Examining the patterns of goodwill impairments in Europe and the US


Accounting in Europe

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Départements : Comptabilité et Contrôle de Gestion, GREGHEC (CNRS)

Mots clés : Goodwill, Impairment, IFRS 3, IAS 36, Europe, US

We examine the patterns of goodwill impairments in Europe and in the US over the period from 2006 to 2015, for a sample of more than 35,000 firm-year observations. We define the timeliness of goodwill impairments as the frequency of accounting impairments conditional to indications of economic impairments. We measure indications of economic impairment with three metrics: equity market value minus equity book value less than goodwill, market-to-book smaller than one, and negative EBITDA. Our research strategy leads us to draw very different conclusions than those in the recent EFRAG (2016) study. While median levels of goodwill on the books between US and European firms are relatively similar, we find several indications that US firms recognize timelier impairments, at least during 2008 and 2009, i.e., the early years of the financial crisis. We further document that US impairers write down a much greater percentage of their beginning balance of goodwill than European impairers. During the financial crisis, the median level of impairment by US firms was 63% of opening goodwill in 2008 and 40% in 2009, whereas median European write-downs were only 6% and 7% of goodwill, respectively. Even though European firms are more likely to impair over multiple years, the cumulative impairments never come close to the level of US firms, be it in a single year or cumulative over multiple years. We also find that the frequency of accounting impairment is small compared to the number of firms presenting evidence of economic impairment: only 20 to 25% of firms recognize impairments depending on the measure of economic impairment. This has often been interpreted by academics as a sign of untimely write-offs. Accounting differences between US GAAP and IFRS are unlikely to explain our results. One caveat of our analysis is that it does not allow us to draw conclusions on whether the observed differences between US and European firms are driven by differences in conditional conservatism and/or big bath accounting practices

Financial Transaction Taxes, Market Composition, and Liquidity


The Journal of Finance

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Financial transaction tax, institutional trading, liquidity, high-frequency trading

We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on the impact of FTTs. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the idea that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term institutional investors. More generally, our findings confirm that moderate aggregate effects on market quality can mask large adjustments made by individual market participants

Financing Capacity Investment Under Demand Uncertainty: An Optimal Contracting Approach


Manufacturing & Service Operations Management

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Capacity, Optimal Contracts, Financial Constraints, Newsvendor Model

We study the capacity choice problem of a firm whose access to capital is hampered by financial frictions in the form of moral hazard. The firm must therefore optimize not only its capacity investment under demand uncertainty, but also its sourcing of funds. Ours is the first study of this problem to follow an optimal contracting approach, where feasible source of funds are derived endogenously from fundamentals and include standard financial claims (debt, equity, convertible debt, call and put warrants, etc.) and combinations thereof. We characterize the optimal capacity level. First, we find conditions under which a feasible financial contract exists that achieves first-best. When no such contract exists, we find that under optimal financing, the choice of capacity sometimes exceeds strictly the efficient level. This runs counter to the literature on financing capacity investment in funds and the intuition that by raising the cost of external capital and hence the unit capacity cost, financial market frictions lower the optimal capacity level. We trace the value of increasing capacity beyond the efficient level to a bonus effect and a demand differentiation effect. In contrast to most of the literature on financing capacity, our results are robust to a change of financial contract

Health Cost Risk: A Potential Solution to the Annuity Puzzle


Economic Journal

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Life-cycle portfolio choice;retirement;post-retirement investment

We find that health cost risk lowers optimal annuity demand at retirement. If medical expenses can be sizeable early in retirement, full annuitisation at retirement is no longer optimal because agents do not have enough time to build a liquid wealth buffer. Furthermore, large deviations from optimal annuitisation levels lead to small utility differences. Our results suggest that health cost risk can explain a large proportion of empirically observed annuity choices. Finally, allowing additional annuitisation after retirement results in welfare gains of at most 2.5% when facing health cost risk, and negligible gains without this risk

Herding and Social Media Word-of-Mouth: Evidence from Groupon

X. LI, L. WU

MIS Quarterly

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Départements : Information Systems and Operations Management, GREGHEC (CNRS)

Mots clés : Herding, word-of-mouth, social media, interaction effect, complementarity

