Overpriced shares, Ill-advised acquisitions, and goodwill impairment

Feng Gu*, Baruch Lev

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We establish that the root cause of many goodwill write-offs is the buyers' overpriced shares at acquisition. Overpriced shares provide managers with strong incentives to exploit the overpricing by acquiring businesses, often paying more than the acquisition's synergies, setting the stage for subsequent goodwill write-offs. In particular, we document the following patterns: (1) Share overpricing is strongly and positively associated with the intensity of corporate acquisitions and the growth of accounting goodwill. (2) Share overpricing predicts goodwill write-offs and their magnitude. (3) Acquisitions by overpriced companies-a strategy often recommended by investment bankers and some academics-are often ill-advised (overpaid for and/or strategic misfit), exacerbating the post-acquisition negative returns of buyers beyond the reversal of the overpricing. Thus, managers' arguments notwithstanding, goodwill write-off is an important event highlighting a dysfunctional investment strategy.

Original languageEnglish
Pages (from-to)1995-2022
Number of pages28
JournalAccounting Review
Volume86
Issue number6
DOIs
StatePublished - Nov 2011
Externally publishedYes

Keywords

  • Acquisitions
  • Goodwill write-off
  • Overpriced shares

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