Research on the Signal Effect of Performance Compensation Commitment on the Impairment of Goodwill in China

Abstract

This study using empirical research method and taking 1233 samples of A-share listed companies in China that completed major asset restructuring from 2007 to 2017, examines the signal effect of performance compensation commitment on goodwill impairment, and the impact of agency motivations on the signal effect based on the proportion of the performance compensation commitment that M&A targets achieve. I find evidence suggesting that the higher the proportion of the unfulfilled performance compensation commitment is, the higher the probability of goodwill impairment and the greater the amount of goodwill impairment. In addition, agency motivations affect the signal effect of performance compensation commitment on the impairment of goodwill. Specifically, for companies facing market return pressure and debt contracting pressure, the signal effect of the performance compensation commitment on the impairment of goodwill will be weakened. Furthermore, companies with performance loss have the incentive to use goodwill impairment to carry out a “big bath” and the loss motivation will lead to the overexpression of the signal effect of performance compensation commitment on goodwill impairment. The findings of this paper provide a new perspective for external users of financial statements to observe goodwill impairment and help them better understand managers’ opportunistic motivations to accrue goodwill impairment.

M&A goodwill impairment, management ability and firm performance: Empirical evidence from Chinese a-shares

“…Goodwill Impairment Management Capability and Company Performance "Agency theory" suggests that the unverifiable nature of goodwill impairment testing leads executives to use their discretion to act opportunistically (Deng, 2019). Therefore, it is possible that a listed company's goodwill explosion may be a result of external circumstances that make it difficult to deliver performance promises, or it may be the case of a company taking a "big bath" to ease the pressure on its financial statements (Giner & Pardo, 2015;J.…”

Performance Compensation Commitment in Mergers and Acquisitions

“…In the case of information asymmetry, this mechanism aims to alleviate the problems related to valuation uncertainty and protect the interests of investors while delivering good news to the outside world, in order to achieve mutual benefit and win-win results [22,23]. Meanwhile, the acquired party will make more efforts to avoid penalties and obtain rewards after signing the performance compensation commitment [24][25][26][27][28][29]. According to the data of Oriental Fortune Choice, the goodwill impairment of A-shares reached 1.31 trillion in 2018.…”