Goodwill Impairment Decisions and Market Reaction After Impairments

Abstract:

To study the influence of goodwill impairment decisions on stock price， the equity market reaction of goodwill impairment decisions is examined based on a comprehensive sample of 885 goodwill impairment charges of Chinese listed companies in 2018. The event study method is adopted to calculate the short-term and long-term market performance while the multiple regression methodology is utilized to test influencing factors. The regression findings indicate that short-term market performance of a company is negatively associated to the proportion of goodwill impairment in the balance of goodwill. In addition， the goodwill balance negatively affects the long-term market performance of a company. The empirical evidences suggest that goodwill impairments will lead to the decline of stock prices in the short-term， and the decline rate depends on the proportion of goodwill impairment. The reduction of goodwill balance can positively affect the market performance of companies in the long-term.