Do controlling shareholders share pledging affect goodwill impairment? Evidence from China

Abstract

Purpose The purpose of this study is to examine the impact of controlling shareholders’ share pledging on goodwill impairment. Design/methodology/approach This study empirically investigates the effect of controlling shareholders’ share pledging on both the decision and amount of goodwill impairment for Chinese listed firms from 2007 to 2017. Findings This study finds that the proportion of controlling shareholders’ share pledging is negatively related to both impairment decisions and amounts; these negative relationships are intensified when firms face high stock price crash risks. In addition, the empirical results show that firms with larger share pledging are less likely to recognize goodwill impairment or are likely to record relatively smaller impairment amounts when they are followed by fewer financial analysts. Originality/value Most of the relevant literature has focused on managers’ behaviors toward goodwill impairments, while less attention has been given to goodwill impairments from the perspective of controlling shareholders. In fact, controlling shareholders may have strong incentives to protect their control rights when they exercise disproportionate control rights, especially in China. Given the high ownership concentration, prior studies may not have adequately explained the agency problem of controlling shareholders in goodwill impairment. This study uses share pledging as a case to fill this gap. Specifically, it investigates whether both goodwill impairment decisions and amounts are affected by controlling shareholders’ share pledging.