Compliance with goodwill-related mandatory disclosure requirements and the cost of equity capital. Issue 3 (16th April 2017)

• Record Type: Journal Article
• Authors: Mazzi, Francesco; André, Paul; Dionysiou, Dionysia; Tsalavoutas, Ioannis
• Is Part Of: Accounting and business research. Volume 47:Issue 3(2017)
• Page Start: 268
• Page End: 312
• Publication Date: 2017-04-16
• Subjects: accounting disclosure -- compliance -- cost of equity capital -- goodwill -- IAS 36 -- IFRS 3 -- impairments; M40 -- M41 -- M48 -- G10; Accounting -- Periodicals; Accounting -- Research -- Periodicals; Business -- Periodicals; Comptabilité -- Périodiques; Comptabilité -- Recherche -- Périodiques; Affaires -- Périodiques; Accounting; Electronic journals; 658.15
• DOI: 10.1080/00014788.2016.1254593
• Languages: English
• ISSNs: 0001-4788

Abstract

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.