Journal of Accounting and Public Policy 21 (2002) 173–191

www.elsevier.com/locate/jaccpubpol

Information content of
accounting goodwill numbers q
Mark Hirschey *, Vernon J. Richardson
School of Business, University of Kansas, Lawrence, KS 66045-2003, USA

Abstract
Information effects narrowly tied to goodwill write-off announcements are typically
negative and material, on the order of 2–3% of the companyÕs stock price. In the one-
year pre-announcement period, negative information effects on the order of )40% are
also noted. Post-announcement period information effects of roughly )11% suggest that
much, but perhaps not all, of the negative information (valuation) effects tied to
goodwill write-off announcements are realized by the end of the announcement period.
Negative stock-price effects tied to goodwill write-off decisions indicate that accounting
goodwill numbers capture a significant aspect of the intangible dimension of firm value,
and suggest that accounting theory and practice is adept at identifying when such
intangible assets are impaired.
Ó 2002 Elsevier Science Inc. All rights reserved.

1. Prior studies

From an economic perspective, balance-sheet accounting goodwill data

represents useful financial information if it helps investors form appropriate
perceptions concerning intangible dimensions of firm value. Recent studies
suggest that this is indeed the case. For example, Chauvin and Hirschey (1994)

q
An earlier version of this paper was presented at the meetings of the Financial Management
Association in Seattle, Washington. Several helpful suggestions were made by two anonymous
referees. Of course, only the authors are responsible for what lies herein.
*
Corresponding author. Tel.: +1-785-864-7563; fax: +1-785-864-5328.
E-mail address: [email protected] (M. Hirschey).

0278-4254/02/$ - see front matter Ó 2002 Elsevier Science Inc. All rights reserved.
PII: S 0 2 7 8 - 4 2 5 4 ( 0 2 ) 0 0 0 4 8 - 0
174 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

use a simple three-part recursive system of simultaneous relations to identify

consistently positive market-value influences of accounting goodwill numbers
in the manufacturing sector. Chauvin and Hirschey (1994) infer that ac-
counting goodwill data offer a useful perspective on the hard-to-measure on-
going concern (reputational) value component of the economic value of the
firm. In a related paper, McCarthy and Schneider (1995), support Chauvin and
HirscheyÕs (1994) contention that the market regards accounting goodwill
numbers as a useful indicator of goodwill assets. This view is corroborated by
Jennings et al. (1996) who offer strong evidence that investors value purchased
goodwill as an economic resource, and weak evidence that purchased goodwill
is declining in value.
Henning et al. (2000) add perspective to these findings by showing that in-
vestors attach different valuation weights to various components of accounting
goodwill numbers. For a sample of acquisitions between 1990 and 1994,
Henning et al. (2000) find differential valuation effects for: (1) going-concern
goodwill, measured as the difference between the fair value of recognized assets
and the pre-acquisition value of the target; (2) synergy goodwill, or the com-
bined cumulative abnormal returns earned by the target and the acquirer in the
event window centered on the acquisition announcement; and (3) residual
goodwill, or the excess of purchased goodwill over going-concern goodwill plus
synergy goodwill. Using a cross-sectional ‘‘balance sheet model’’ similar to
Chauvin and Hirschey (1994), Henning et al. (2000) find significantly positive
valuation effects of both going-concern goodwill and synergy goodwill, but
negative market value effects of residual goodwill. The going concern com-
ponent of goodwill appears to be valued similarly to other assets, while the
synergy component of goodwill receives a higher weight by the market. This
latter result suggests that acquirers pay less than the full economic value of
targets, and thereby share in the benefits of acquisitions. Negative market value
effects of residual goodwill suggests that historical treatments of accounting
goodwill include asset values that are effectively written off by investors during
the year of acquisition.
This paper proposes a new test of the information content of accounting
goodwill numbers using an event-study methodology that avoids potential
pitfalls of the balance sheet models tested by Chauvin and Hirschey (1994),
among others. As noted by Chauvin and Hirschey (1994), important positive
influences of advertising and R&D on goodwill are apparent, as are beneficial
spillover effects of identifiable intangible assets. A reservoir of customer
goodwill enjoyed by large firms with significant tangible assets is also apparent.
While Chauvin and Hirschey (1994) find robust support for the hypothesis that
the positive valuation effects of goodwill are above and beyond the now fa-
miliar favorable market-value effects of advertising, R&D and tangible assets,
modeling problems complicate the precise identification of each respective
positive market-value influence.
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 175

In the event-study framework adopted here, we analyze market-value effects

of goodwill write-off decisions. Goodwill write-off announcements can be
precisely identified, so any resulting market-value influence can be taken as
evidence that investors regard such accounting information as useful. If
goodwill write-off announcements represent meaningful information concern-
ing the loss of economic goodwill, significant negative stock-price effects can be
anticipated. By precisely identifying the timing of goodwill write-off an-
nouncements, the problem of confounding the stock-price effects of goodwill
numbers with similar influences due to advertising, R&D or tangible assets is
eliminated. Negative stock-price effects tied to goodwill write-off announce-
ments represent an important confirmation of the economic relevance of
goodwill accounting numbers because such announcements typically have no
direct cash flow implications. More than ‘‘mere’’ accounting pronouncements,
negative stock-price effects tied to goodwill write-off announcements suggest
the economic relevance of historical accounting goodwill numbers. Such effects
also suggest the relevance of new accounting standards that mandate the timely
write-off of impaired goodwill assets.
The paper is organized as follows: Section 2 gives a brief review of the new
goodwill accounting standards and goodwill write-off decisions. Section 3
discusses data and methodology. Section 4 shows stock-price behavior during
the goodwill write-off announcement period, and during the pre-announcement
and post-announcement periods. Conclusions and implications for accounting
policy are given in Section 5.

