Debt crisis, age and value relevance of goodwill: evidence from Greece

Abstract

Purpose The purpose of this study is to investigate the value relevance of goodwill and its additional aspects during a long-term period in Greece. Furthermore, by implementing two of the most popular value relevance models, the Ohlson’s price and Easton and Harris’ return model, this study examines the impact of goodwill on Greek stock prices from 2007 to 2018, a period of 12 years in which International Financial Reporting Standards (IFRS) are applied. Furthermore, this study analyzes how goodwill’s value relevance changes as it ages and during the Greek debt crisis. Design/methodology/approach In order to test the value relevance of goodwill we implemented two of the most popular value relevance models, Ohlson’s price and Easton and Harris’ return model. Our sample consists of non-financial listed Greek companies that reported positive goodwill accounting balances on their financial statements during the financial period from 2007 to 2018. Finally, we applied fixed-effects regression model to all equations. Findings The results provide evidence that the year-end goodwill accounting balance is value relevant, and that the debt crisis has improved goodwill’s information content. Finally, the empirical findings suggest that only current year acquired goodwill is value relevant compared to older goodwill, and therefore, goodwill’s impact on stock prices is decreasing as it ages. Research limitations/implications A noteworthy limitation of this study is that it focuses on a specific code-law country Greece, which is a relatively small economy compared to the whole Eurozone. This research contributes to the research literature as it confirms other research findings in the European context and specifically that goodwill based on IFRS is value relevant to financial statement users. Additionally, it investigates for the first time how goodwill was affected by the Greek debt crisis. Finally, it contributes to other researcher’s debate concerning the duration of goodwill’s value relevance in a code law environment such as Greece. Practical implications Financial analysts and institutions are provided with more assurance about goodwill’s financial reporting quality to be embedded in the financial evaluation process of corporates. As this research confirms that goodwill should be regarded as an asset, companies should obtain better financial ratings from financial institutions and investors and thus will have better access to equity and debt funding. Originality/value We investigate the value relevance of goodwill in Greece during a long-term period of 12 years. Additionally, our study examines the impact of the Greek debt crisis on the information content of goodwill accounting balances and the period during which accumulated goodwill balances and within-year acquired goodwill maintain its value relevance. Our research could assist accounting standard setters such as the International Accounting Standard Board to evaluate the quality of specific standards such as IFRS 3 “Business Combination” and IAS 38 “Impairment of Assets.”

Accounting, ESG dynamics and the pandemic: when the quality of disclosure becomes crucial to sustainable success

“…Financial leverage (FL) : the more companies report higher financial leverage, the more they try to improve their reputation. Hence, higher quality of<IR>disclosure should be the natural consequence of this attempt, as supported by legitimacy theory (Gelmini et al , 2021; Songini et al , 2021; Pechlivanidis et al , 2022);…”

“…Financial leverage (FL): the more companies report higher financial leverage, the more they try to improve their reputation. Hence, higher quality of<IR>disclosure should be the natural consequence of this attempt, as supported by legitimacy theory (Gelmini et al, 2021;Songini et al, 2021;Pechlivanidis et al, 2022); Corporate governance characteristics, such as %ID and of Women on the Board (%W): coherently with past studies (Songini et al, 2021), the former should improve the board efficiency and efficacy overall, leading to better disclosure; on the other hand, the latter (even if this holds true if a ¼ 10%)due to the greater ESG sensitivity associated with womenmight boost and elevate non-financial disclosure quality. This assumption is coherent with stakeholder theory (Songini et al, 2020;Csedo † et al, 2022;; Country, represented by "Anglo-Saxon" territories (AN): companies established in English-speaking countries appear to draft <IR> of higher quality in terms of COVID-19 disclosurethis result would support the institutional theory for which a positive association has been proven to exist with regional and country contexts (Holder-Webb et al, 2009;Songini et al, 2020;Aladwey et al, 2022); "High Impact" industry (HI): based on the legitimacy theory (de Villiers et al, 2017), companies that are reportedly considered to have a higher impact on the environment and society are likely to disclose more information concerning their actual activities and of greater quality.…”

The information content of half-yearly goodwill impairment losses: analysis of the European context

“…Along the same lines, Baboukardos and Rimmel (2014) explore Greek companies and find that fair value accounting generates relevant goodwill amounts but only in companies highly compliant with IFRS disclosure requirements. Similarly, Pechlivanidis et al (2022) demonstrate that the year-end goodwill amount is value relevant in the Greek context and that the debt crisis has improved its information content.…”

Stakeholder’s Perception of Subsequent Goodwill Measurement: An Analysis of IASB Comment Letters

“…The adoption of the fair-value-based goodwill impairment approach in 2005 has been motivated by the assumption that the impairment approach will enable managers to provide information regarding goodwill that is value-relevant to the market (Colquitt and Wilson, 2002). However, several authors state that the goodwill impairment is not timely (Bepari and Mollik, 2017;Li and Sloan, 2017;Pechlivanidis, Ginoglou and Barmpoutis, 2022;Ramanna and Watts, 2012). Thus, the empirical evidence suggests that the impairment approach has resulted in inflated goodwill balances and untimely goodwill impairments, because the estimates of the current fair value of goodwill rely on unverifiable assumptions such as expectations of value to be generated by managers' future actions.…”

“…Some empirical findings suggest that only current-year acquired goodwill is value relevant compared to older goodwill, and therefore goodwill's impact on stock prices is decreasing as it ages (Pechlivanidis, Ginoglou and Barmpoutis, 2022). However, there is also evidence that under the impairment approach the value relevance of goodwill does not decline with the ages of goodwill (Bepari and Mollik, 2017).…”