Do controlling shareholders share pledging affect goodwill impairment? Evidence from China
DOI | https://doi.org/10.1108/IJAIM-07-2021-0141 |
Published date | 27 October 2021 |
Date | 27 October 2021 |
Pages | 793-822 |
Subject Matter | Accounting & finance,Accounting/accountancy,Accounting methods/systems |
Author | Yanxi Li,Shanshan Ouyang |
Do controlling shareholders share
pledging affect goodwill
impairment? Evidence from China
Yanxi Li and Shanshan Ouyang
School of Economics and Management, Dalian University of Technology,
Dalian, China
Abstract
Purpose –The purposeof this study is to examine the impact of controlling shareholders’sharepledging on
goodwillimpairment.
Design/methodology/approach –This study empirically investigates the effect of controlling
shareholders’sharepledging on both the decision and amountof goodwill impairment for Chinese listed firms
from 2007 to 2017.
Findings –This study finds that the proportion of controllingshareholders’share pledging is negatively
related to both impairment decisions and amounts; these negative relationships are intensified when firms
face high stock price crash risks. In addition,the empirical results show that firms with larger share pledging
are less likely to recognizegoodwill impairment or are likely to record relatively smallerimpairment amounts
when they are followedby fewer financial analysts.
Originality/value –Most of the relevant literature has focused on managers’behaviors toward goodwill
impairments, whileless attention has been given to goodwill impairments from the perspective of controlling
shareholders.In fact, controlling shareholders may have strong incentivesto protect their control rights when
they exercise disproportionate control rights, especially in China. Given the high ownership concentration,
prior studies may not have adequately explainedthe agency problem of controlling shareholders in goodwill
impairment.This study uses share pledging as a case to fill this gap. Specifically, it investigates whetherboth
goodwillimpairment decisions and amounts are affected by controlling shareholders’sharepledging.
Keywords Goodwill impairment, Stock price crash risk, Analyst coverage, Controlling shareholder,
Share pledging
Paper type Research paper
1. Introduction
In 2004, the International Accounting Standards Board (IASB) issued International
Financial Reporting Standards3 (IFRS3), Business Combinations. IFRS3 abolished periodic
goodwill amortization and required that all goodwill be tested annually or more frequently
for impairments using estimates of its current fair value. Compared with the amortization
approach, impairment-only approach has attracted more attention from investors. Li et al.
(2011) show that announcements of goodwill impairment loss would influence investors to
revise their expectationsof future cash flows downward, therebycausing a negative market
reaction. Moreover, prior studies have agreed on the existence of managerial discretion in
Funding: This work was supported by the Key Program of National Social Science Foundation of
China under Grant [No. 18ZDA095].
Author contributions: SO and YL conceived and designed the research. SO collected and analysed
the data. SO wrote the paper in consultation with YL. All authors discussed the results and
contributed to the final manuscript.
Controlling
shareholders
share pledging
793
Received12 July 2021
Revised30 August 2021
Accepted6 September 2021
InternationalJournal of
Accounting& Information
Management
Vol.29 No. 5, 2021
pp. 793-822
© Emerald Publishing Limited
1834-7649
DOI 10.1108/IJAIM-07-2021-0141
The current issue and full text archive of this journal is available on Emerald Insight at:
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the impairment test for goodwilland have argued that managers might use this discretion to
avoid goodwill impairment recognition for a positive stock price reaction. For example,
managers are more likely to delay impairment when they have debt covenants, earnings-
based bonuses or in-the-money exercisable stock options (Abughazaleh et al.,2011;
Lapointe-Antuneset al.,2008;Ramannaand Watts, 2012).
However, most of the relevant literature has focused on managers’behaviors toward
goodwill impairments,while less attention has been given to goodwill impairmentsfrom the
perspective of controlling shareholders. In fact, controlling shareholders may have strong
incentives to protect their controlrights when they exercise disproportionate control rights,
especially in China (Gul et al.,2010;Liu and Lu, 2007). China’s capital markets are
characterized by a high concentration of ownership (Hou et al., 2012). Despite the market
reform in 2005 [1], ownership interests commonly remained highly concentrated in the
hands of a few large shareholders (Huang, 2016). With highly concentrated ownership,
controlling shareholders typically play a dominant role on the board and at shareholder
meetings, and can influence executive selections (Hou et al.,2015;Yeh and Woidtke, 2005).
Through direct or indirect involvement, controlling shareholders arecapable of influencing
the firm’s affairs, including financial reporting choices. For example, controlling
shareholders in China may intervene and encourage earnings management for private
interests (Dong et al.,2020), and influence firmsto adopt accounting policies that reflect their
own wishes (Firth et al., 2007). Thus, given the high ownership concentration, prior studies
may not have adequately explained the agency problem of controlling shareholders in the
impairment test for goodwill.This study uses share pledging as a prominent case to fill this
gap. Specifically, it investigates whether both goodwill impairment decisions and amounts
are affected by controllingshareholders’share pledging.
Share pledging is a scenarioin which shareholders (borrowers or pledgers) use their own
shares as collateral to obtain loans from financial institutions (lenders or pledgees).
Compared with other types of loans, share pledging is favored by controlling shareholders
because of its relatively low cost, fast financing and simple approval process (Chan et al.,
2018). Although share pledgingis convenient for shareholders, some associated risks cannot
be ignored. When the share price falls belowa certain level requiredby pledging contracts,a
margin call is triggered. In a margin call, if pledgers cannot deposit more funds or repay
loans, pledgees can dump their pledgedshares. If the pledgers are controlling shareholders,
they would lose their ownership and control of firms (Ouyang et al.,2019). Thus, controlling
shareholders may be incentivizedto use all their power to relieve margin call pressure when
they have share pledged (Chan et al., 2018;Ouyang et al.,2019;Xu et al.,2020). Given the
complexity of goodwillaccounting and discretion in the impairment test (Andreicoviciet al.,
2019), we predict that controllingshareholders involved in share pledging may understateor
simply not recognize goodwillimpairment losses to maintain share prices. With the increase
in the stock price crash risk, the manipulation of goodwill impairment would be stronger
because of the higher probabilityof the share price falling below the warning line. However,
financial analyst coverage,as a type of external corporate governance, will deterfirms (Chen
et al.,2016;Chen et al.,2015), and we predict that the adverse impact of share pledging on
both impairment decisions and amountswill be alleviated when firms are followed by more
financial analysts.
This study empiricallyinvestigates the effect of controlling shareholders’sharepledging
on both the decision and amount of goodwill impairment forChinese listed firms from 2007
to 2017. We find that the proportionof controllingshareholders’share pledging is negatively
related to both the decisions regarding and amounts of goodwill impairment.Moreover, the
results show that firms with larger share pledging are less likely to recognize goodwill
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