2. Accounting for goodwill

2.1. New accounting standards

Until recently, goodwill accounting in the United States was governed by

rules contained in American Institute of Certified Public Accountants
(American Institute of Certified Public Accountants, 1970a,b), Accounting
Principles Board (APB) Opinion no. 16, Business Combinations (Issued 1970).
Under APB Opinion no. 16, goodwill was defined as ‘‘the excess of the cost of
the acquired company over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed (para. 87)’’. Generally speaking, any
excess of fair market value over the book value of the acquired firmÕs recog-
nized net assets was recorded as goodwill. The amount paid for goodwill in a
purchase combination was amortized over a period not to exceed 40 years. To
avoid the resulting drag on reported earnings, the vast majority of companies
sought to account for their combinations on a pooling of interest basis in which
purchased goodwill was not recorded and amortized.
176 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

Under APB Opinion no. 16, goodwill accounting policy in the US was
starkly different from global standards, and was thought by many to be out of
step with economic reality. For example, Reither (1998) asked a group of
participants in the 1996 American Accounting Association/Financial Ac-
counting Standards Board (AAA/FASB) Financial Reporting Issues Confer-
ence to consider the entire body of accounting standards, and to identify
winners and losers. APB Opinion no. 16 was voted the second worst ac-
counting standard, next to Accounting for Leases, FASB Statement no. 13.
Respondents gave five major reasons for rating APB Opinion no. 16 as among
the worst of all accounting standards. Concerns include: (a) the choice of a
pooling-of-interests or purchase method treatment for a business combination
is arbitrary; (b) under the standard, the form of a business combination can
become more important than its substance; (c) similar business combinations
are accounted for differently; (d) the standard raises the cost of business
combinations as companies strive to meet pooling-of-interest requirements
while avoiding SEC enforcement actions; and (e) the US standard is incon-
sistent with global accounting standards. In most countries, pooling-of-inter-
ests methods are exceedingly rare.
While practical problems involved with identifying and measuring goodwill
make setting a clear and appropriate accounting standard difficult, users of
financial statement information complained that it was difficult to compare
financial results for entities that used different methods of merger accounting.
Users of financial statements also indicated a need for more specific informa-
tion about the value of intangible assets because intangibles have become a
significant proportion of the value motivating many business combinations.
Corporate management also voiced concern that differences between the
pooling and purchase methods of accounting affected competition in the
mergers and acquisitions markets.
After a prolonged period of study and comment, the accounting profession
recently adopted historic new goodwill accounting standards. For fiscal years
that end subsequent to December 15, 2001, Financial Accounting Standards
Board (FASB, 2001a,b) Statement no. 141, Business Combinations (Issued
June, 2001), supersedes APB Opinion no. 16. FASB Statement no. 141 requires
that all business combinations be accounted for by the purchase method. 1 In
addition, FASB Statement no. 141 requires disclosure of the primary reasons

1
FASB Statement no. 141 applies to all business combinations initiated after June 30, 2001, and
all business combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. This statement does not apply, however, to combinations of two
or more not-for-profit organizations, the acquisition of a for-profit business entity by a not-
for-profit organization, and combinations of two or more mutual enterprises.
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 177

for a business combination and an allocation of the purchase price among the
assets acquired. When the amounts of goodwill and intangible assets acquired
are significant, disclosure must be made of the amount allocated among
goodwill and each major intangible asset class. The related FASB Statement
no. 142, Goodwill and Other Intangible Assets (Issued June, 2001), specifically
governs financial reporting for acquired goodwill and other acquired intangible
assets, and supersedes American Institute of Certified Public Accountants,
APB Opinion no. 17, Intangible Assets (Issued 1970). Under the obsolete APB
Opinion no. 17, goodwill and other intangible items were wasting assets with a
finite life. The values assigned to goodwill and other intangible assets were
amortized over an arbitrary period of time not to exceed 40 years. FASB
Statement no. 142 does away with the presumption that acquired goodwill and
other acquired intangible assets have finite lives and eliminates mandatory
amortization. 2 Acquired intangible assets that have finite lives will continue to
be amortized over their useful lives, but without the constraint of any arbitrary
ceiling.
In particular, FASB Statement no. 142 mandates: (a) annual tests
for goodwill and intangible asset impairment. Goodwill will be tested for im-
pairment at least annually using a two-step process that begins with an esti-
mation of the fair value of a reporting unit. The first step is a screen for
potential impairment, and the second step measures the amount of impair-
ment, if any; (b) write-offs of goodwill and intangible asset impairment losses.
If the carrying amount of acquired goodwill or acquired intangible assets ex-
ceeds fair value estimates, an impairment loss must be recognized against net
income in an amount equal to that excess. After goodwill or intangible asset
impairment losses are recognized, subsequent reversals of impairment losses
are prohibited; (c) improved disclosure about goodwill and intangible asset
values and expenses. Information about changes in the carrying amount of
goodwill and other intangible asset categories must be disclosed on an annual
basis, along with estimates of intangible asset amortization expense for the next
five years.
Under FASB Statement no. 142, tests for goodwill and intangible asset
impairment and the write-off of impaired assets promise to become routine
corporate events. This makes it timely to consider whether goodwill write-off
decisions represent ‘‘mere’’ accounting transactions or, instead, signify eco-
nomic events with important implications for the ongoing value of the firm.

