Discretionary Goodwill Impairment Losses in Europe

• In Event: Financial Accounting Issues: International Evidence II

Abstract

The Impairment-Only-Approach regarding goodwill has been regularly criticized to offer too much discretion to the management to manipulate goodwill impairment losses. The existing body of research provides mixed results whether managers use their discretion informatively or opportunistically. This paper examines the determinants of discretionary goodwill impairment losses in Europe. We predict non-discretionary goodwill impairments based on economic determinants of goodwill impairment losses in a first step. Afterwards we calculate discretionary goodwill impairment losses and examine the determinants. Our results seem to indicate that discretionary goodwill impairments are used to overstate goodwill impairment losses if the management has the incentive to conduct Big-Bath-Accounting. This opportunistic behavior seems to be constrained by effective corporate governance mechanisms.

Authors

• Sebastian Koch, Goethe-University Frankfurt

• Marius F. Gros, Goethe-Universität Frankfurt