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.
| Original language | English |
|---|---|
| Pages (from-to) | 106-126 |
| Number of pages | 21 |
| Journal | Journal of International Accounting, Auditing and Taxation |
| Volume | 21 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 26 Jul 2012 |
Funding
We gratefully acknowledge the valuable and constructive comments by Sebastian Hoffmann. We also thank Kathleen Sinning (the editor), the reviewers and participants of the 34th Annual Meeting of the European Accounting Association (EAA) and the 7th Workshop on European Financial Reporting (EUFIN). We thank Gregor Kaczmarek and Tobias Kretzschmar for their research assistance. Appendix A
Keywords
- Executive compensation
- Goodwill
- IFRS
- Mergers and acquisitions