2
Costs of internally developing, maintaining, or restoring intangible assets (including goodwill)
that are not specifically identifiable, that have indeterminate lives, or that are inherent in a
continuing business and related to an entity as a whole, continue to be recognized as an expense
when incurred.
178 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

2.2. Goodwill write-off decisions

Accounting write-off decisions are material, infrequent charges against

earnings for asset revaluations or provisions for future costs. Goodwill write-
off decisions, like many asset write-offs, are bookkeeping adjustments that do
not typically coincide with changes in tangible assets or cash flows. The in-
formation value of goodwill write-off decisions lies in the role they play as a
signal of important changes in the value of the companyÕs intangible assets, and
of important changes to come in the companyÕs future earning potential.
Goodwill write-off decisions may have similarities to the bank loan-loss
reserve (LLR) additions studied by Docking et al. (1997), among others. LLR
announcements are simple bookkeeping adjustments that do not typically
coincide with changes in the value of bank loan portfolios nor with bank loan
write-off decisions. The information value of loan-loss decisions rests in the
role they play as a signal of important changes in the value of the bankÕs loan
portfolio, and important changes to come in bank loan write-off decisions,
earnings, and dividend payments. Docking et al. (1997) report that ‘‘simple’’
bank announcements of additions to LLRs result in negative event-period
returns, and such influences are markedly more negative in the case of regional
versus money-center banks. Apparently, investors view such LLR announce-
ments as foreshadowing more bad news. It is interesting to note, however, that
bank LLR announcements rarely have such simple negative effects. Most LLR
announcements are made at the same time that other important operating
information is disclosed. The generally negative stock-price effects of ‘‘simple’’
LLR additions are nullified when such announcements are accompanied by
favorable earnings announcements. Investors appear to regard LLR an-
nouncements accompanied by earnings decreases, losses, or dividend reduc-
tions or omissions as much more threatening, resulting in negative event-period
returns that are consistent with those reported for broader samples of indus-
trial firms reporting unfavorable earnings or dividend information. As a result,
the negative stock-price effects associated with LLR announcements can be
largely attributed to the expected influence of bank earnings or dividends.
Absent new earnings or dividend information, investors appear to react to
‘‘simple’’ LLR announcements in a manner that is consistent with an expec-
tation of future adverse effects on bank earnings and dividends.
As Bartov et al. (1998) point out, write-offs are important corporate events
due to the large dollar amounts involved and their significant ramifications for
firm performance and value. What makes the assessment of write-off decisions
difficult is the fact that they tend to be infrequent and ambiguous in the in-
formation that they convey. Write-offs can represent good news when man-
agement rids the company of relatively unprofitable operations in order to
refocus on its ‘‘core competence’’. Write-offs can represent bad news when
reductions in asset values foreshadow even deeper troubles yet to come.
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 179

This paper seeks to offer information germane to the goodwill accounting

standards setting process by providing evidence regarding stock-price behavior
tied to company goodwill write-off announcements. From an accounting per-
spective, valuation effects associated with company goodwill write-off decisions
have the potential to offer new evidence on the extent to which accounting
goodwill numbers capture the value of intangible factors with asset-like char-
acteristics. From an economic perspective, negative valuation effects tied to
accounting goodwill write-off decisions provide evidence that such accounting
adjustments reflect the loss of important intangible assets.

3. Data and methodology

3.1. The sample

This study of goodwill write-off decisions focuses on discretionary an-

nouncements taken by companies during the 1992–1996 five-year period. This
time frame allows consideration of event-period returns that are unaffected
by discussions surrounding recent accounting changes, and consideration
of stock-market returns during long-window pre-announcement and post-
announcement periods. Event dates for goodwill write-off announcements are
identified from The Wall Street Journal Index on-line (WSJI). The WSJI is an
attractive source for event-day (0) information because it offers a precise in-
dication of when the stock market first received relevant news regarding the
firmÕs write-off decision. Searches were conducted using the key words
‘‘goodwill’’ and ‘‘write-offÕ or ‘‘charge’’. To be included in the sample, the
common stock of each firm must be listed on either the New York Stock
Exchange, the American Stock Exchange, or on NASDAQ, and included on
the Center for Research for Security Prices (CRSP) daily stock returns file for
six months prior to the goodwill write-off announcement. Firms also need to be
continuously listed over the estimation and event periods to be included.
This sample selection method resulted in a total sample of N ¼ 80 goodwill
write-off announcements broadly distributed across 32 different Standard In-
dustrial Classification (SIC) code two-digit industry groups (see Appendix A).
It is interesting to note that while goodwill write-off announcements occur in
a number of settings, they appear most common in manufacturing
ð20 6 SIC < 40Þ where 43 of 80 sample goodwill write-off announcements are
found. This is especially true in the Industrial and Commercial Machinery
industry group ðSIC ¼ 35Þ where 10 sample firms made goodwill write-off
announcements over the 1992–1996 period.
Consistent with findings reported by Docking et al. (1997) in their study of
LLR announcements, most goodwill write-off disclosures are ‘‘messy’’ an-
nouncements. In most instances, goodwill write-off announcements are made
180 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

