Good Will or Risky Business? - The required risk premium for stocks with goodwill

Sammanfattning: This paper studies the empirical relationship between goodwill and the cross-sectional variation in US stock returns during different market conditions. In order to better understand how goodwill is priced in the market, the correlation with both absolute and risk-adjusted future stock returns are investigated using a Fama-MacBeth regression setting. When controlling for other variables known to affect stock returns, the results indicate a positive relationship between goodwill and future absolute stock returns. This result provides evidence for the hypothesis that investors perceive goodwill as risky and requires a risk premium as compensation for holding stocks with large goodwill. Furthermore, our findings show that firms with goodwill have higher market betas, earn lower returns during market downturns and higher return during market upturns.