Goodwill and Firm Innovation: An Inverted-U Relationship

The paper explores the impact of goodwill on firm innovation using data from Chinese listed firms over the period 2007-2017. The study reveals strong evidence supporting an inverted-U relationship between goodwill and firm innovation. Specifically, when goodwill is less than 11-13% of total assets, an increase in goodwill positively affects firm innovation. However, then the ratio of goodwill to total assets exceeds 14%, increasing goodwill hampers firm innovation. Heterogeneity analyses indicate that the inverted-U relationship remains consistent across various groups of firms, except for those audited by the Big Four accounting firms. Lastly, we show that financial constraints, ownership concentration, and manager sentiment are three channels that can help explain the inverted-U relationship.