Goodwill Amortization and the Usefulness of Earnings

Posted: 26 Nov 2001

See all articles by Ross Jennings

Ross Jennings

University of Texas at Austin - Department of Accounting

Marc J. LeClere

Valparaiso University

Robert B. Thompson

American University

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Abstract

This study provides evidence of the effect of goodwill amortization on the usefulness of earnings data as an indicator of share value for a large sample of publicly traded companies over the 1993-98 period. This issue is of special interest because the Financial Accounting Standards Board recently adopted new accounting standards that eliminate the systematic amortization of goodwill in favor of a requirement to review goodwill for impairment when circumstances warrant. We found that earnings before goodwill amortization explain significantly more of the observed distribution of share prices than earnings after goodwill amortization and that when share valuations are based on earnings alone, goodwill amortization simply adds noise to the measure. These results suggest that eliminating goodwill amortization from the computation of net income will not reduce its usefulness to investors and analysts as a summary indicator of share value.

JEL Classification: M41, M44, G12

Suggested Citation

Jennings, Ross and LeClere, Marc J. and Thompson, Robert B., Goodwill Amortization and the Usefulness of Earnings. Financial Analysts Journal, Vol. 57, No. 5, September/October 2001. Available at SSRN: https://ssrn.com/abstract=287309

Ross Jennings (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

Marc J. LeClere

Valparaiso University ( email )

Valparaiso, IN 46383
United States
219-464-4158 (Phone)

Robert B. Thompson

American University ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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