Managerial discretion or economic conditions? Examining the determinants of goodwill impairments in Finnish listed companies

This thesis examines the determinants of IAS 36 goodwill impairments in Finnish listed companies. The revision of the accounting standards regarding acquired goodwill in the beginning of the 21st century signified a remarkable change in the prevailing accounting practises in several countries. While the new approach to goodwill accounting was intended to improve the representational faithfulness of earnings and increase the transparency of accounting, the standards have also received much criticism in the accounting literature. Due to the unverifiable discretion inherent in the accounting standards, the outcome of the impairment test might be subject to managerial opportunism and bias. This thesis aims to investigate whether goodwill impairments recognised by Finnish listed companies are driven by managerial reporting incentives or actual economic conditions, as intended by the standard setting authorities. Although data on Finnish companies have been included in previous studies, there exists only one paper in which these firms are separately studied. This thesis builds on that paper, providing new evidence on goodwill impairment accounting in the Finnish reporting environment. The research sample comprises 609 firmyear observations of 98 OMXH listed non-financial companies from the period 2010-2016. Using logistic and multiple linear regression, this study separately examines the decision to impair and the size of the reported impairment loss. To test the research hypotheses, the two dependent variables are regressed on proxies for managerial reporting incentives, economic factors and control variables for firm size and industry membership. The research findings are in line with prior Finnish and international research. Having controlled for economic conditions, the combined results provide evidence on the notion that Finnish managers use their discretion in goodwill impairment accounting. More specifically, managerial reporting incentives appear to influence decisions relating to both the timing and the magnitude of reported impairment losses. The results reveal a significant positive association between recognised impairments and recent, year t, CEO changes, which suggests that tenured managers are more reluctant to impair goodwill than their newly appointed counterparts. The empirical results also provide evidence on big bath accounting behaviour among Finnish managers: impairments are both more frequent and larger in size when the firms’ pre-impairment earnings would have been negative in the observation year. In addition, although leverage does not appear to influence the impairment decision as such, the reported impairment losses are found to be significantly smaller for more indebted companies. These results are believed to relate to managers’ debt contracting concerns. Finally, the analysis also indicates that the reported goodwill impairments are associated with actual economic factors. The incidence of impairment seems to be reflected in the market valuation of the firm and it appears as if it is the small and, in particular, the goodwill-intensive companies, that are most exposed to goodwill impairment.