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Admitting mistakes pays: the long term impact of goodwill impairment write-offs on stock prices

Author

Listed:
  • Yingmei Cheng

    (Florida State University)

  • David Peterson

    (Florida State University)

  • Karen Sherrill

    (Sam Houston State University)

Abstract

Prior studies find a negative stock price reaction after goodwill impairment write-offs both in the short term and in the long term. In 2002 the Financial Accounting Standards Board rules for accounting for goodwill changed. We examine data from after the rule changes and find that investors continue to perceive goodwill write-offs as negative events in the short term, but contrary to previous studies, we find that investors perceive goodwill write-offs as positive news in the long term. We provide evidence suggesting that firms incorporate all foreseeable non-recurring charges into the goodwill impairment. We examine the overall firm performance and find that it improves significantly post event. However, firm operating performance only slightly improves after the write-off. The overall firm performance improvements are due to decreased non-recurring charges in the years subsequent to the write-off.

Suggested Citation

  • Yingmei Cheng & David Peterson & Karen Sherrill, 2017. "Admitting mistakes pays: the long term impact of goodwill impairment write-offs on stock prices," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(2), pages 311-329, April.
    • Handle: RePEc:spr:jecfin:v:41:y:2017:i:2:d:10.1007_s12197-015-9349-z
    DOI: 10.1007/s12197-015-9349-z
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    References listed on IDEAS

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    1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    2. Churyk, Natalie Tatiana, 2005. "Reporting goodwill: are the new accounting standards consistent with market valuations?," Journal of Business Research, Elsevier, vol. 58(10), pages 1353-1361, October.
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    Cited by:

    1. Xu, Jingjing & Huang, Haijie & Lee, Edward & Petaibanlue, Jirada, 2023. "Does goodwill pressure drive business restructuring based on subsidiary disposal?," International Review of Financial Analysis, Elsevier, vol. 86(C).
    2. Bartłomiej Lisicki, 2021. "Impairment of Assets and Market Reaction during COVID-19 Pandemic on the Example of WSE," Risks, MDPI, vol. 9(10), pages 1-21, October.
    3. Gulraze Wakil, 2020. "Firm size proxies and the value relevance of predictive stock return models," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(3), pages 434-457, July.
    4. Killins, Robert & Ngo, Thanh & Wang, Hongxia, 2021. "Goodwill impairment and CEO overconfidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).

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    More about this item

    Keywords

    Goodwill; Impairments; Write-offs; Earnings management;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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