The Impairment of Purchased Goodwill: Effects on Market Value

40 Pages Posted: 19 Sep 2006 Last revised: 25 May 2012

See all articles by Kevin Li

Kevin Li

University of Cambridge - Judge Business School

Amir Amel-Zadeh

University of Oxford - Said Business School

Geoff Meeks

University of Cambridge - Judge Business School

Date Written: November 20, 2010

Abstract

This paper examines the value relevance of goodwill impairment and the information content of impairment announcements with the introduction of Financial Reporting Standard (FRS) 11 in the UK in 1998 which allowed an annual impairment review as an alternative to capitalisation and subsequent systematic amortisation of goodwill. In contrast to systematic amortisation of capitalised goodwill, our results suggest that goodwill impairment is associated with economically significant reductions in market value. We also find evidence of a significant negative market reaction to goodwill impairment announcements. The negative impact is greater for firms with a higher proportion of assets carried as goodwill and for firms that release little information prior to the announcement. Our results also confirm previous findings that capitalised goodwill is significantly associated with market value in the year of acquisition, but weakens thereafter; and that systematic amortisation of capitalised goodwill is not value-relevant.

Keywords: Goodwill, impairment, amortisation, value relevance, information content

JEL Classification: G14, G18, G34, M41, M44, M47

Suggested Citation

Li, Kevin and Amel-Zadeh, Amir and Meeks, Geoff, The Impairment of Purchased Goodwill: Effects on Market Value (November 20, 2010). Available at SSRN: https://ssrn.com/abstract=930979 or http://dx.doi.org/10.2139/ssrn.930979

Kevin Li (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Amir Amel-Zadeh

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Geoff Meeks

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0) 1223 764226 (Phone)
+44 (0) 1223 339701 (Fax)

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