Leading Indicators of Goodwill Impairment

Abstract

This paper examines whether currently available financial disclosures on acquired entities allow investors to effectively predict goodwill impairment, a task that has become more important following the recent abolishment of goodwill amortization. We track the performance of acquired companies through time from the year of the acquisition, using performance measures of the operating segment to which the acquired company's assets are allocated as well as characteristics of the acquisition. We find that available disclosures do not provide financial statement users with information to adequately predict future write-offs of goodwill. Further, the characteristics of the original acquisitions are more powerful predictors of eventual goodwill write-offs than those based on segment disclosures of the acquired entities' performance. On average, goodwill write-offs lag behind the economic impairment of goodwill by an average of three to four years. For a third of the companies examined, the delay can extend up to ten years.

Keywords: Financial Accounting Standard No. 142, Goodwill, Impairment, Acquisitions, Mergers, Intangible Assets, Write-offs, Write-downs, Announcement Period Returns, Bankruptcy Prediction, Segment Reporting

JEL Classification: M41, M45, M43, G34