Does managerial discretion affect the value relevance of goodwill impairment information under IFRS? Korean evidence

Abstract

This study examines managers’ use of discretion in determining goodwill impairment losses and the differential value relevance of impairment information depending on the type of management discretion under IFRS in Korea. We distinguish management discretions into accelerated, timely, and delayed recognition of goodwill impairment. We find that impairment decision is driven by managerial incentives, such as big bath behaviour, income smoothing, and avoidance of loss reporting. Moreover, the impairment loss is positively (negatively) associated with contemporaneous share price and future expected cash flows, when managers recognize impairments in an accelerated (timely) manner. The positive association of accelerated impairment coincides with the negative value relevance of pre-impairment goodwill balance. We also observe that the accelerated impairers exhibit superior market performance in the 2-years subsequent to the reporting of goodwill-related information. Overall, the evidence documented in this study is in line with the positive valuation implication of accelerated discretionary impairment, consistent with a signalling perspective.