Goodwill Impairment : Predicting goodwill impairment with the market reaction to acquisitions

Abstract: In the economy intangible assets have become more and more important. Financial standards have evolved in order to capture this change and to be relevant. IFRS are international financial accounting standards with the goal to provide investors relevant information in their investment decision process.  Since 2005, all listed companies in the European Union have to implement the IFRS 3; Forcing companies to write off their goodwill instead of amortizing it. The goal of this measure was to provide investors more information about management’s investment decisions. Beside, companies proceed to firm acquisitions in order to gain a competitive advantage. Such events are important in companies’ life and are impacting the potential value creation. Out of that reason, investors are reacting to acquisition announcements. Moreover, the market reacts to goodwill impairments.   The purpose of this research was to examine to what extent the market reaction of an acquisition announcement can predict goodwill impairment in the two following years. This study was conducted using a quantitative method; focusing on aspects of the financial statements of 43 companies from the Nordic countries that acquired companies in the G20 countries. A Spearman’s correlation, logistic and linear regressions were pursued in order to observe the correlation and the strength of the relationship between goodwill impairment and the market reaction.   The findings imply that the market reaction can predict goodwill impairment in the first year after an acquisition in case of positive market reaction. Additional to that, it can also predict the amount of impairment in the second year, but not whether the impairment is happening. Also, there is a correlation between the first and second year goodwill impairments. However, the results of this research indicate that neither the industry, financial or non-financial, nor the deal value can predict goodwill impairment after an acquisition.