debt financing cost will gradually appear only after the impairment information is disclosed.