A Study Of The Causes And Economic Consequences Of Excess Goodwill In The M&A Activities Of China’s Listed Companies

Just as President Xi proposed on the 19^thCPC National Congress,preventing and resolving financial risks remains a primary task in the era of building a moderately prosperous society.In recent years,China’s listed companies’consolidated goodwill bubble and one-off significant provision of goodwill impairment has become one of the critical financial risks in the domestic stock market.The overvaluation of consolidated goodwill not only shows an implication of high expectation of the acquired company’s financial performance,but also involves massive risks.To take over the target,the acquirer must pay extra contribution for the excess goodwill;meanwhile,it bears risks of goodwill impairment if the acquired company’s performance fails to meet the expectation.Moreover,current accounting standard on the follow-up measurement of goodwill gives rise to untimely and/or random provision of goodwill impairment.The company’s management may take advantage of the insider information to transfer their personal wealth through massive share reduction before the announcement of goodwill impairment,which could aggravate the agency problem.This paper takes Zhejiang Jinke Culture Industry Co.,Ltd（hereinafter referred to as Jinke Culture）as an example,explores the causes and the economic consequences of its excess goodwill and provides insights that may be useful to the prevention of abnormal goodwill.Results show that the financial conditions of both parties of the takeover,the selection of valuation methods,the compensation agreement and the degree of information asymmetry all contribute to the overstatement of Jinke Culture’s consolidated goodwill.The excess consolidated goodwill does not promise continuous improvement of the business performance.Jinke Culture recorded a goodwill impairment charge of 2.611 billion RMB in the financial year of 2019,which turned the company’s net profit attributable to shareholders to below zero.Additionally,Jinke Culture’s major shareholders had reduced their shareholdings massively before the announcement of goodwill impairment.To alleviate the negative effects of excess goodwill,the following suggestions could be taken into consideration:（1）any takeover should be well-planned to ensure a reasonable premium for the consolidated goodwill and reduce the risk of goodwill impairment to an acceptable level;the acquirer should improve the entity’s internal control environment to ensure the fairness of the asset evaluation and the goodwill;an appropriate and feasible compensation agreement should be met by the two parties of an acquisition;（2）the author suggests the accounting standard committee update relevant requirements of the subsequent measurement of consolidated goodwill to curb manipulation of goodwill overvaluation;（3）when making an investment in the share market,minority shareholders are encouraged to focus on the target company’s long-term performance rather than the increase of share price in a couple of days merely following the takeover.In a word,be less speculative and invest wisely.