Goodwill Impairment, Earnings Management, and Law System. The influence of earnings management and law system on goodwill impairment

Abstract

This study is conducted in order to investigate the impact that the quality of a national legal system has on accounting/business decisions and to better understand the management’s opportunistic behaviors. The research is conducted on 480 publicly listed firms in 4 European countries: Norway, Sweden, Italy, and Greece, in the time period from 2014 to 2017, constituting a total sample of 1,644 firm-years. By using multivariate regressions, this paper finds new evidence in support of the relationship between goodwill impairment and earnings management, as well as its correlation with the quality of the national law system. The findings indicate that earnings management incentives, in form of big bath and income smoothing, are positively and significantly related to goodwill impairment decisions and its magnitude, suggesting that firms use goodwill impairment as a tool for earnings management. Furthermore, the results also support the positive association between the strength of the law system and goodwill impairment, indicating that firms operating in countries with a strong legal system are more likely to report goodwill impairments in a larger amount. This paper contributes to the existing literature by providing a detailed analysis of the newest financial data from 4 European countries, not previously covered together in this context and provides a better understanding on the effects that the national legal system has on goodwill impairment decisions. Finally, our paper is a thorough review of management opportunistic behavior with regards to goodwill accounting treatment.