THE SHORT-TERM EFFECT OF GOODWILL IMPAIRMENT ANNOUNCEMENTS ON COMPANIES’ STOCK PRICES

Lucy P. Allen
Jorge Baez
National Economic Research Associates, Inc.

ABSTRACT

This study examines the short-term effect of goodwill impairment announcements on
companies’ stock prices. The substantial changes in accounting rules regarding goodwill
impairment in recent years, as well as the expected increase in goodwill impairment
announcements given the current COVID-19-driven economic downturn, make this evaluation
relevant. The results of this study indicate that after the adoption of the most recent substantial
change to goodwill accounting, accounting standards update (ASU) 2011-08, the stock price
reaction to announcements of goodwill impairment is not statistically significant. Prior literature
found that under previous accounting regulations there was a negative stock price reaction to
impairment announcements, and that this effect had been decreasing as updates relaxing prior
regulations’ stringent testing procedures were implemented. The results of this study suggest that
investors, following the recent accounting changes, find no new information in impairment
announcements. these findings help inform decisions on whether the cost, complexity, and burden
of goodwill impairment accounting can provide a compensating benefit.

Keywords: Goodwill impairment, stock price reaction; accounting standards update (ASU) 2011-08; market
efficiency; event study