at the same time that other significant positive or negative earnings informa-
tion is released. ‘‘Simple’’ goodwill announcements unaccompanied by other
important corporate announcements are in the minority. In the present study,
N ¼ 53, or 66.3% of the goodwill write-off announcements studied, are ac-
companied by the contemporaneous disclosure of other important operating
information. 3
Information effects on the stock prices of announcing firms are reported for
the ð1; 0Þ event period for all N ¼ 80 firms, and for each subsample. From an
accounting perspective, we expect negative and statistically significant stock-
price effects tied to goodwill write-off decisions as evidence of a loss of future
profit-generating capability.

3.2. Estimation method

To test for robustness, we obtain three alternative estimates of prediction

errors (abnormal stock returns) surrounding company goodwill announce-
ments in The Wall Street Journal. In addition to prediction errors estimated
using security returns that follow the classic single factor market model, pre-
diction errors are also estimated using market-adjusted returns and compari-
son period mean-adjusted returns. In all instances, a 255-day estimation period
is used that begins 300 trading days before the event date, t ¼ 300, and ends
45 trading days before the event date, t ¼ 45. The event date, t ¼ 0, is The
Wall Street Journal announcement date.
Daily prediction errors are averaged over the sample of N firms to yield
average prediction errors, APE (or average abnormal returns). Cumulative
average prediction errors, CAPE (or cumulative average abnormal returns) are
then calculated over an event interval period. Following Haw et al. (1990),
among others, a t-test is applied to examine the hypothesis that the CAPET 1;T 2
are not significantly different from zero. Under cross-sectional independence
and other conditions (see Patell, 1976), this test statistic follows the standard
normal distribution under the null hypothesis.

4. Information effects of goodwill write-off decisions

4.1. Announcement window effects

Table 1 depicts CAPEs for all sample companies making goodwill write-off
announcements during the five-year 1992–1996 period. Estimation results for
the equally weighted market-model approach are contrasted with those from

3
See Appendix A for further information about the sample.
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 181

Table 1
CAPEs over the ð1; 0Þ event period for firms announcing goodwill write-off decisions, 1992–1996
ðN ¼ 80Þ
Goodwill write-off Market model Mean-adjusted CAPE Market-adjusted
subsample adjusted CAPE CAPE
Panel A: Goodwill write-offs by type of announcement
‘‘SimpleÕ goodwill write-off announcement ðN ¼ 27Þ
CAPE )2.23% )2.48% )2.83%
t-Statistic ()2.31)b ()2.51)c ()2.93)c
Goodwill write-off w/contemporaneous announcement ðN ¼ 53Þ
CAPE )3.30% )3.73% )3.86%
t-Statistic ()4.48)c ()4.90)c ()5.17)c

Positive earnings ðN ¼ 13Þ

CAPE 1.82% 1.76% 1.57%
t-Statistic (1.69)b (1.61)a (1.46)a
Negative earnings ðN ¼ 21Þ
CAPE )6.86% )7.45% )7.69%
t-Statistic ()4.63)c ()4.82)c ()5.07)c
Miscellaneous ðN ¼ 19Þ
CAPE )2.91% )3.43% )3.42%
t-Statistic ()2.91)c ()3.35)c ()3.42)c

Panel B: Goodwill write-offs by industry group

Manufacturing Firms ðN ¼ 43Þ
CAPE )3.32% )3.43% )3.77%
t-Statistic ()4.36)c ()4.33)c ()4.87)c
Industrial and commercial machinery firms (SIC 35) ðN ¼ 10Þ
CAPE )6.03% )6.60% )6.72%
t-Statistic ()2.71)c ()2.89)c ()2.99)c
Non-industrial and commercial machinery manufacturing firms ðN ¼ 33Þ
CAPE )2.50% )2.47% )2.88%
t-Statistic ()4.05)c ()3.90)c ()4.63)c
Non-manufacturing firms ðN ¼ 37Þ
CAPE )2.52% )3.21% )3.25%
t-Statistic ()2.70)c ()3.42)c ()3.49)c
Total sample ðN ¼ 80Þ
CAPE )2.94% )3.31% )3.52%
t-Statistic ()4.75)c ()5.22)c ()5.63)c
Market-model, mean-adjusted, and market-adjusted CAPEs and t-statistics are shown for the
ð1; 0Þ event-period window by type of goodwill write-off announcements in Panel A, and by
industry group in Panel B. The analysis suggests a 2–3% adverse stock-price reaction to goodwill
write-off announcement irrespective of contemporaneous announcements or industry grouping.
a
Statistically significant at the 0.10 level (one-tailed test).
b
Statistically significant at the 0.05 level (one-tailed test).
c
Statistically significant at the 0.01 level (one-tailed test).
182 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

