The Invisible Burden: Goodwill and the Cross-Section of Stock Returns
57 Pages Posted: 13 Dec 2018 Last revised: 18 Jan 2019
Date Written: January 18, 2019
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: Suggested Citation