Causes and consequences of goodwill impairment losses |
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Authors: | Zining Li Pervin K Shroff Ramgopal Venkataraman Ivy Xiying Zhang |
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Institution: | (1) Southern Methodist University, PO BOX 750333, Dallas, TX 75275, USA;(2) University of Minnesota, Carlson School of Management, 321 19th Ave. South, Minneapolis, MN 55455, USA |
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Abstract: | 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. |
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