Market Reaction to Goodwill Impairments

56 Pages Posted: 16 Jan 2012 Last revised: 7 Apr 2015

See all articles by Thorsten Knauer

Thorsten Knauer

Ruhr Universität Bochum

Arnt Wöhrmann

University of Giessen

Date Written: March 23, 2015

Abstract

This paper examines the information content of goodwill write-downs under International Accounting Standard (IAS) 36 (Impairment of Assets) and Statement of Financial Accounting Standards (SFAS) No. 142. We investigate whether the informational value depends on the reliability of the news. Using a sample of 564 goodwill write-down announcements issued from 2005 to 2009, we find a negative capital market reaction to announcements of unexpected goodwill write-offs. Our results indicate that investors react more negatively when a country’s level of legal protection is low and allows more management discretion. We further report that market reaction is associated with managers explaining the write-down decision and depends on the verifiability of these explanations. Investors react more negatively when an unverifiable internal explanation is given and less negatively when a verifiable external explanation is provided. We do not find significant differences between write-down announcements under SFAS 142 and IAS 36.

Keywords: Goodwill, IAS 36, SFAS 142, impairment, market reaction, write-down

JEL Classification: D78, G38, M41

Suggested Citation

Knauer, Thorsten and Wöhrmann, Arnt, Market Reaction to Goodwill Impairments (March 23, 2015). European Accounting Review Forthcoming. Available at SSRN: https://ssrn.com/abstract=1985477 or http://dx.doi.org/10.2139/ssrn.1985477

Thorsten Knauer (Contact Author)

Ruhr Universität Bochum ( email )

Universitätsstraße 150
Bochum, NRW 44801
Germany

HOME PAGE: http://www.wiwi.ruhr-uni-bochum.de/con/

Arnt Wöhrmann

University of Giessen ( email )

Managerial Accounting
Licher Str. 62
35394, 35394
Germany

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