Goodwill and Stock Price Crash Risk: An International Study

Abstract

Using data from 43 markets around the world, we document that firms with larger goodwill balances have a higher stock price crash risk in future years. The positive association between goodwill balances and future crash risk is stronger for firms with weaker incentives to provide transparent disclosure, in markets with poorer investor protection or weaker accounting and auditing enforcement, and after periodic goodwill amortization was replaced by fair-value- based goodwill impairment. Further evidence suggests that goodwill balances are positively related to a measure of bad news withholding. Overall, the results are consistent with the view that managers have greater tendency to withhold negative information about goodwill and delay the release of information about the economic impairments of goodwill, thereby leading to increasing the likelihood of stock price crash occurrences in the future.

Keywords: Goodwill, intangible assets, accounting standards, stock price crash risk

JEL Classification: G14, G41