Goodwill impairment, M&A, and industry development—Empirical evidence from listed companies in China

Goodwill has been a controversial issue in China since 2007 when the new accounting standards changed the subsequent measurement of goodwill from periodic amortization to impairment testing. Using the change in subsequent measurement of goodwill, this paper examines the impact of goodwill accounting on corporate M&A and industry development. The paper finds that adopting the goodwill impairment test significantly increases firms’ M&A incentives, as evidenced by a significant increase in the frequency and probability of M&A and a significant reduction in the time interval between successive M&A at the industry level. From an industrial perspective, the impairment policy has significantly improved industry concentration, total factor productivity, and competitive advantage in international trade across Chinese industries. The positive impact of goodwill impairment policy on M&A is more pronounced among firms with asset-light characteristics or high P/E ratios, and its contribution to industry competitiveness is more pronounced in asset-light or high P/E ratios industries. From the perspective of promoting capital market mergers and acquisitions and industry competitiveness, the article finds that the current goodwill impairment policy can have positive economic consequences. Our study breaks through existing perspectives to provide compelling empirical evidence for the current theoretical and practical controversy over goodwill measurement standards.