Big bath and goodwill impairment

Gonçalves, Cristina; Ferreira, Leonor; Rebelo, Efigénio; Fernandes, Joaquim Santana

doi:10.7819/rbgn.v21i2.3977

Acessibilidade / Reportar erro

Brasil

Revista Brasileira de Gestão de Negócios

Español English

Brasil

Español English

sumário « anterior atual seguinte »

Sumário

Article • Rev. Bras. Gest. Neg. 21 (2) • Apr-Jun 2019 • https://doi.org/10.7819/rbgn.v21i2.3977 copy

Big bath and goodwill impairment

Authorship Authorship Authorship Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

Purpose

– To analyze the extent to which recognition of impairments in goodwill is associated with periods of negative results before these losses (big bath practices). To determine whether indebtedness and the capital market restrict the recognition of such losses in big bath practices.

Design/methodology/approach

– Quantitative empirical study based on accounting and market data of companies listed on the Lisbon and Madrid stock exchanges (2007-2015), supported by multivariate regression models estimated using the generalized moments method (system GMM).

Findings

– Impairment in goodwill is relevant in big bath practices, and there is great discretion in the use of this accrual. It can be concluded that companies adjust to capital market cycles. The positive relationship between the level of indebtedness and the impairment in goodwill suggests that any penalties from creditors do not condition the recognition of the impairments.

Originality/value

– There is evidence of big bath practices being associated with companies with negative results and of the role of debt and capital markets as explanatory factors of big bath strategies that use impairments in goodwill.

