Goodwill impairment, economic uncertainty and corporate tax avoidance

Purpose This paper investigates the impact of goodwill impairments on corporate tax avoidance and provides explanations for this association from the perspective of economic policy uncertainty. Design/methodology/approach Using a sample of nonfinancial firms listed on China’s A-share market, this study empirically investigates the impact of a deduction allowed by accounting standards on the level of corporate tax avoidance and rules out the possibility that this association is driven by managerial opportunism. Findings Impairment losses are positive and significant, associated with corporate tax avoidance. Economic policy uncertainty, instead of earnings management incentives, drives the recognition of goodwill impairments and ultimately leads to a higher level of tax avoidance. Moreover, higher financial constraints and lower accruals quality strengthen the positive association between impairments and tax avoidance and strict tax enforcement and more government subsidies attenuate the positive impact of impairments on tax avoidance. Practical implications This study provides important implications for distinguishing the intended and unintended tax avoidance and helps tax authorities detect and handle tax planning cases according to different situations. Originality/value This study enriches literature on the economic consequences of goodwill impairments and increases our understanding of the influence of perceived economic policy uncertainty at the firm level on corporate behavior.