The Value-Relevance of Goodwill Write-offs

Abstract:     
The SEC and the FASB recently have expressed concern that firms write-off some goodwill long after it becomes valueless. This study investigates the value-relevance of goodwill write-offs by considering different types of goodwill and possible market anticipation of goodwill write-offs. We find that goodwill write-offs lack value-relevance when researchers ignore the source of the goodwill. Conversely, we find that write-offs of some types of goodwill are value-relevant. Specifically, write-offs of goodwill related to intangible assets valued by the market are associated with both advance and contemporaneous stock price decreases. In addition, firms performing better (worse) than industry medians drive the contemporaneous (advance) reaction, consistent with market surprise to the write-off for firms reporting strong results and anticipation of the write-off for firms reporting relatively poor results. Write-offs of goodwill related to control premiums paid for target firms are not associated with stock price changes. Write-offs of "tax-related" goodwill (amounts written off when purchasing firms realize tax benefits from target firm net operating losses) are associated with stock price increases. Further, we find evidence that the market cannot anticipate tax-related goodwill write-offs for firms that consolidate after the acquisition because tax law imposes information requirements on the market that inhibit such anticipation.

JEL Classification: G34, M41, M44

working papers series