Motivation of discretionary goodwill impairments

With the recent wave of mergers and acquisitions (M&As), the total amount of goodwill balances has significantly increased in the Chinese capital market. Meanwhile, high accounting standards have become crucial in subsequent goodwill measurements. Thus, this study determines whether goodwill book value is consistent with corporate performance and examines the motivation of discretionary goodwill impairments. Based on the panel data of A-share listed companies from 2007 to 2020, the fix-effect regression results indicate that beginning goodwill balance is negatively associated with corporate performance, whereas acquired goodwill is positively associated with such performance. In addition, the interactive effect shows a significant negative correlation between the initial goodwill balance and corporate performance. Overall, this study reveals that goodwill balance continuously damages corporate performance, and that the motivation of discretionary goodwill impairments should focus on decreasing goodwill balance by withdrawing goodwill impairments. [Display omitted] •Existing studies not reached a consistent conclusion on the relationship between the book value of goodwill and firm performance, this paper analyzes the reasons and studies the relationship between goodwill and business performance by using decomposed book value of goodwill.•This paper reveals that the goodwill balance continues to damage the performance of enterprises.•This paper puts forward the incentive for enterprises to deduct the goodwill balance through the goodwill impairments.