alternate mean-adjusted and market-adjusted returns methods. Estimation

results for the stock-market reaction to goodwill write-off announcements by
subgroups of goodwill announcement types and industry groups are also given.
In all cases, CAPEs are reported for the two-day ð1; 0Þ event period. 4
From Table 1, it is clear that event-period CAPEs are generally negative and
statistically significant at the 1% level for the overall sample of N ¼ 80 goodwill
write-off announcements. On average, goodwill write-off announcements lead
to uniformly large and statistically significant information effects (event-period
returns) of )2.94% ðt ¼ 4:75Þ using the market-model approach, )3.31%
ðt ¼ 5:22Þ using the mean-adjusted approach, and )3.52% ðt ¼ 5:63Þ using
the market-adjusted approach. From an economic perspective, these findings
are consistent with the hypothesis that company goodwill write-off an-
nouncements signal important information about a meaningful deterioration
in the firmÕs future profit-making potential. From an accounting perspective,
the typically negative valuation effects associated with company goodwill write-
off decisions offer evidence that the loss of accounting goodwill captures the
loss of intangible factors with asset-like characteristics.
In an earlier study, Francis et al. (1996) find no link between the size of
goodwill write-offs and abnormal stock returns. In a regression-based test
(results available on request), we also found no relationship between goodwill
write-off size and these information effects. These results suggest that investors
regard the fact of a goodwill write-off, and not necessarily its size, as important
from an information perspective. Following Docking et al. (1997) study of
significant negative contagion effects for bank LLR announcements, we con-
sidered the possibility of contagious information effects stemming from cor-
porate goodwill write-off announcements. However, we found no evidence of
contagious information effects for competing firms, and conclude that goodwill
write-offs are essentially a firm-specific event.

4.2. Announcement effects by types of contemporaneous announcements

Goodwill write-off announcements are relatively ‘‘messy’’ bits of informa-

tion in that firms typically make other important corporate announcements at
the time goodwill write-offs are made. Thus, it becomes interesting to learn the
extent to which the typically negative information effect associated with
goodwill write-offs is affected by the nature of contemporaneous announce-
ments.

4
Each of these methods assumes time series independence in the stock-price reaction tied to
goodwill write-off announcements. Following Beatty et al. (1996) we also tested whether later
announcements were as ‘‘important’’ as earlier announcements, and found no statistically
significant difference related to time of announcement (results available on request).
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 183

In Table 1, event-period CAPEs are generally negative and statistically

significant at the 1% level for the N ¼ 27 sample of ‘‘simple’’ goodwill write-off
announcements. Simple goodwill write-off announcements lead to a relatively
large and statistically significant information effect (event-period return) of
)2.23% ðt ¼ 2:31Þ using the market-model approach, )2.48% ðt ¼ 2:51Þ
using the mean-adjusted approach, and )2.83% ðt ¼ 2:93Þ using the market-
adjusted approach. On average, the information effect of simple goodwill
write-off announcements is somewhat smaller than the effect when such an-
nouncements are accompanied by the contemporaneous disclosure of other
important information.
For N ¼ 53 goodwill write-offs tied to the announcement of other important
information, large and statistically significant information effects are noted
using the market-model approach ()3.30%, t ¼ 4:48), the mean-adjusted
approach ()3.73%, t ¼ 4:90), and the market-adjusted approach ()3.86%,
t ¼ 5:17). Table 1 shows that while N ¼ 13 companies making goodwill
write-off announcements also report positive earnings, many more report op-
erating losses ðN ¼ 21Þ or other information ðN ¼ 19Þ regarded as negative by
investors, such as the sale of a division, corporate restructuring, plant closures,
etc. For N ¼ 13 goodwill write-offs announcements by companies with positive
operating earnings, the information effect appears immaterial using the mar-
ket-model approach (1.82%, t ¼ 1:69), the mean-adjusted approach (1.76%,
t ¼ 1:61), and the market-adjusted approach (1.57%, t ¼ 1:46). For N ¼ 21
goodwill write-offs announced by firms with operating losses, large and sta-
tistically significant information effects are noted using the market-model ap-
proach ()6.86%, t ¼ 4:63), the mean-adjusted approach ()7.45%, t ¼ 4:82),
and the market-adjusted approach ()7.69%, t ¼ 5:07). For N ¼ 19 goodwill
write-offs tied to the announcement of other miscellaneous corporate restruc-
turing information, material and statistically significant information effects are
noted using the market-model approach ()2.91%, t ¼ 2:91), the mean-
adjusted approach ()3.43%, t ¼ 3:35), and the market-adjusted approach
()3.42%, t ¼ 3:42).
These results are also important because they confirm the economic im-
portance of goodwill write-off decisions, despite the fact that such announce-
ments are often ‘‘messy’’ bits of information in the sense of being accompanied
by contemporaneous disclosures. Like findings reported by Docking et al.
(1997), these results suggest that investors interpret important corporate an-
nouncements, such as goodwill write-off decisions, within the context of other
company information.

