Earnings Management and Goodwill Accounting: Implications on Dividend Policy in Italian Listed Companies

Abstract

In this paper, we investigate the effects of goodwill accounting under IAS 36 on dividend policy in Italian Listed Companies. The technical areas of discretion in impairment test accounting enable pursuing three typical forms of earnings management: earnings smoothing, earnings increasing and earnings decreasing. Possible earnings manipulations could be concealed in the five phases of the impairment test: identification of cash generating units, allocation of goodwill to each CGU, determination of carrying amount, estimation of fair value less cost to sell and measurement of value in use. We develop and test some hypotheses that allow us to demonstrate the existence of earnings management practices in relation to the goodwill impairment test. The evidence suggests that the economic and equity effects of goodwill accounting under IAS 36 can be observed - as we demonstrate - in the distribution of dividends determined on the basis of earnings that are "inflated" by the failure to write-down goodwill.

Keywords: Earnings Management, Goodwill, Impairment Test, Dividend Policy

JEL Classification: G35, M41