Does Tax Deductibility Affect Goodwill Impairment Decisions?

The Journal of the American Taxation Association, forthcoming. Available at: https://doi.org/10.2308/JATA-2021-004

Posted: 1 Nov 2016 Last revised: 29 Jul 2022

See all articles by Sarah Khalil

Sarah Khalil

University of Connecticut

Miles A. Romney

Florida State University

Steven Utke

University of Connecticut - Department of Accounting

Date Written: July 19, 2022

Abstract

Using a setting with tax-deductible goodwill impairments, we examine how tax deductibility affects impairment decisions. Goodwill impairments are costly to firms, and managers generally attempt to avoid recording impairments. However, we propose that tax deductibility reduces the net cost of impairment, increasing the likelihood of impairment. Results indicate that tax deductibility increases impairment likelihood, especially when capital market pressure is high, consistent with tax deductibility reducing the net cost of impairments (i.e., partially offsetting high costs of impairment). We rule out known plausible non-tax explanations for these effects. Overall, results suggest that taxation is an important, previously overlooked determinant of economically important goodwill impairments.

Keywords: Tax Planning, Goodwill Impairments, Tax Havens

JEL Classification: F23, G32, H20, M41

Suggested Citation

Khalil, Sarah and Romney, Miles A. and Utke, Steven, Does Tax Deductibility Affect Goodwill Impairment Decisions? (July 19, 2022). The Journal of the American Taxation Association, forthcoming. Available at: https://doi.org/10.2308/JATA-2021-004, Available at SSRN: https://ssrn.com/abstract=2862196 or http://dx.doi.org/10.2139/ssrn.2862196

Sarah Khalil

University of Connecticut ( email )

Storrs, CT 06269-1063
United States

Miles A. Romney

Florida State University ( email )

Tallahasse, FL 32306
United States

Steven Utke (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

HOME PAGE: http://www.steveutkedata.com/

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