The Invisible Burden: Goodwill and the Cross-Section of Stock Returns

57 Pages Posted: 13 Dec 2018 Last revised: 18 Jan 2019

See all articles by Xin Liu

Xin Liu

University of Bath

Chengxi (Adam) Yin

Renmin University of China

Weinan Zheng

The University of Hong Kong Faculty of Business and Economics

Date Written: January 18, 2019

Abstract

We study the role of goodwill, a form of intangible assets arising from past mergers and acquisitions, on asset pricing. We find that goodwill-to-sales strongly and negatively predicts the cross-section of stocks returns, especially among firms with cross-industry M&A histories and firms with overconfident CEOs. It remains as an economically and statistically significant predictor of stock returns after adjusted by all known factors. Our results suggest that high goodwill-to-sales subsumes negative information on future 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

Liu, Xin and Yin, Chengxi and Zheng, Weinan, The Invisible Burden: Goodwill and the Cross-Section of Stock Returns (January 18, 2019). Available at SSRN: https://ssrn.com/abstract=3292675 or http://dx.doi.org/10.2139/ssrn.3292675

Xin Liu (Contact Author)

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Chengxi Yin

Renmin University of China ( email )

59 Zhongguancun Street
Beijing
China

Weinan Zheng

The University of Hong Kong Faculty of Business and Economics ( email )

Hong Kong
(+852) 5547-5290 (Phone)

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