Articlegreen2015

Market Reaction to Goodwill Impairments

89 citations0/0 files storedEuropean Accounting Review

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Accounting Theory and Financial Reporting

Abstract

This paper examines the information content of goodwill write-downs under International Accounting Standard (IAS) 36 (Impairment of Assets) and Statement of Financial Accounting Standards (SFAS) No. 142. We investigate whether the informational value depends on the reliability of the news. Using a sample of 564 goodwill write-down announcements issued from 2005 to 2009, we find a negative capital market reaction to announcements of unexpected goodwill write-offs. Our results indicate that investors react more negatively when a country's level of legal protection is low and allows more management discretion. We further report that market reaction is associated with managers explaining the write-down decision and depends on the verifiability of these explanations. Investors react more negatively when an unverifiable internal explanation is given and less negatively when a verifiable external explanation is provided. We do not find significant differences between write-down announcements under SFAS 142 and IAS 36.

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References

1998Law and Finance 1997A Survey of Corporate Governance 1997Legal Determinants of External Finance 2003Earnings management and investor protection: an international comparison 2000The effect of international institutional factors on properties of accounting earnings 2003Conservatism in Accounting Part I: Explanations and Implications 2008Do Managers Withhold Bad News?2008Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences

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2016Compliance with goodwill-related mandatory disclosure requirements and the cost of equity capital 2018The effect of corruption and culture on mandatory disclosure compliance levels: Goodwill reporting in Europe 2020Goodwill Impairment, Securities Analysts, and Information Transparency 2021Empirical Goodwill Research: Insights, Issues, and Implications for Standard Setting and Future Research 2018Reviewing IFRS Goodwill Accounting Research: Implementation Effects and Cross-Country Differences

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