The impact of goodwill impairment on the performance of listed firms in China

Abstract

Under the background of policy guidance and the rapid capital market development, Mergers and Acquisition (M&A) and goodwill appreciation follow. However, due to the overestimation of goodwill recognition and the following goodwill impairment, there are potential risks for the sustainable development of listed companies. In this study, we investigate the impact of goodwill impairment on the firm’s future performance growth. Our research sample includes Chinese A-share listed companies with goodwill balance and makes some necessary screening. We tend to use the percentage calculating method to measure the goodwill impairment to prevent the possible error caused by the vast difference of the listed firm’s goodwill assets. The main finding of the study is that goodwill impairment has negative impact on next year's or future performance of listed firms in China. According to robustness check, zero goodwill impairment may not have negative impact on future firm performance. In addition, goodwill impairment may cause or be caused by the firms' performance in the current year. This study is helpful to the recognition of goodwill after mergers and acquisitions (M&A) of listed companies, taking into account the potential risks caused by future goodwill impairment. Besides, this study has reference significance for the investors to consider the goodwill impairment of a listed firm before investing it. This study also has regulatory authorities on how to prevent the hidden risks in recognition of goodwill impairment and maintain the stable development of the financial market.