The market reaction to goodwill impairment announcements - Do investors value information content, tone and opportunistic managerial behavior?

Sammanfattning: What make goodwill impairment announcements especially noteworthy for investors is that fairvalue measurements require managers to make unverifiable estimations due to the absence of quoted market prices, meaning that choices whether goodwill is impaired or not could be subject to biased decisions. This study examines the stock market reaction of goodwill write-offs in respect to the information content (the provided reason for the write-down decision) and tone (the sentiment used by managers to explain the write-down decision) of the announcements. In addition, this study investigates if stock market investors evaluate signals of managerial opportunistic behavior (CEO transitions and executive compensation) and adjust their expectations accordingly. By using a sample of 155 goodwill impairment announcements published by Nordic listed companies during the time period 2005 - 2019, this study does not find significant differences between external and internal write-down reasons. However, the findings suggest that the market reaction is in fact associated with the tone of the goodwill impairment announcement. Investors respond less negatively when the language used in the press release is more positive, and they react more negatively when the message is more superfluous. The results also indicate that investors do evaluate signals of managerial opportunistic behavior by reacting less negatively to goodwill impairment announcements in case of CEO transitions. Still, this study does not find that the market reaction differs between firms having executive compensation tied to either earnings or equity, comparing to companies that do not offer the CEO performance-based compensation.