Earnout,Institutional Investor Ownership And Goodwill Impairment

Recently goodwill impairment has attracted more attention by the listed company,regulators and academics.China Securities Regulatory Commission has ruled that Accounting Supervision Risk No.8—Goodwill Impairment on November 2018,which aims to supervise the capital market more efficiently and to remind companies to obey the standards.Then on March 2020,the Commission again stressed that there were problems with goodwill impairment and the assessment method—income method.On the board of SEM and GEM,there involves many asset-light acquisitions,and the assessment institution usually adopts income method to measure the value of target firms.Based on the assessment result,the acquirer pays to the seller.If the assessment result overvalues the real future income level of target firms,the acquirer faces the risk of overpaid and thus estimates the improper goodwill,so it will increase goodwill impairment risk at some level.Earnout in M&As is an agreement that the seller promises to the buyer about the target firm's future performance,if the target firm fails to realize the committed,the seller will make a compensation through cash or stock.It aims originally at reducing the information asymmetry between the buyer and the seller and protecting the benefits of the buyer especially small and medium investors.However,in the M&As of high information asymmetry,earnout may also become the tool of the target firm to get a high valuation,while whether the target firm will realize the committed performance aim or not is still uncertain,and the buyer may pay the overvalued price silently to finish the M&A quickly.Therefore,earnout increases the valuation at a level,this puts goodwill up and hides the risk of goodwill impairment;the higher the rate committed in the earnout,the harder the target firm realizes the aim.The target firm has to recognize goodwill impairment if the target firm cannot perform well as it committed in the agreement.The institutional investor plays a positive role in corporate governance,so whether the increase of stable institutional investors can release the signal of having purchased a good target firm? And whether it can promote the integration of the target and the acquirer?This research chooses M&As of SEM and GEM during the year of 2008-2017 to study the influence of earnout and the rate committed in the earnout on goodwill impairment.The findings indicate that earnout increases the risk of goodwill impairment,and the relationship between the rate committed in the earnout and goodwill impairment is significantly positive.Besides,institutional investors play positive roles in corporate governance,they can mitigate the positive relationship between earnout and goodwill impairment.Further studies show that related parties may play a role of information tunnel to reduce the influence of earnout on goodwill impairment.Distinguished from other researchers which find that earnout increases the performance of target firms,this paper finds that earnout increases the risk of goodwill impairment through holding up high valuation,providing a reference for the reasonable use of earnout in M&As.