Admitting mistakes pays: the long term impact of goodwill impairment write-offs on stock prices

Abstract Prior studies find a negative stock price reaction after goodwill impairment write-offs both in the short term and in the long term. In 2002 the Financial Accounting Standards Board rules for accounting for goodwill changed. We examine data from after the rule changes and find that investors continue to perceive goodwill write-offs as negative events in the short term, but contrary to previous studies, we find that investors perceive goodwill write-offs as positive news in the long term. We provide evidence suggesting that firms incorporate all foreseeable non-recurring charges into the goodwill impairment. We examine the overall firm performance and find that it improves significantly post event. However, firm operating performance only slightly improves after the write-off. The overall firm performance improvements are due to decreased non-recurring charges in the years subsequent to the write-off.