Does Tax Deductibility Affect Goodwill Impairment Decisions?

Using a setting with tax-deductible goodwill impairments, we examine how tax deductibility affects impairment decisions. Goodwill impairments are costly to firms, and managers generally attempt to avoid recording impairments. However, we propose that tax deductibility reduces the net cost of impairment, increasing the likelihood of impairment. Results indicate that tax deductibility increases impairment likelihood, especially when capital market pressure is high, consistent with tax deductibility reducing the net cost of impairments (i.e., partially offsetting high costs of impairment). We rule out known plausible nontax explanations for these effects. Overall, results suggest that taxation is an important, previously overlooked determinant of economically important goodwill impairments.