The Value Relevance of Goodwill Impairment and the Impact of Financial Leverage: Evidence from Sweden

Abstract: The aim of this study is first to examine the value relevance of goodwill impairment losses, and second, to examine the impact of financial leverage on value relevance. Value relevance is defined as the statistical association between the market reaction of earnings announcement and the reported goodwill impairment loss. Goodwill impairment losses are considered value relevant if the association between the market reaction and the reported goodwill impairment loss is statistically significant and non-zero. The sample consists of firms listed on Nasdaq OMX Stockholm with recognized goodwill impairment losses between 2005 and 2013. The value relevance analysis is carried out with two separate multivariate OLS regressions. The results suggest, in contrast to most prior value relevance studies, that goodwill impairment losses on average are non-value relevant for investors on the Swedish equity market. Similarly, goodwill impairment losses are non-value relevant for investors of firms with low financial leverage. However, for firms with high financial leverage, goodwill impairment losses cause a negative market reaction and are considered value relevant by the investors. The value relevance of goodwill impairment is therefore determined by financial leverage. This study therefore supports prior research stating that the market reaction to goodwill impairment becomes more negative with financial leverage. A robustness test is also carried out, suggesting that debt covenants play a crucial part in explaining why value relevance is determined by financial leverage.