The Invisible Burden
63 Pages Posted: 13 Dec 2018 Last revised: 14 Apr 2020
Date Written: April 13, 2020
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