Causes and consequences of goodwill impairment losses

Zining Li, Pervin K. Shroff, Ramgopal Venkataraman, Ivy Xiying Zhang

Research output: Contribution to journalArticlepeer-review

175 Scopus citations


The paper examines the reaction of market participants to the announcement of a goodwill impairment loss, the nature of the information conveyed by the loss, and whether a cause of goodwill impairment can be traced back to overpayment for targets at the time of prior acquisitions. Our evidence suggests that both investors and financial analysts revise their expectations downward on the announcement of an impairment loss. We find that the negative impact of the loss is significant under different reporting regimes, that is, pre-SFAS-142, transition period and post-SFAS-142, though it is lower in the post period. We further show that goodwill impairment serves as a leading indicator of a decline in future profitability. Our tests also reveal that proxies for overpayment for targets can predict the subsequent goodwill impairment. Indirect evidence suggests that firms with potentially impaired goodwill that did not report an impairment loss may have used their managerial discretion to avoid taking the loss.

Original languageEnglish (US)
Pages (from-to)745-778
Number of pages34
JournalReview of Accounting Studies
Issue number4
StatePublished - Dec 2011

Bibliographical note

Funding Information:
Acknowledgments We thank the editor, two anonymous reviewers, Hemang Desai, Peter Easton, Wayne Landsman, K. Ramanna, K. Ramesh, Judy Rayburn, Katherine Schipper, the participants of the University of Minnesota Empirical Accounting Conference, AAA Financial Accounting and Reporting Section Mid-Year Conference, Financial Economics and Accounting Conference, and workshop participants at Baruch College, Duke University, Penn State University, and Southern Methodist University for valuable comments and suggestions. We gratefully acknowledge the financial support provided by the Accounting Research Center of the Carlson School of Management at the University of Minnesota.

Copyright 2011 Elsevier B.V., All rights reserved.


  • Acquisitions
  • Goodwill write-off
  • Managerial discretion
  • SFAS 121
  • SFAS 142


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