Abstract
Prior studies find a negative stock price reaction after goodwill impairment write-offs both in the short term and in the long term. In 2002 the Financial Accounting Standards Board rules for accounting for goodwill changed. We examine data from after the rule changes and find that investors continue to perceive goodwill write-offs as negative events in the short term, but contrary to previous studies, we find that investors perceive goodwill write-offs as positive news in the long term. We provide evidence suggesting that firms incorporate all foreseeable non-recurring charges into the goodwill impairment. We examine the overall firm performance and find that it improves significantly post event. However, firm operating performance only slightly improves after the write-off. The overall firm performance improvements are due to decreased non-recurring charges in the years subsequent to the write-off.
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Notes
See the Financial Accounting Standards Board 2007, Business Combinations.
Write-off announcements frequently occur at earnings releases. The post-announcement abnormal return cannot be a manifestation of post-earnings announcement drift because, with write-offs, the long term response (more than) reverses the initial reaction.
Firms were required to make the transition to the new accounting rules in 2001. Fiscal year 2002 was completely under the new SFAS 142 guidelines.
Hayn and Hughes (2006) find that not only has the number of write-offs increased, but the size of the write-off has grown as well.
Examples of substantial write-offs include Time Warner’s $44.69B write-off in December of 2002 related to the AOL acquisition in 2000; Qwest’s $8.48B write-off in December of 2002 related to the U.S. West acquisition in June of 2000; and Macy’s Inc. $5.4B write-off in January of 2009 related to the May Department Stores acquisition of 2005.
The address of Kenneth French’s website is http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.
The Compustat variable for the quarterly pre-tax goodwill impairment write-off is GDWLIPQ.
All data from Eastman Kodak Company is deleted to avoid any potential confidentiality concerns due to a previous affiliation of one of the authors with Eastman Kodak.
The new goodwill accounting rules went into effect beginning with fiscal year 2002. The first date of any firm in our sample is October 2001, which is part of their fiscal year 2002, and thus is under the auspices of the new rules. We therefore use this as our starting date in our size analysis.
The Compustat mnemonic for net income is NI, and operating income before depreciation is OIBDP.
The raw returns are the mean returns of the portfolios minus the risk free rate, but not adjusted for risk using MKT, SMB, HML, and UMD.
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Cheng, Y., Peterson, D. & Sherrill, K. Admitting mistakes pays: the long term impact of goodwill impairment write-offs on stock prices. J Econ Finan 41, 311–329 (2017). https://doi.org/10.1007/s12197-015-9349-z
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DOI: https://doi.org/10.1007/s12197-015-9349-z