Does goodwill pressure drive business restructuring based on subsidiary disposal?

Jingjing Xu, Haijie Huang, Edward Lee, Jirada Petaibanlue

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Abstract

This study investigates whether the existence of goodwill influences firms to remove subsidiaries from consolidation to reduce the pressure from potential impairment loss. Using a sample of Chinese A-share listed companies between 2007 and 2018, we find that the magnitude of goodwill is associated with firms' decisions to dispose of their merged subsidiaries. Also, the likelihood of disposing of subsidiaries is higher among firms with greater impairment probability due to a larger amount of goodwill and lower profitability. Additionally, we observe that firms may simultaneously employ both disposal strategies and impairment write-offs to reduce goodwill pressure. In the cross-sectional analyses, we find that the effect varies between SOEs and non-SOEs. Our findings present the real effect of goodwill impairment on companies' decision-making and provide insights into the impact of accounting practices on firms' investment strategies.
Original languageEnglish
Article number102511
JournalInternational Review of Financial Analysis
Volume86
Early online date13 Jan 2023
DOIs
Publication statusPublished - 1 Mar 2023

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