4.3. Announcement effects by industry group

The majority of announcements concerning goodwill write-off decisions are

made by manufacturing companies, with a significant representation of firms
184 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

from the Industrial and Commercial Machinery industry group (see Appendix
A). It therefore seems worth asking if the information effects described above
are broadly descriptive of all such goodwill write-off announcements, or more
narrowly relevant for certain manufacturing firms.
For N ¼ 43 goodwill write-offs announcements by manufacturing firms
ð20 6 SIC < 40Þ, Table 1 shows material negative information effects tied to
goodwill write-offs using the market-model approach ()3.32%, t ¼ 4:36), the
mean-adjusted approach ()3.43%, t ¼ 4:33), and the market-adjusted ap-
proach ()3.77%, t ¼ 4:87). For N ¼ 10 goodwill write-offs announcements by
firms in the Industrial and Commercial Machinery industry group ðSIC ¼ 35Þ,
large negative information effects tied to goodwill write-offs are evident using
the market-model approach ()6.03%, t ¼ 2:71), the mean-adjusted approach
()6.60%, t ¼ 2:89), and the market-adjusted approach ()6.72%, t ¼ 2:99).
For N ¼ 33 goodwill write-offs announced by manufacturing firms that are not
in SIC ¼ 35, negative and statistically significant information effects are also
noted using the market-model approach ()2.50%, t ¼ 4:05), the mean-
adjusted approach ()2.47%, t ¼ 3:90), and the market-adjusted approach
()2.88%, t ¼ 4:63). And finally, for N ¼ 37 goodwill write-off announce-
ments by nonmanufacturing firms, negative and statistically significant infor-
mation effects are again noted using the market-model approach ()2.52%,
t ¼ 2:70), the mean-adjusted approach ()3.21%, t ¼ 3:42), and the market-
adjusted approach ()3.25%, t ¼ 3:49).
Based on these results, it seems fair to conclude that negative information
effects of goodwill write-off announcements are relevant for firms across a
broad cross-section of the US industry. In the eyes of the stock market,
goodwill write-offs generally suggest the loss of intangible factors with asset-
like characteristics.

4.4. Pre- and post-announcement period effects

Our finding that goodwill write-off decisions lead to 2–3% adverse stock-
price reactions during the announcement period is compatible with Bartov et al.
(1998) finding of )2.14% announcement period returns for their sample
of tangible asset write-down announcements. Tangible asset write-downs
that convey information about lowered asset values appear to represent un-
equivocally bad news. Still, Bartov et al. (1998) contend that the small size of
these negative ramifications are somewhat anomalous because the typical
tangible asset write-off announcement represented some 20% of the value of
announcing firms. This led Bartov et al. (1998) to consider the possibilities that
the market largely anticipates write-off announcements and/or it underreacts to
them.
The relative magnitude of goodwill write-offs considered in this study tend
to be on the same order of magnitude as tangible asset write-offs studied by
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 185

Table 2
Cumulative average prediction errors (CAPEs) over three windows ð250; 10Þ, ð1; 0Þ and
ðþ10; þ250Þ event period for firms announcing goodwill write-off decisions, 1992–1996 ðN ¼ 80Þ
Goodwill write-off CAPE year  1 CAPE announcement CAPE year þ 1
subsample ð250; 10Þ period ð1; 0Þ ðþ10; þ250Þ
Panel A: Goodwill write-offs by type of announcement
ÔSimpleÕ goodwill write-off announcement ðN ¼ 27Þ
CAPE )47.55% )2.83% )14.55%
t-Statistic ()4.89)c ()2.93)c ()1.50)a
Goodwill write-off w/contemporaneous announcement ðN ¼ 53Þ
CAPE )38.81% )3.86% )8.98%
t-Statistic ()5.62)c ()5.17)c ()1.30)a

Positive earnings ðN ¼ 13Þ

CAPE )14.22% 1.57% )5.21%
t-Statistic ()1.27) (1.46)a ()0.47)
Negative earnings ðN ¼ 21Þ
CAPE )55.10% )7.69% )18.97%
t-Statistic ()3.57)c ()5.07)c ()1.23)
Miscellaneous ðN ¼ 19Þ
CAPE )39.40% )3.42% )0.96%
t-Statistic ()3.90)c ()3.42)c ()0.09)

Panel B: Goodwill write-offs by industry group

Manufacturing firms ðN ¼ 43Þ
CAPE )39.71% )3.77% )11.89%
t-Statistic ()4.98)c ()4.87)c ()1.49)a
Industrial and commercial machinery firms (SIC 35) ðN ¼ 10Þ
CAPE )39.42% )6.72% )6.82%
t-Statistic ()1.71)b ()2.99)c ()0.30)
Non-industrial and commercial machinery manufacturing firms ðN ¼ 33Þ
CAPE )39.81% )2.88% )12.93%
t-Statistic ()5.92)c ()4.63)c ()1.92)b

Non-manufacturing firms ðN ¼ 37Þ

CAPE )44.02% )3.25% )10.19%
t-Statistic ()4.97)c ()3.49)c ()1.15)
Total sample ðN ¼ 80Þ
CAPE )41.77% )3.52% )11.02%
t-Statistic ()7.04)c ()5.63)c ()1.86)b
Market-adjusted cumulative average prediction errors (CAPEs) and t-statistics are shown for the
year preceding ð250; 10Þ, announcement period ð1; 0Þ and the year following ðþ10; þ250Þ the
goodwill write-off announcement event-period windows by type of goodwill write-off announce-
ments in Panel A, and by industry group in Panel B.
a
Statistically significant at the 0.10 level (one-tailed test).
b
Statistically significant at the 0.05 level (one-tailed test).
c
Statistically significant at the 0.01 level (one-tailed test).
186 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

