Can Institutional Investors Restrain the Risk of Goodwill Impairment of Listed Companies? Evidence from China A-share Market
LI Antai, ZHANG Jianyu, LU Bing
School of Management, Huazhong University of Science and Technology; C.T. Bauer College of Business, University of Houston; School of Statistics, Beijing Normal University
Summary:
China A-share listed companies have recorded significant goodwill impairment since 2015 as a result of increasing ambitious acquisitions during the merger wave. The literature documents that Chinese institutional investors play a supervising role in promoting corporate governance (Cheng, 2006; Gao and Zhang, 2008; Yao and Liu, 2009) and improve corporate post-merger performance by managing corporate merger decisions (Zhou et al., 2017). However, few studies examine how institutional investors affect corporate goodwill impairment risk. In this study, we investigate whether the level of institutional holding lowers the risk of goodwill impairment, whether the influence of different groups of institutional investors differs, and possible mechanisms underlying the above relationship. Using data from non-financial firms listed on the Shanghai and Shenzhen stock exchanges from 2011 to 2018, we document that institutional investors significantly reduce corporate goodwill impairment risk. Independent institutional investors, represented by investment funds, social security funds, and the QFII, play a more important role than non-independent investors. The mechanism test reveals that institutional investors reduce the risk of goodwill impairment by providing pre-merger advisory services and improving post-acquisition performance. One potential endogeneity issue stems from sample selection bias among the firms that experienced institutional investors choose to invest or from omitted key variables. We use an instrumental variable approach together with propensity score matching (PSM) and a difference-in-differences (DID) model to address this endogeneity issue. We first use the stock turnover rate as an instrumental variable because the turnover rate can predict changes in institutional holdings. Additionally, using the CSI index reconstitution setting to isolate exogenous shocks to institutional ownership, we test whether institutional investors influence goodwill impairment risk. Each June and December, the CSI assigns firms to the 800 Index (800 largest firms) and the 1000 Index (1,000 next-largest firms) based on market capitalization. The CSI index is mimicked by many institutional investors (quasi-indexers); therefore, this annual reconstitution leads to changes in institutional holdings that are plausibly exogenous to the firm. In conjunction with the exogenous shock, we use a PSM-DID regression that permits cleaner identification. Our results indicate that institutional holdings are negatively related to both the incidence and amount of goodwill impairment. These additional tests help mitigate the alternative explanation that institutions choose to follow firms with low goodwill impairment risk. This paper contributes to the literature in several ways. First, we demonstrate that institutional ownership inhibits goodwill impairment risk, providing a solution for forestalling major financial risks. Specifically, we find that prior to an acquisition, institutional investors help select high-quality targets through more site visits; subsequent to the acquisition, institutional investors attract a high level of analyst following and improve pay-for-performance sensitivity. Taken together, we provide empirical evidence on how institutional investors reduce goodwill impairment risk. Second, this paper complements research on the monitoring role of heterogeneous institutional investors (Bushee, 1998; Chen et al., 2007; Yang et al., 2012) by investigating the effect of independent and non-independent institutional investors on corporate goodwill impairment risk. This study differs from that of Glaum et al. (2018), which examines investors' substitutional monitoring role for public accounting enforcement because our study provides direct evidence of institutional investors' private monitoring. We find that independent institutional investors can better monitor firms and suggest that regulators keep promoting independent institutional investors' access to the market. Third, most studies on goodwill impairment focus on economic factors and management discretion (Wang, 2015). In this paper, we focus on institutional holdings and demonstrate that institutional investors inhibit goodwill impairment risk, highlighting the role of institutional investors in reducing financial risks.
李安泰, 张建宇, 卢冰. 机构投资者能抑制上市公司商誉减值风险吗？——基于中国A股市场的经验证据[J]. 金融研究, 2022, 508(10): 189-206.
LI Antai, ZHANG Jianyu, LU Bing. Can Institutional Investors Restrain the Risk of Goodwill Impairment of Listed Companies? Evidence from China A-share Market. Journal of Financial Research, 2022, 508(10): 189-206.
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