Compliance with goodwill related mandatory disclosure requirements and the cost of equity capital

Mazzi, F., André, P., Dionysiou, D. and Tsalavoutas, I. (2017) Compliance with goodwill related mandatory disclosure requirements and the cost of equity capital. Accounting and Business Research, 47(3), pp. 268-312. (doi: 10.1080/00014788.2016.1254593)

Abstract

Theory suggests that increased levels of corporate disclosure lead to a decrease in cost of equity via the reduction of estimation risk. We examine compliance levels with International Financial Reporting Standard 3 Business Combinations and International Accounting Standard 36 Impairments of Assets mandated goodwill-related disclosure and their association with firms’ implied cost of equity capital (ICC). Using a sample of European firms for the period 2008–2011, we find a median compliance level of about 83% and significant differences in compliance levels across firms and time. Non-compliance relates mostly to proprietary information and information that reveals managers’ judgement and expectations. Overall, we find a statistically significant negative relationship between the ICC and compliance with mandated goodwill-related disclosure. Further, we split the sample between firms meeting (or not) market expectations about the recognition of a goodwill impairment loss in a given year to study whether variation in compliance levels mainly plays a confirmatory or a mediatory role. We find the latter: higher compliance levels matter only for the sub-sample of firms that do not meet market expectations regarding goodwill impairment. Finally, our results hold only in countries where enforcement is strong.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Tsalavoutas, Professor Yannis and Dionysiou, Dr Dionysia
• Authors: Mazzi, F., André, P., Dionysiou, D., and Tsalavoutas, I.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Accounting and Business Research
• Publisher: Taylor & Francis
• ISSN: 0001-4788
• ISSN (Online): 2159-4260
• Published Online: 05 December 2016
• Copyright Holders: Copyright © 2016 Taylor and Francis
• First Published: First published in Accounting and Business Research 2017
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher