Review of Accounting Studies

, Volume 16, Issue 4, pp 745-778

First online:

Causes and consequences of goodwill impairment losses

  • Zining LiAffiliated withSouthern Methodist University
  • , Pervin K. ShroffAffiliated withUniversity of Minnesota, Carlson School of Management Email author 
  • , Ramgopal VenkataramanAffiliated withSouthern Methodist University
  • , Ivy Xiying ZhangAffiliated withUniversity of Minnesota, Carlson School of Management

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The paper examines the reaction of market participants to the announcement of a goodwill impairment loss, the nature of the information conveyed by the loss, and whether a cause of goodwill impairment can be traced back to overpayment for targets at the time of prior acquisitions. Our evidence suggests that both investors and financial analysts revise their expectations downward on the announcement of an impairment loss. We find that the negative impact of the loss is significant under different reporting regimes, that is, pre-SFAS-142, transition period and post-SFAS-142, though it is lower in the post period. We further show that goodwill impairment serves as a leading indicator of a decline in future profitability. Our tests also reveal that proxies for overpayment for targets can predict the subsequent goodwill impairment. Indirect evidence suggests that firms with potentially impaired goodwill that did not report an impairment loss may have used their managerial discretion to avoid taking the loss.


Goodwill write-off SFAS 121 SFAS 142 Acquisitions Managerial discretion

JEL Classification

G14 G34 M41 M48