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Executive compensation and goodwill recognition under IFRS: Evidence from European mergers

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  • Detzen, Dominic
  • Zülch, Henning

Abstract

Based on principal agent theory we posit that managers account for a business combination opportunistically by recognizing goodwill in excess of its economic determinants. We examine the relationship between CEOs’ short-term cash bonuses and the amount of goodwill recognized in IFRS acquisitions. We find that with increasing cash bonus intensity managers recognize more goodwill. More detailed analysis indicates that this relationship is not a linear one. Instead, there seems to be a corridor in which CEOs are susceptible to the incentive given by bonus payments. In particular, the relationship seems to be fulfilled only for CEOs whose cash bonus is between 150% and 200% of their base salary prior to the acquisition. Our findings have an implication for companies that bonus caps should be introduced to limit CEOs’ bonuses to a given percentage of their base salary. By doing so, they may re-align shareholders’ and managers’ interests and avoid an increased impairment risk in the future.

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  • Detzen, Dominic & Zülch, Henning, 2012. "Executive compensation and goodwill recognition under IFRS: Evidence from European mergers," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 21(2), pages 106-126.
    • Handle: RePEc:eee:jiaata:v:21:y:2012:i:2:p:106-126
    DOI: 10.1016/j.intaccaudtax.2012.07.002
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    Cited by:

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    2. Ann Tarca, 2020. "The IASB and Comparability of International Financial Reporting: Research Evidence and Implications," Australian Accounting Review, CPA Australia, vol. 30(4), pages 231-242, December.
    3. Wu, Kai & Lai, Seiwai, 2020. "Intangible intensity and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 64(C).
    4. Bikki Jaggi & Alessandra Allini & Raffaela Casciello & Fiorenza Meucci, 2022. "Firm life cycle stages and earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 1019-1049, October.
    5. Runesson, Emmeli & Samani, Niuosha, 2023. "Goodwill or “No-will”: Hubris in the tone at the top," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(1).
    6. Carla Carvalho & Ana Maria Rodrigues & Carlos Ferreira, 2016. "The Recognition of Goodwill and Other Intangible Assets in Business Combinations – The Portuguese Case," Australian Accounting Review, CPA Australia, vol. 26(1), pages 4-20, March.
    7. d'Arcy, Anne & Tarca, Ann, 2018. "Reviewing IFRS Goodwill Accounting Research: Implementation Effects and Cross-Country Differences," The International Journal of Accounting, Elsevier, vol. 53(3), pages 203-226.
    8. Roncagliolo, Elisa & Avallone, Francesco, 2022. "Recognition of provisional goodwill: Real need or communication strategy?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).
    9. Agyei-Boapeah, Henry & Ntim, Collins G. & Fosu, Samuel, 2019. "Governance structures and the compensation of powerful corporate leaders in financial firms during M&As," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 37(C).
    10. Wolfgang Ballwieser, 2020. "International Valuation Standards (IVS) – Bedarf, Reichweite, Würdigung, diskutiert anhand der Bewertung von Unternehmen und Goodwill [International Valuation Standards (IVS)—Demand, Range, Critica," Schmalenbach Journal of Business Research, Springer, vol. 72(1), pages 71-94, March.

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