Country-specific drivers of the value relevance of goodwill impairment losses

This study is the first to analyze the value relevance of goodwill impairment losses (GIL) in an international context; therefore, it builds a link between institutional, cultural, and religious factors and cross-country variations in the relevance of GIL. Using a sample of 18,143 firm-year observations drawn from 21 countries during the period 2005–2018, we find that firms, on average, have reported GIL that are value relevant to their investors. However, consistent with the litigation perspective, the value relevance of GIL is found to be substantially higher for firms domiciled in countries with high-level institutional quality (IQ) than for firms in countries where IQ is relatively low. Our findings remain robust after controlling for macroeconomic effects or excluding observations from the biggest countries, which constitute a substantial proportion of the data set that we analyze. Additional tests show that institutional effects, although absorbing religion, did not supersede or restrain cultural effects, suggesting that social norms also influence the relevance of impairment information. Our evidence introduces a new explanation for heterogeneity in value relevance of goodwill impairments, and adds to research on the effects of legal and social norms on value relevance.