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Debt contracting and the goodwill debate

Author

Listed:
  • Chatterjee, Chandrani
  • Shroff, Arpita A.
  • Sivaramakrishnan, K.

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.

Suggested Citation

  • Chatterjee, Chandrani & Shroff, Arpita A. & Sivaramakrishnan, K., 2022. "Debt contracting and the goodwill debate," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(2).
    • Handle: RePEc:eee:jocaae:v:18:y:2022:i:2:s181556692200011x
    DOI: 10.1016/j.jcae.2022.100316
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    References listed on IDEAS

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    More about this item

    Keywords

    Goodwill; Valuation; Net-worth covenants; Private debt contract;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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