Bridge over ocean
1 November 2003 Financial Analysts Journal Volume 59, Issue 6

Investor Underreaction to Goodwill Write-Offs

  1. Mark Hirschey
  2. Vernon J. Richardson

Current accounting rules end regular amortization of goodwill and mandate annual tests for goodwill impairment and loss recognition, when appropriate. These rules make consideration of goodwill write-offs important and timely. In the study reported here, we found that the effects of goodwill write-off announcements were typically negative and material—on the order of −2.94 percent to −3.52 percent of the company's stock price. What makes goodwill write-off announcements especially noteworthy for investors is that additional effects of roughly −11.02 percent were realized by the end of a one-year post-announcement period. These results suggest that investors initially underreact to goodwill write-off announcements and that they need to be aware of the potential for further losses in the post-announcement period.

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