Excess goodwill and enterprise litigation risk

Muyun Wang and Ying Zhang

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: Corporate mergers and acquisitions (M&A) are now a common strategic choice for enterprises. As such, goodwill, which is a core asset of M&A activities, is pivotal for financial valuation and accounting. However, the phenomenon of ‘excess goodwill’, resulting from overvaluation due to management overconfidence and performance promises, poses significant risks, including potential financial statement distortions and increased litigation. This study investigates the intrinsic link between excess goodwill and corporate litigation risk by utilising theoretical analyses and empirical tests. By analysing data from A-share listed companies in Shanghai and Shenzhen from 2007 to 2022, we employed the regression residual method to measure excess goodwill and determine its impact on litigation risk through mediating factors such as financing constraints, risk-taking and agency costs. The findings indicate that excess goodwill significantly increases litigation risk, with a more pronounced effect on manufacturing firms and those with low internal control quality. This research provides valuable insights into optimising goodwill accounting treatment and enhancing enterprise risk management practices. The study's implications suggest that stricter internal controls and cautious goodwill valuation practices are essential to mitigate risks, ultimately contributing to the stability of the capital market and the protection of investor interests.

Keywords: Excess goodwill; Enterprise litigation risk; Mediating effect; Heterogeneity analysis (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324008493

DOI: 10.1016/j.frl.2024.105819

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