The Implications of Goodwill Accounting Methods, Corporate Social Responsibility and Taxes for the Cost of Debt

Résumé du livre

This dissertation investigates the implications of corporate social responsibility, tax avoidance, and goodwill impairments for debt capital providers. The first essay considers whether corporate social responsibility (CSR) acts as insurance to protect corporate creditors against risks linked to tax avoidance. Risk management theory suggests that CSR generates valueby preserving corporate financial performance. I rely on this theory to hypothesize that CSR mitigates the known positive association between tax avoidance and the cost of debt. The interaction between CSR and tax avoidance is negatively associated with bond yields and is consistent across multiple measures of tax avoidance. At the mean cash effective tax rate, a one standard deviation increase in CSR is, on average, associated with a 2.3 basis-point decrease in bond yields. Positive CSR activities, rather than fewer CSR concerns, drive this result. Overall, the findings suggest that CSR tempers the risks of tax avoidance.My second essay focuses on the implications of goodwill impairments for creditors. On December 16, 2020, the Financial Accounting Standards Board (FASB) announced it intends to eliminate goodwill impairment testing and reintroduce amortization. This decision came after reporting companies voiced complaints about the complexity, costliness, and lack of benefits of the annual impairment testing. Although prior research considers the usefulness of goodwill impairment charges for equity investors, I examine their information content for creditors.I find that goodwill impairment losses are positively associated with bond and loan spreads. Further analysis shows that the occurrence of impairments is associated with higher bond spreads; rather than adjusting interest rates, banks appear to require more stringent covenants. These results are consistent with impairment losses conveying private information about firms' prospects, and creditors respond with adjustments to compensate for the increased risk.Path analysis shows that the effect of goodwill impairments on the cost of debt is mediated by volatility in future profits and volatility in future cash flows. The study results remain consistent after controlling for firm fixed effects and accounting for sample heterogeneity using entropy balancing. Overall, the findings suggest that goodwill impairments send meaningful signals to the credit market pertaining to future financial performance.