Keywords
– Goodwill impairment; Big bath; Indebtedness; Capital market

Variable	Description	Expected sign	Reference
BIG4_t	Dummy: 1 if the auditor is a Big4, 0 otherwise	+	Escribano (2015)Escribaño, J. (2015). Análisis de la discrecionalidad en el reconocimiento del deterioro del fondo de comercio: Un estudio empírico (Tese doctorado). Universidad Complutense, Madrid, Espanha.. Giner & Pardo (2015)Giner, B., & Pardo, F. (2015). How ethical are managers’ goodwill impairment decisions in Spanish-listed firms? Journal of Business Ethics, 132(1), 21-40. doi:10.1007/s10551-014-2303-8 https://doi.org/doi:10.1007/s10551-014-2... .
Debt_t	$D e b t = \frac{T o t a l l i a b i l i t i e s_{t}}{T o t a l a s s e t s_{t}}$	-	Avallone & Quagli (2015)Avallone, F., & Quagli, A. (2015). Insight into the variables used to manage the goodwill impairment test under IAS 36. Advances in Accounting, 31(1), 107-114. doi:10.1016/j.adiac.2015.03.011. https://doi.org/doi:10.1016/j.adiac.2015... . Giner & Pardo (2015)Giner, B., & Pardo, F. (2015). How ethical are managers’ goodwill impairment decisions in Spanish-listed firms? Journal of Business Ethics, 132(1), 21-40. doi:10.1007/s10551-014-2303-8 https://doi.org/doi:10.1007/s10551-014-2... . Stenheim & Madsen (2016)Stenheim, T., & Madsen, D. (2016). Goodwill impairment losses, economic impairment, earnings management and corporate governance. Journal of Accounting and Finance, 16(2), 11- 29..
GW_assets_t	$G W \underline{} a s s e t s = \frac{G W_{t}}{T o t a l a s s e t s_{t}}$	+	*Abughazaleh et al.* (2011)AbuGhazaleh, N., Al-Hares, O., & Roberts, C. (2011). Accounting discretion in goodwill impairments: UK evidence. Journal of International Financial Management and Accounting, 22(3), 165-204. doi:10.1111/j.1467-646X.2011.01049. x. https://doi.org/doi:10.1111/j.1467-646X.... . Castro (2012)Castro, E. (2012). A Manipulação de resultados em Portugal através do goodwill (Tese mestrado). Instituto Politécnico do Porto, Porto, Portugal.. Giner & Pardo (2015)Giner, B., & Pardo, F. (2015). How ethical are managers’ goodwill impairment decisions in Spanish-listed firms? Journal of Business Ethics, 132(1), 21-40. doi:10.1007/s10551-014-2303-8 https://doi.org/doi:10.1007/s10551-014-2... . Rammana & Watt (2012). Zhang (2008)**Zhang, J. (2008). The contracting benefits of accounting conservatism to lenders and borrowers. Journal of Accounting and Economics, 45(1), 27–54. doi:10.1016/j.jacceco.2007.06.002. https://doi.org/doi:10.1016/j.jacceco.20... .
Ln_assets_t	Natural logarithm of net assets, deducted from GW in year t	+	Avallone & Quagli (2015)Avallone, F., & Quagli, A. (2015). Insight into the variables used to manage the goodwill impairment test under IAS 36. Advances in Accounting, 31(1), 107-114. doi:10.1016/j.adiac.2015.03.011. https://doi.org/doi:10.1016/j.adiac.2015... . *Hamberg et al. (2011)*Hamberg, M., Paananen, M., & Novak. J. (2011). The adoption of IFRS 3: The effects of managerial discretion and stock market reactions. European Accounting Review, 20(2), 263–288. doi:10.1080/09638181003687877 https://doi.org/doi:10.1080/096381810036... .
∆PBV_t	$P B = \frac{\Pr i c e D e c_{t}}{S h a r e h o l d e r s' e q u i t y b y s h a r e_{t}}$ $Δ P B V = P B_{t} - P B_{t - 1}$	-	Avallone & Quagli (2015)Avallone, F., & Quagli, A. (2015). Insight into the variables used to manage the goodwill impairment test under IAS 36. Advances in Accounting, 31(1), 107-114. doi:10.1016/j.adiac.2015.03.011. https://doi.org/doi:10.1016/j.adiac.2015... . Brutting (2011)Brütting, M. (2011). Goodwill Impairment Causes and Impact (Doctoral thesis). City University London, Londres, UK.. *Francis et al.* (1996)Francis, J., Hanna, D., & Vincent, L. (1996). Causes and effects of discretionary asset write off. Journal of Accounting Research, 34(3), 117-134. doi:10.2307/2491429 https://doi.org/doi:10.2307/2491429... . Stenheim & Madsen (2016)**Stenheim, T., & Madsen, D. (2016). Goodwill impairment losses, economic impairment, earnings management and corporate governance. Journal of Accounting and Finance, 16(2), 11- 29..
