Goodwill impairment test disclosures under IAS 36: Compliance and disclosure quality, disclosure determinants, and the role of enforcement

Abstract

Prior research documented that higher disclosure quality reduces information asymmetry and the cost of capital. Accordingly, firms have an incentive to comply with disclosure requirements and to provide voluntary disclosure. However, prior research on mandatory disclosures on goodwill impairment testing reveals low compliance among European firms. In this paper, we contribute to the literature and assist regulators, enforcers, and standard setters by shedding light on the determinants of the observed low levels of compliance and voluntary disclosure. Consistent with economic theory, we reveal that firms determine the level of disclosure strategically. We find firms with higher preparation and proprietary cost to show lower compliance and less voluntary disclosure while firms with higher growth opportunities provide better compliance and more voluntary disclosure. However, the strategic behavior is constrained by enforcement. Consequently, our results are more (less) pronounced within a weak (strong) enforcement environment.