The Invisible Burden

63 Pages Posted: 13 Dec 2018 Last revised: 14 Apr 2020

See all articles by Xin Liu

Xin Liu

Hanqing Advanced Institute of Economics and Finance, Renmin University of China

Chengxi (Adam) Yin

University of International Business and Economics

Weinan Zheng

The University of Hong Kong Faculty of Business and Economics

Date Written: April 13, 2020

Abstract

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

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

Xin Liu (Contact Author)

Hanqing Advanced Institute of Economics and Finance, Renmin University of China ( email )

Room 307A
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

Chengxi Yin

University of International Business and Economics ( email )

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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