Ret_t	$Re t = \frac{P_{t} - P_{t - 1}}{P_{t - 1}}$ P_t = Price on 31st December, year t.	-	*Francis et al.* (1996)Francis, J., Hanna, D., & Vincent, L. (1996). Causes and effects of discretionary asset write off. Journal of Accounting Research, 34(3), 117-134. doi:10.2307/2491429 https://doi.org/doi:10.2307/2491429... . Giner & Pardo (2015)Giner, B., & Pardo, F. (2015). How ethical are managers’ goodwill impairment decisions in Spanish-listed firms? Journal of Business Ethics, 132(1), 21-40. doi:10.1007/s10551-014-2303-8 https://doi.org/doi:10.1007/s10551-014-2... . Godfrey & Koh (2009)Godfrey, J., & Koh P. (2009). Goodwill impairment as a reflection of investment opportunities. Accounting and Finance, 49(1), 117–140. doi:10.1111/j.1467-629X.2008.00272.x https://doi.org/doi:10.1111/j.1467-629X.... . Rammana & Watts (2012). Stenheim & Madsen (2016)**Stenheim, T., & Madsen, D. (2016). Goodwill impairment losses, economic impairment, earnings management and corporate governance. Journal of Accounting and Finance, 16(2), 11- 29..
RL _neg_t	Dummy: 1 if RL before Imp_GW is negative, 0 otherwise.	+	*Abuaddous et al.* (2014)Abuaddous, M., Hanefah, M., & Laili, N. (2014). Accounting standards, goodwill impairment, and earnings management in Malaysia. International Journal of Economics and Finance, 6(12), 201-211. doi:10.5539/ijef.v6n12p201. https://doi.org/10.5539/ijef.v6n12p201... . Giner & Pardo (2015)Giner, B., & Pardo, F. (2015). How ethical are managers’ goodwill impairment decisions in Spanish-listed firms? Journal of Business Ethics, 132(1), 21-40. doi:10.1007/s10551-014-2303-8 https://doi.org/doi:10.1007/s10551-014-2... . Godfrey & Koh (2009)Godfrey, J., & Koh P. (2009). Goodwill impairment as a reflection of investment opportunities. Accounting and Finance, 49(1), 117–140. doi:10.1111/j.1467-629X.2008.00272.x https://doi.org/doi:10.1111/j.1467-629X.... . Walsh et al. (1991)**Walsh, P., Craig, R., & Clarke, F. (1991). Big bath accounting using extraordinary items adjustments: Australian empirical evidence. Journal of Business Finance & Accounting, 18(2), 173-189. doi:10.1111/j.1468-5957.1991.tb00587.x https://doi.org/doi:10.1111/j.1468-5957.... .
ROE_t	$R O E = \frac{R A I b e f o r e i m p . G W_{t}}{S h a r e h o l d e r s' e q u i t y_{t}}$	-	Escribano (2015.Escribaño, J. (2015). Análisis de la discrecionalidad en el reconocimiento del deterioro del fondo de comercio: Un estudio empírico (Tese doctorado). Universidad Complutense, Madrid, Espanha. Giner & Pardo (2015)Giner, B., & Pardo, F. (2015). How ethical are managers’ goodwill impairment decisions in Spanish-listed firms? Journal of Business Ethics, 132(1), 21-40. doi:10.1007/s10551-014-2303-8 https://doi.org/doi:10.1007/s10551-014-2... . *Hamberg et al. (2011)*Hamberg, M., Paananen, M., & Novak. J. (2011). The adoption of IFRS 3: The effects of managerial discretion and stock market reactions. European Accounting Review, 20(2), 263–288. doi:10.1080/09638181003687877 https://doi.org/doi:10.1080/096381810036... .
ROS_t	$R O S = \frac{R L b e f o r e I m p_G W_{t}}{S a l e s r e v e n u e s_{t}}$	-	*Abuaddous et al.* (2014)Abuaddous, M., Hanefah, M., & Laili, N. (2014). Accounting standards, goodwill impairment, and earnings management in Malaysia. International Journal of Economics and Finance, 6(12), 201-211. doi:10.5539/ijef.v6n12p201. https://doi.org/10.5539/ijef.v6n12p201... . Jordan & Clark (2004Jordan, E., & Clark, J. (2004). Big bath earning management: The case of GW impairment under SFAS no. 142. Journal of Applied Business Research, 20(2), 63–69., 2015**Jordan, E., & Clark, J. (2015). Do New CEOs practice big bath earnings management via goodwill impairments?. Journal of Accounting and Finance, 15(7), 11-21.).
RV_CEO_t	CEO remuneration in year t	-	Stenheim & Madsen (2016)Stenheim, T., & Madsen, D. (2016). Goodwill impairment losses, economic impairment, earnings management and corporate governance. Journal of Accounting and Finance, 16(2), 11- 29..

