The impact of reporting goodwill and impairments on the market's anticipation of future earnings
Journal
NTU Management Review
Journal Volume
25
Journal Issue
2
Pages
23-52
Date Issued
2015
Author(s)
Abstract
We investigate the effect of reporting goodwill and impairments on the stock market's ability to predict acquirers' future earnings, as captured by the Future Earnings Response Coefficient (FERC). Based on Collins, Kothari, Shanken, and Sloan (1994), the FERC is the association between current-year stock returns and next-year corporate earnings. Reporting goodwill reveals economic rents expected by the acquirers when they allocate purchase prices among purchased assets. This allocation assigns fair value to the book of identifiable assets acquired in business combinations. Periodical impairment tests update the fair value information. The information enables market participants to match post-merge revenue with depreciation expenses of the identifiable assets. Our results show robust evidence consistent with this argument, supporting the usefulness of fair value accounting for goodwill and impairments.
Type
journal article