DETERMINANTS OF THE CORPORATE DECISION TO RECORD GOODWILL IMPAIRMENT LOSS: CANADIAN EVIDENCE

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Abstract

The initial application of the new goodwill accounting standard enables firms to record an actual goodwill impairment loss in their books without affecting their earnings. The recording of a goodwill impairment loss indicates that the acquiring firm paid an excessive premium at the time of the business combination, and that this goodwill does not enable it to generate future earnings. This study is based on the hubris hypothesis and governance structure and is aimed at predicting whether managers will choose to record a goodwill impairment loss. Using a sample of high-tech Canadian firms, we noted that firms where: (1) managers showed excessive confidence, (2) the CEO cumulates the function of chairman and (3) the dominant shareholder was also a manager tended to record a goodwill impairment loss. The results are consistent with those of previous studies, which suggest that systematic differences exist between firms that choose alternative accounting methods. Hence, the results provide further support in the developing framework of a positive theory of accounting methods.

Keywords: Goodwill, Impairment Loss, Hubris, Governance Structure, Accounting Method

How to cite this paper: Rakoto, P. (2008). Determinants of the corporate decision to record goodwill impairment loss: Canadian evidence. Corporate Ownership & Control, 5(2-3), 393-402. https://doi.org/10.22495/cocv5i2c3p8