Debt contracting and the goodwill debate

Chandrani Chatterjee, Arpita A. Shroff and K. Sivaramakrishnan

Journal of Contemporary Accounting and Economics, 2022, vol. 18, issue 2

Abstract: Extant literature offers mixed evidence on the quality of goodwill after the promulgation of SFAS 141/2 (Li and Sloan, 2017; Lee, 2011; Chen et al., 2008). We reconcile these conflicting findings by examining the role of managerial incentives in determining the efficacy of SFAS 141/2 in improving the quality of goodwill reporting. Using the context of debt contracting, we find that the value-relevance of goodwill is higher for firms that include goodwill in debt covenants in the post-SFAS 141/2 period. We also find that in the post-period, firms that include goodwill in their debt contracts appear to take timelier impairments. In addition, debt contracts in these firms also have tighter covenant thresholds, further corroborating the increased value-relevance of goodwill under the current impairment regime. We also document a relatively higher frequency of covenant violation for firms that use goodwill in their debt contract in the post-SFAS 141/2 period. Taken together, our results inform ongoing discussions regarding the accounting for goodwill and provide new insight into understanding of debt contracting and the role of accounting standards therein.

Keywords: Goodwill; Valuation; Net-worth covenants; Private debt contract (search for similar items in EconPapers)
JEL-codes: G32 G38 L1 M41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:18:y:2022:i:2:s181556692200011x

DOI: 10.1016/j.jcae.2022.100316

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