Goodwill Write-Off and Financial Market Behaviour: An Analysis of Possible Relationships

Abstract

The aim of this contribution is to verify whether there exists a reaction of financial markets to the new accounting method for goodwill introduced by SFAS 142 and IAS 36. Our research hypothesis is that financial markets should have no significant reaction to the goodwill write-off following the impairment test, since the latter's outcome represents an economic estimate without financial significance. The hypothesis was checked by the analysis of the companies added to the Standard & Poor's Europe 350 index over a three-year period, taking note of goodwill write-off announcements and relating them with the stock market prices and their volatility. The results demonstrate a correlation between the goodwill write-off and the behaviour of financial markets, while the same connection cannot be evinced for prices volatility. Also, what comes out from our analysis is that markets need a relatively long period, over one semester, before absorbing in full the effects resulting from the write-off announcement.

Keywords: impairment, impairment test, IAS, financial accounting, market reaction, goodwill, write-off, goodwill charge, goodwill write-off

JEL Classification: M44