SSRN-Investor Underreaction to Goodwill Write-Offs by Mark Hirschey, Vernon Richardson

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Investor Underreaction to Goodwill Write-Offs

MARK HIRSCHEY
University of Kansas
VERNON J. RICHARDSON
University of Arkansas at Fayetteville

Financial Analysts Journal, Vol. 59, No. 6, pp. 75-84, November/December 2003

Abstract:
Current accounting rules end regular amortization of goodwill and mandate annual tests for goodwill impairment and loss recognition, when appropriate. These rules make consideration of goodwill write-offs important and timely. In the study reported here, we found that the effects of goodwill write-off announcements were typically negative and material - on the order of -2.94 percent to -3.52 percent of the company's stock price. What makes goodwill write-off announcements especially noteworthy for investors is that additional effects of roughly -11.02 percent were realized by the end of a one-year post-announcement period. These results suggest that investors initially underreact to goodwill write-off announcements and that they need to be aware of the potential for further losses in the post-announcement period.

Keywords: Equity Investments: fundamental analysis and valuation models; Financial Statement Analysis: financial accounting standards and proposals; Investment Theory: behavioral finance

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Contact Information for MARK HIRSCHEY (Contact Author) Email address for MARK HIRSCHEY University of Kansas School of Business 1300 Sunnyside Ave. Lawrence , KS 66045-7585 United States 785-864-7563 (Phone) 785-864-5328 (Fax)
Contact Information for VERNON J. RICHARDSON Email address for VERNON J. RICHARDSON University of Arkansas at Fayetteville Fayetteville , AR 72701 United States

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