The Effect of Time Orientation in Languages on the Recognition of Goodwill Impairment Losses

Synopsis The research problem In this study, we investigated the relationship between future-time reference (FTR) in languages and goodwill impairment. Motivation Previous studies on goodwill have focused mainly on firms’ economic and reporting incentives in single-country settings using economic theories. There have been recent calls for more research on goodwill accounting across countries (d’Arcy and Tarca, 2018), and greater use of behavioral theories in goodwill accounting studies (Amel-Zadeh et al., 2021). In response, we applied the linguistic relativity hypothesis to a new and highly significant area of future-oriented behavior (impairment decision) to explain cross-country variations in goodwill impairment reporting. The test hypotheses We hypothesized that firms in countries that use weak-FTR languages have higher levels of (and greater quality) goodwill impairment than those in countries that use strong-FTR languages. Target population We used a sample of 15,179 firm-year observations taken from firms reporting under IFRS across 21 countries for the fiscal years 2005–2018. Adopted methodology We used Tobit regressions, logit regressions, mixed-effects modeling, and propensity score-matching analyses for robustness. Analyses We tested the relationship between FTR in languages and (a) goodwill impairment decisions, (b) goodwill impairment amounts, and (c) abnormal goodwill impairments. We repeated our main analyses using several subsamples, different measures of FTR, and alternative regression specifications. Findings In line with the linguistic relativity hypothesis, our findings indicate that managers who speak weak-FTR languages are more willing to bear the costs of their impairment decisions in the present and are less motivated to shift current impairment into future accounting periods. In contrast, speakers of strong-FTR languages tend to delay the recognition of current impairments to future periods to reduce their anxiety about the negative effects of current impairment decisions. Findings from further analyses indicate that firms in weak-FTR countries report lower abnormal goodwill impairment, thereby bringing impairment levels closer to their normal optimal levels. Our inferences are robust to alternative samples, different measures of FTR, and alternative model specifications.