Variable (unit: 10⁶€)	Average	Portugal	Spain
Market value	3,314.4	1,430.0	4,389.1
Net earnings (before Imp_GW)	263.7	109.9	351.4
Market to Book	2.2	1.9	2.4
GW	831.2	303.9	1.132.0
Debt	0.709	0.739	0.692
Imp_GW	11.8	1.6	17.6

Recognition/Year	2007	2008	2009	2010	2011	2012	2013	2014	2015	Total
*% Yes (sample)*	23%	28%	26%	26%	36%	30%	26%	20%	25%	27%
Portugal (%)	21%	32%	25%	18%	41%	25%	27%	22%	25%	26%
Spain (%)	24%	26%	28%	31%	33%	31%	25%	18%	27%	27%

*Average Imp_GW (10⁶€)*	0.7	3.7	3.2	3.8	13.2	18.1	30.4	22.2	4.3	11.1
Portugal (10⁶€)	0.21	1.66	1.21	2.36	3.25	1.24	1.90	0.44	2.37	1.63
Spain (10⁶€)	0.97	4.96	4.33	4.63	18.80	37.14	46.13	34.24	5.49	17.58

Firms RL_neg (%)	6%	20%	25%	22%	26%	36%	31%	22%	26%	24%
Portugal (%)	12%	32%	18%	12%	32%	35%	21%	25%	27%	24%
Spain (%)	3%	12%	28%	28%	22%	36%	37%	21%	25%	24%

Variables		Periods	Sub periods
Variables		2007-2015	2007-2011	2012-2015
Imp_GW_t-1		0.2239^**	0.3623**	---
RL_neg_t		0.4704^*	---	0.1537**
RL_neg_t (Country)	Portugal	---	---	---
RL_neg_t (Country)	Spain	0.7528*	---	0.8940**

RL_neg_t (Industry)	Manufacturing	1.2756*	2.6394*	---
	Consumer goods	-2.9203*	---	---
	Services	---	---	1.8777*
	Energy	---	---	---
	Technology	---	--	4.4598*
Debt_t		0.4702**	---	0.3679*
Debt_t (RL_neg)		0.8196**	---	0.9681**
Debt_t (Country)	Portugal	---	---	---
Debt_t (Country)	Spain	0.4890**	---	0.3389*

Debt_t (Industry)	Manufacturing	2.2949**	---	---
	Consumer goods	---	---	---
	Services	---	---	---
	Energy	---	---	---
	Technology	7.950*	---	6.3028*

Ret_t		0.1109*	-0.3162*	0.1537**
Ret_t (RL_neg)		---	-2.5933**	0.1265**
Ret_t (Country)	Portugal	---	---	---
Ret_t (Country)	Spain	0.1217*	---	0.1597 **

Ret_t (sector)	Manufacturing	---	---	0.1140**
	Consumer goods	---	---	---
	Services	0.3201**	---	0.986**
	Energy	---	---	---
	Technology	---	---	---

ROE_t		---	---	---
ΔPBV_t		---	---	---
GW_assets _t		3.6530**	9.2167**	---
Ln_assets_t		0.5922**	0.5709**	0.4939**
ROS_t		0.0049**	0.2625**	0.0050*
BIG4_t		-1.9218**	---	---
RV_CEO_t		---	---	---
# Observations		721	333	265
# Groups		94	93	94
# Instruments		88	56	84
Wald chi2 (Prob>chi2)		93.05 (0.000)	82.28 (0.000)	59.52 (0.000)
Hansen test (Prob>chi2)		79.28 (0.376)	52.67 (0.174)	76.60 (0.333)
Arellano-Bond test (Prob>z) AR (2)	AR (1)	-3.42 (0.001)	-2.22 (0.027)	-1.83 (0.068)
Arellano-Bond test (Prob>z) AR (2)		-0.63 (0.528)	-1.63 (0.104)	-0.55 (0.582)

Fundação Escola de Comércio Álvares Penteado Fundação Escola de Comércio Álvares Penteado, Av. da Liberdade, 532, 01.502-001 , São Paulo, SP, Brasil , (+55 11) 3272-2340 , (+55 11) 3272-2302, (+55 11) 3272-2302 - São Paulo - SP - Brazil
E-mail: rbgn@fecap.br

Acompanhe os números deste periódico no seu leitor de RSS

[1] Responsible editor: Prof. Dr. Javier Montoya del Corte