Bartov et al. (1998). In this sample, the mean goodwill write-off of $148.2
million represents 16.3% of the market value of announcing firms. As a result,
long-window pre-announcement and post-announcement period stock-price
behavior surrounding goodwill announcements provide an interesting com-
parison with event-period results. Table 2 shows long-window pre- and post-
announcement period results.
In the one-year (day )250 to )10) period that immediately precedes good-
will write-off announcements, the market-adjusted information effect (cumu-
lative average prediction error) is a large and statistically significant )41.77%
ðt ¼ 7:04Þ for the overall sample. Similarly negative and statistically
significant pre-announcement period effects are also noted for simple good-
will write-off announcements ()47.55%, t ¼ 4:89), and for such announce-
ments accompanied by other important information ()38.81%, t ¼ 5:62).
Large negative and statistically significant pre-announcement period effects
are also typical for both manufacturing ()39.71%, t ¼ 4:98) and nonmanu-
facturing firms ()44.02%, t ¼ 4:97). Negative information effects during
the pre-announcement period document that goodwill write-off announce-
ments come after a prolonged period of market under performance. As such,
goodwill write-off announcements may be interpreted as managementÕs official
recognition that a recently severe downturn in the companyÕs stock portends a
permanent rather than transitory decline in the value of firm assets. Negative
pre-announcements effects also suggest that investors partially anticipate
goodwill write-off decisions, and/or such firms experience a series of related
value-reducing events during the pre-announcement period.
Also as shown in Table 2, firms that announce goodwill write-offs experience
large negative information effects during the one-year (day ¼ þ10 to þ250)
post-announcement period. However, while the average negative post-
announcement period effect of )11.02% ðt ¼ 1:86Þ is statistically significant
over the entire sample of N ¼ 80, it is somewhat variable over each respective
subsample. We conclude from this evidence that most, but perhaps not all, of
the negative valuation effects tied to goodwill write-off announcements are
realized by the end of the announcement period.

5. Summary and conclusions

This paper extends prior research through further consideration of the in-
formation content of accounting goodwill numbers. Limited prior research
suggests that despite the obvious shortcomings of historical (purchase) ac-
counting goodwill numbers, these data are economically meaningful in that
they are systematically reflected in the market value of the firm. These results
are consistent with the notion that stock-market investors regard goodwill
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 187

numbers as favorable indicators of the firmÕs future profit-making potential. In

this way, prior studies support the hypothesis that firms derive significant
‘‘future economic benefits’’ from goodwill, a key criteria necessary for asset
recognition. However, a possible limitation of prior results is that cross-sec-
tional valuation effects of accounting goodwill numbers have the potential to
reflect, at least in part, similarly positive valuation affects of advertising and
R&D expenditures, among other such influences. It is now well-known that
both advertising and R&D give rise to ‘‘intangible assets’’ with favorable effects
on long-term profitability and the market value of the firm (see Hirschey and
Weygandt, 1985).
This study reports on a simple test of the economic relevance of accounting
goodwill numbers within an event-study framework that is not apt to be in-
fluenced by the valuation effects of advertising, R&D or other intangible assets.
Specifically, information effects tied to company goodwill write-off an-
nouncements are proposed and tested as an interesting basis upon which to
judge the economic relevance of accounting goodwill numbers. Goodwill write-
off decisions, like asset write-offs, are bookkeeping adjustments that do not
typically coincide with any changes in tangible assets or cash flows. However,
from an economic standpoint, goodwill write-off decisions are meaningful to
the extent that they provide information regarding important future changes in
company earnings.
In terms of results, this study finds that the information effects narrowly tied
to goodwill write-off announcements are typically negative and material, on the
order of 2–3% of the companyÕs stock price. In the one-year pre-announcement
period, negative information effects on the order of )40% are also noted.
Average negative post-announcement period information effects of roughly
)11% suggest that much, but perhaps not all, of the negative information
(valuation) effects tied to goodwill write-off announcements are realized by the
end of the announcement period. These effects are consistent with similar in-
fluences tied to asset write-offs reported by Bartov et al. (1998). An obvious
implication is that the market at least partially anticipates goodwill write-off
decisions, or such firms tend to experience a series of value-reducing events
over the pre-announcement period.
While one must always be cautious when drawing public policy implica-
tions, results reported here suggest that accounting goodwill numbers do in fact
embody aspects necessary for asset recognition on the financial statements of
business enterprises. Like balance-sheet models that show positive valuation
effects of accounting goodwill numbers, negative stock-price effects tied to
goodwill write-off decisions indicate that these data capture a significant aspect
of the intangible dimension of firm value. Negative and statistically significant
stock-price reactions tied to goodwill write-off decisions also suggests that
accounting theory and practice is adept at identifying when such intangible
assets are impaired.
188 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

Appendix A

A typical example of the N ¼ 27 ‘‘simple’’ goodwill write-off announcements

covered in this study is provided by Voice Control Systems, Inc., on January 3,
1995:
Business Brief––Voice Control Systems, Inc.: Charge for Fourth
Quarter of $2.7 million is expected––Voice Control Systems, Inc.,
Dallas, expects to take a special charge of about $2.7 million, or
around 84 cents a share, for the fourth quarter.

The company, which makes speech-recognition hardware and soft-

ware, said the charge provides for the write-off of goodwill capital-
ized as a result of the August merger of VCS Industries, Inc. into
Scott Instruments Corp. Scott Instruments changed its name to
Voice Control Systems in that merger.

