The Invisible Burden

We study the role of goodwill, an important form of intangible assets arising from merger and acquisitions (M&As), on asset pricing. We find that goodwill-to-sales strongly and negatively predicts the cross-section of U.S. stock returns, especially among firms with cross-industry M&As and firms with overconfident CEOs. It remains an economically and statistically significant predictor of stock returns after adjustment for common factors. Our results suggest that goodwill-to-sales subsumes information on firm value, and stock markets underreact to this information because the fair value of goodwill is unobservable and hard to evaluate.

Keywords: Goodwill, Return Predictability, Cash Flow, Underreaction, Market Inefficiency

JEL Classification: G12, G14 G32, G34

Suggested Citation: Suggested Citation

Liu, Xin and Yin, Chengxi and Zheng, Weinan, The Invisible Burden (April 13, 2020). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3292675 or http://dx.doi.org/10.2139/ssrn.3292675