Modern online retailing practices provide consumers with new types of real-time information that can potentially increase demand. In particular, showing past product sales information can reduce uncertainty about product quality, inducing consumers to herd. This effect could be particularly salient for experience goods due to their inherent high uncertainty about product quality. Social media word-of-mouth (WOM) can increase product awareness as product information spreads via social media, increasing demand directly and also amplifying existing quality signals such as past sales. This study examines the mechanisms behind the strategy of facilitating herding and the strategy of integrating social media platforms to understand the potential complementarities between the two strategies. We conduct empirical analysis using data from which sells goods in a fast cycle format of “daily deals”. We find that facilitating herding and integrating social media platforms are complements in generating sales, supporting that it is beneficial to combine the two strategies on social media-driven platforms. Furthermore, we find that herding is more salient for experience goods, consistent with our hypothesized mechanisms, while the effect of social media WOM does not differ between experience goods and search goods

How Do Firm Political Connections Impact Foreign Acquisitions? The Effects of Decision Makers’ Political and Firm Embeddedness


Global Strategy Journal

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Départements : Stratégie et Politique d’Entreprise, GREGHEC (CNRS)

Mots clés : political connections, non-market strategies, foreign acquisitions, French firms, mental models

Research summary: We examine how firm political connections established through the political embeddedness of senior decision makers affect firms’ foreign acquisition strategy. We argue that such political embeddedness affects the mental models of decision makers and, in turn, influences their preferences for particular strategies. We propose that political embeddedness leads to the formation of mental models that favor foreign acquisition strategies. We further argue that the firm embeddedness of politically-embedded decision makers alters their mental models, thereby mitigating their inclination for such strategies. We find evidence consistent with our mental models explanation using a sample of foreign acquisitions made by French publicly-traded firms during the 2009-2014 period. Overall, this study contributes to a better understanding of the mechanisms through which political connections impact global strategy. Managerial summary: We investigate how firm political connections affect firms’ foreign acquisition strategies. We argue that when firms have top decision makers with close connections to the government, they will make more foreign acquisitions. We further argue that this inclination towards foreign acquisitions is primarily driven by non-executive board members, with politically-connected executives appearing to be more reluctant to engage in such strategies. We find evidence consistent with these ideas when examining foreign acquisitions made by French publicly-traded firms managed by graduates of the prestigious ENA government school, which trains many government and senior civil servants in France

How Much Do Means Tested Benefits Reduce the Demand for Annuities?


Journal of Pension Economics and Finance

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Means-Tested Benefits, Occupational Pension, Annuity

We analyze the effect of means-tested benefits on annuitization decisions using an administrative dataset of pension wealth cash-out choices. Availability of means-tested payments creates an incentive to cash out pension wealth for low and middle income earners, instead of taking the annuity. Agents trade off the advantages from annuitization, receiving longevity risk insurance, to the disadvantages, giving up “free” wealth in the form of means-tested supplemental income. Our life-cycle model demonstrates that the availability of means-tested benefits substantially reduces the desire to annuitize especially for low and intermediate levels of pension wealth. In our empirical analysis we show that the model’s predicted fraction of retirees choosing the annuity is able to match the annuitization pattern of occupational pension wealth observed in Switzerland

Impact of Average Rating on Social Media Endorsement: The Moderating Role of Rating Dispersion and Discount Threshold


Information Systems Research

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Départements : Information Systems and Operations Management, GREGHEC (CNRS)

Inventory allocation models for a two-stage, twoproduct, capacitated supplier and retailer problem with random demand


International Journal of Production Economics

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Départements : Information Systems and Operations Management, GREGHEC (CNRS)

Mots clés : supply chain management, inventory management, capacity allocation, heuristic methods

The objective of this research is to develop an optimal inventory allocation methodology for a supply chain consisting of a capacitated retailer with limited shelf space, and two unreliable capacitated suppliers in an uncertain environment. We develop conceptual and analytical models that provide allocation preferences between shelf-space and warehouse in both deterministic and stochastic demand cases, and develop managerial insights based on them. For each case, we provide both a closed-form solution and a heuristic method, and illustrate the bounds on the optimal solution. Further, we show that the cost function is L-convex in some cases. Finally, we prove that the expected profit decreases as the variance of demand increases

Life-Cycle Asset Allocation with Ambiguity Aversion and Learning


Journal of Financial and Quantitative Analysis

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Départements : Finance, GREGHEC (CNRS)