Voice Control Systems, which made the announcement after the

close of the market Friday, said that including the charge, it expects
to post a loss in the fourth quarter. For the nine months ended Sep-
tember 30, the company reported a loss of $4 million on revenue of
$4.2 million.
In most instances, 53 out of 80 cases studied here, companies tie goodwill
write-off announcements to the simultaneous release of partially offsetting fa-
vorable earnings information, exacerbating unfavorable earnings information,
or miscellaneous other information that might be regarded by investors as
either favorable or unfavorable. A typical example of the N ¼ 13 companies
making goodwill write-off decision announcements at the same time positive
operating earnings are released is given by the Greiner Engineering, Inc., on
November 3, 1995:
Business Brief––Greiner Engineering, Inc.: Third-Quarter Loss
Posted on $5.4 Million in Charges––Greiner Engineering, Inc., Ir-
ving, Texas, reported a third-quarter loss of $4.3 million after it
took charges of $5.4 million. The company said its fourth-quarter
results also will be affected. The company reported year-earlier
net income of $776,000, or 16 cents a share. Revenue rose 4.1%
to $39.7 million from $38.2 million a year earlier. Greiner said it
took a $3.1 million charge to cover the costs of cutting operation
and reducing the goodwill on residential-land-development opera-
tions in California. The company said it will take a fourth-quarter
charge to cover the cost of staff cuts in California. Greiner also took
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 189

a $2.3 million hit from a valuation adjustment of a tollway-manag-

ing partnership with Dallas-based Perot Group.
In some situations, goodwill write-off announcements are linked to the si-
multaneous release of negative operating earnings information. A typical ex-
ample of N ¼ 21 companies making goodwill write-off decision announcements
at the same time losses are reported is given by Sulcus Computer Corp. on
April 18, 1995:
Business Brief––Sulcus Computer Corp.: Company’s Loss for 1994
Widened to $11.7 million––Sulcus Computer Corp., Greensburg,
PA, said its 1994 loss widened to $11.7 million, or 84 cents a share,
from $3.1 million, or 22 cents a share, for a year earlier. The com-
puter-systems developer said the 1994 figure included $3.7 million
in unusual charges, including a $1.8 million write-off of software de-
velopment costs and a $1.3 million write-off of goodwill related to
the companyÕs Asian units.

Sulcus said its revenue fell about 12% to $43.1 million from $49.3
million.
Finally, goodwill write-off announcements are sometimes accompanied by
operating information that cannot be precisely tied to earnings performance. A
common example of N ¼ 19 companies making goodwill write-off decision
announcements at the same time other important operating information is
released is given by Tredegar Industries, Inc., on August 29, 1994:
Business Brief––Tredegar Industries, Inc.: Plant to be Closed; Charge
and Write-off are Planned––Tredegar Industries, Inc., Richmond,
VA, said it plans to lease a facility in Graham, NC, to produce injec-
tion-molded packaging components, and close a similar facility in
Alsip, IL, which has 128 employees. Tredegar said it will record a
charge of $1.3 million, or 12 cents a share, for the planned plant clos-
ing, and a goodwill write-off of $3.1 million, or 29 cents a share, due
to disappointing performance in certain lines of the molded-prod-
ucts unit. Both charges will be taken in the third quarter.

Tredegar manufactures plastics and metal products.

In sum, complete data could be obtained on a sample of N ¼ 80 accounting
goodwill write-off announcements comprised of N ¼ 27 ‘‘simple’’ goodwill
write-off announcements, N ¼ 13 companies making goodwill write-off deci-
sion announcements at the same time positive operating earnings are released,
N ¼ 21 companies making goodwill write-off decision announcements at the
190 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191

same time losses are reported, and N ¼ 19 companies making goodwill write-
off decision announcements at the same time other important favorable or
unfavorable operating information is released. The overall sample of N ¼ 80
goodwill write-off announcements broadly distributed across 32 different SIC
code two-digit industry groups (see Table 3).

Table 3
Goodwill write-off sample breakoff by industry (SIC code)
Two-digit SIC code SIC code description Number
20 Food and kindred products 5
22 Textile mill products 4
23 Apparel 3
27 Printing, publishing and allied industries 2
28 Chemicals and allied products 3
30 Rubber and miscellaneous plastic products 2
31 Leather and leather products 1
34 Fabricated metal products 1
35 Industrial and commercial machinery 10
36 Electronic and other electrical equipment 3
37 Transportation equipment 4
38 Measuring, analyzing and controlling instruments 5
42 Motor freight transportation and warehousing 1
48 Communications 1
49 Electric, gas and sanitary services 3
50 Wholesale trade––durable goods 1
52 Building materials, hardware, garden supply and 1
mobile home dealers
54 Food stores 1
57 Home furniture, furnishings, and equipment stores 1
58 Eating and drinking establishments 3
59 Miscellaneous retail 1
60 Depository institutions 4
61 Nondepository credit institutions 1
62 Security and commodity brokers, dealers, exchanges 1
and services
63 Insurance carriers 4
64 Insurance agents, brokers and service 1
65 Real estate 1
73 Business services 6
76 Miscellaneous repair services 1
78 Motion pictures 1
80 Health services 2
87 Engineering, accounting, research, management and 2
related services
Total sample 80
 M. Hirschey, V.J. Richardson / J. of Accounting and Public Policy 21 (2002) 173–191 191

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