A Study On The Impairment Of M&A Goodwill From The Perspective Of Management Overconfidence

The impairment of goodwill refers to the recognition of the corresponding impairment loss after the impairment test of the goodwill formed in the merger.Huge goodwill impairment will seriously affect the company’s reputation,but also have a huge impact on the company’s production and operation,resulting in lower corporate profits.Goodwill impairment is often caused by high premium mergers and acquisitions.If the future profitability of the acquired company declines and the expected effect is not achieved,goodwill impairment is easy to occur.M&A decisions are often decided by the management,and different psychological traits of the management will affect M&A decisions.Then how does overconfident management affect M&A decisions and whether M&A decisions will affect goodwill impairment?Therefore,this paper takes Changying Precision as an example to study whether the psychological trait of management’s overconfidence will affect goodwill impairment.As the industry leader of precision manufacturing industry,Changying Precision is a very typical family-owned enterprise,which has more obvious characteristics of overconfidence in the management.In recent years,mergers and acquisitions have been frequent.In just two or three years,a total of four mergers and acquisitions have been carried out,and the goodwill has been recognized as high as 415 million yuan,and the goodwill impairment has finally reached 300 million yuan.It has seriously affected the profits of enterprises and is representative and typical to a certain extent.Therefore,this paper adopts the method of case study and takes Changying Precision Precision as a case company.Based on the principal-agent theory,synergistic effect theory,overconfidence theory and risk management theory,firstly,the relationship between management overconfidence and goodwill impairment is analyzed.Then,two main indicators,"change in the number of management shares" and "executive relative compensation",are selected.By evaluating the overconfidence of the management of Changying Precision industry and comparing with the same industry,it is found that the management of Changying Precision industry does have the psychological characteristics of overconfidence in the process of M&A decision-making.Based on this,this paper further analyzes Changying’s M&A behavior and finds that:(1)The overconfidence characteristic of Changying’s management affects the financing decision during M&A and tends to debt financing,resulting in the increase of financing cost;(2)The overconfidence of the management of Changying Precision affects the investment decision during M&A.The enterprise intends to achieve new profit growth through cross-border M&A.Due to the optimistic prospect of the investee company and the influence of overconfidence,the management tends to use the income method to evaluate the acquired company,overestimating the growth of future earnings.At the time of the merger,a large premium was generated.Further study found that due to the overconfidence of the management,Changying Precision Industry took aggressive mergers and acquisitions,which brought the risk of goodwill impairment.The reasons for goodwill impairment are mainly divided into three aspects:(1)Aggressive mergers and acquisitions will cause frequent mergers and acquisitions with high premiums,thus recognizing huge goodwill and increasing the risk of goodwill impairment;(2)Overconfident management is prone to sign excessive performance commitment agreements.Once the performance is not up to standard,goodwill impairment will be generated;(3)Changying Precision was too optimistic about merger and integration,ignored the existing market risks,reduced profitability,and easy to set aside goodwill impairment.Therefore,in view of the above situation,in order to reduce the overconfidence of the management and reduce the impairment of enterprise goodwill,this paper puts forward the following suggestions:(1)Strengthen the internal control of the enterprise;(2)Make adequate investigation before the merger and acquisition;(3)Optimize the organizational structure of the company to avoid cronyism;(4)Standardize enterprise merger and acquisition behavior to avoid concentrated goodwill impairment.These suggestions have a certain reference value for the management to make rational decisions in M&A and reduce the risk of goodwill impairment in M&A.