Goodwill Impairment Losses and Corporate Debt Maturity

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Abstract. This study investigates whether goodwill impairment losses recognized by firms under Statement of Financial Accounting Standards No. 142 (SFAS 142, Goodwill and Other Intangible Assets) are associated with firms’ choice of debt maturity. I hypothesize goodwill impairment losses are negatively associated with corporate debt maturity through the avenue of information asymmetry. Compared with firms that do not report goodwill impairment charges, firms recognizing goodwill impairment charges are likely to be perceived to have higher information asymmetry by creditors because of managers’ unverifiable discretion in goodwill impairment tests granted by SFAS 142. Because goodwill impairment losses tend to worsen creditors’ information asymmetry, creditors are likely to respond by granting short-maturity debt to firms with goodwill impairment charges in order to improve the efficiency of monitoring. Short-term debts mitigate information asymmetry problems by forcing more frequent information disclosure and renegotiation of contract terms. The results are consistent with the hypothesis. This study is important as it advances the research on goodwill impairmentsby providing evidence of the association between goodwill impairment losses and corporate financing decisions.

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