Investor Underreaction to Goodwill Write-Offs

Posted: 29 Jan 2004

See all articles by Mark Hirschey

Mark Hirschey

University of Kansas

Vernon J. Richardson

University of Arkansas at Fayetteville

Abstract

Current accounting rules end regular amortization of goodwill and mandate annual tests for goodwill impairment and loss recognition, when appropriate. These rules make consideration of goodwill write-offs important and timely. In the study reported here, we found that the effects of goodwill write-off announcements were typically negative and material - on the order of -2.94 percent to -3.52 percent of the company's stock price. What makes goodwill write-off announcements especially noteworthy for investors is that additional effects of roughly -11.02 percent were realized by the end of a one-year post-announcement period. These results suggest that investors initially underreact to goodwill write-off announcements and that they need to be aware of the potential for further losses in the post-announcement period.

Keywords: Equity Investments: fundamental analysis and valuation models; Financial Statement Analysis: financial accounting standards and proposals; Investment Theory: behavioral finance

Suggested Citation

Hirschey, Mark and Richardson, Vernon J., Investor Underreaction to Goodwill Write-Offs. Available at SSRN: https://ssrn.com/abstract=490805

Mark Hirschey (Contact Author)

University of Kansas ( email )

School of Business
1300 Sunnyside Ave.
Lawrence, KS 66045-7585
United States
785-864-7563 (Phone)
785-864-5328 (Fax)

HOME PAGE: http://www.business.ku.edu/gen/bschool_generated_pages/Hirschey_Mark_p2272.html

Vernon J. Richardson

University of Arkansas at Fayetteville ( email )

401 WCOB
Fayetteville, AR 72701
United States

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