Debt crisis, age and value relevance of goodwill: evidence from Greece

• DOI: https://doi.org/10.1108/IJAIM-10-2021-0215
• Published date: 22 February 2022
• Date: 22 February 2022
• Pages: 189-210
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Eleftherios Pechlivanidis,Dimitrios Ginoglou,Panagiotis Barmpoutis

Debt crisis, age and value relevance

of goodwill: evidence from Greece

Eleftherios Pechlivanidis and Dimitrios Ginoglou

Department of Accounting and Finance,

University of Macedonia, Thessaloniki, Greece, and

Panagiotis Barmpoutis

Department of Computer Science, University College London, London, UK

Abstract

Purpose –The purpose of this study is to investigate the value relevance of goodwill and its additional

aspects during a long-term period in Greece. Furthermore, by implementing two of themost popular value

relevance models, the Ohlson’sprice and Easton and Harris’return model, this study examines the impact of

goodwill on Greek stock prices from 2007 to 2018, a period of 12years in which International Financial

Reporting Standards (IFRS) are applied. Furthermore, this study analyzes how goodwill’s value relevance

changesas it ages and during the Greek debt crisis.

Design/methodology/approach –In order to test the value relevance of goodwillwe implemented two

of the most popular valuerelevance models, Ohlson’s price and Easton and Harris’returnmodel. Our sample

consists of non-financiallisted Greek companies that reported positivegoodwill accounting balances on their

financial statementsduring the financial period from 2007 to 2018. Finally, we applied fixed-effectsregression

model to all equations.

Findings –The results provide evidence that the year-endgoodwill accounting balance is value relevant,

and that the debt crisis has improved goodwill’s informationcontent. Finally, the empirical findings suggest

that only current year acquired goodwill is value relevant compared to older goodwill, and therefore,

goodwill’simpact on stock prices is decreasing as it ages.

Research limitations/implications –A noteworthy limitation of this study is that it focuses on a

specific code-law countryGreece, which is a relatively small economy compared to the whole Eurozone.This

research contributesto the research literature as it confirms other researchfindings in the European context

and specifically that goodwill based on IFRSis value relevant to financial statement users. Additionally, it

investigates for the first time how goodwillwas affected by the Greek debt crisis. Finally, it contributes to

other researcher’s debate concerning the duration of goodwill’s value relevance in a code law environment

such as Greece.

Practical implications –Financial analysts and institutions are provided with more assurance about

goodwill’sfinancial reporting quality to be embedded in the financial evaluatio n process of corporates.

As this research confirms that goodwill should be regarded as an asset, companies should obtain better

financial ratings from financial institutions and investors and thus will have better access to equity and

debt funding.

Originality/value –We investigate thevalue relevance of goodwill in Greece during a long-term periodof

12 years. Additionally,our study examines the impact of the Greek debt crisis on the informationcontent of

goodwill accounting balancesand the period during which accumulated goodwill balances and within-year

acquired goodwillmaintain its value relevance. Our researchcould assist accounting standard setterssuch as

the International Accounting Standard Board to evaluate the quality of specific standards such as IFRS 3

“BusinessCombination”and IAS 38 “Impairment of Assets.”

Keywords Greece, IFRS, Goodwill, Value relevance, Debt crisis

Paper type Research paper

Declarations of interest: none.

Debt crisis, age

and value

relevance

189

Received20 October 2021

Revised26 December 2021

Accepted15 January 2022

InternationalJournal of

Accounting& Information

Management

Vol.30 No. 2, 2022

pp. 189-210

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-10-2021-0215

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

1. Introduction

Goodwill, due to the increase of mergers and acquisitions, plays globally an increasingly

important role in the balance sheet of listed companies. Generally, if an entire company or

business is purchased and the consideration paid exceeds the fair value of the assets of the

acquired company or business, then goodwill should be recognized as the difference

between these two elements (Chauvin and Hirschey, 1994). Additionally, goodwill is

categorized in the balance sheet as an intangible asset that captures the competitive

advantages in the context of knowledge, skills, management and marketing which cannot

be separately recognized and measured (Chauvin and Hirschey, 1994). However, while

goodwill is only recognizedthrough business combinations, internally generated goodwillis

not represented in the balance sheet, as it does not comply with International Financial

reporting standards(IFRS) recognition criteria.

Furthermore, many researchers raise the question of whether or not goodwill should be

recognized as an asset by investigating the value relevance of goodwill to the users of the

financial statements (Laghi et al.,2013). Furthermore, an accounting element is regarded as

value relevant if it predictably affects stock prices. Alternatively, if the balance of an

accounting figure can exert influencein the decision-making process of financial statements

users it is considered tobe value relevant (Barth et al.,2001).

One of the major changes of International Accounting Standard 36 “Impairment of

Assets”was the introduction of the annual goodwill impairment test instead of the

amortization alternative that is still applied to other intangible assets with definite useful

life. By doing that, the objective of the international accounting standard setters was to

improve financial reporting quality and usefulness. However, goodwill impairment

calculation includes a high degree of subjectivity that can be misused for earnings

management purposes. Additionally, allocating a lower fair value to the assets of the

acquired company and thus recognizinga higher amount of goodwill, enables management

to have higher discretional power on earnings management, as the fixed percentage of

depreciation amount of non-current assets is reduced and the goodwill impairment

opportunity is increased (Li and Taylor, 2018). Therefore, strong national enforcement

institutions are one major factor that could contribute to more timely goodwill impairment

(Glaum et al.,2015). Furthermore, developed national enforcement systems can also lead to

more man disclosure and more value relevant financial information concerning goodwill

impairment to financialstatement users (André et al.,2018).

Overall, the contributionof this work is summarized as follows:

Initially, we investigate the value relevance of goodwill in Greece, a code-law

country during a long-term period of 12 years.

We examine the impact of the Greek debt crisis on the information content of

goodwill accounting balances.

We decompose goodwill in various elements to test the relationship between the

value relevance of goodwill and its age. Specifically, we examine the period in which

accumulated goodwill balances and within-year acquired goodwill maintain its

value relevance.

We confirmed the results of our study by applying the two state-of-the-art value

relevance models, i.e. Ohlsen’s price model and Easton and Harris’return model.

Furthermore, it is our firm belief that Greece constitutes an interesting case for scientific

research, due to the fact that it is considered a code-lawcountry in which the adoption of the

IFRS has radically changed its accounting regulation framework and additionally its

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