Goodwill

The case of goodwill non-impairments: A study on the current situation with evidence from the European market Master Thesis Claes Christiansen Master of Science in Strategic Management Submitted to: Prof. Yann le Fur

HEC Paris Jouy-en-Josas, France May, 2013

Abstract This thesis examines the attitudes of both management and shareholders to goodwill impairments. Whereas management for a number of reasons tends to impair less than it would if only the shareholder value was the basis for their decision, the shareholders seem to particularly value accuracy in financial reporting in goodwill accounting. Based on changes in Price-to-Book ratio since acquisition of goodwill this thesis finds that 23 of the 50 companies of the EURO STOXX 50 have not impaired enough goodwill and should further impair 185 billion Euros or an average of eight billion Euros which represents 22 per cent of their total assets. This thesis also finds that new CEOs are more likely to impair goodwill than the CEOs that have accumulated the goodwill. The market, on the other hand, seems to attach less value to goodwill impairments than to other events reducing earnings. The study shows that stock prices of the companies that have impaired are one month after the impairment 3.8% higher compared with peers that have missed their EPS targets due to other reasons.

Table of Contents

1. INTRODUCTION ............................................................................................................................................ 6 1.1 TOPICALITY ................................................................................................................................................................ 6 1.2 PURPOSE AND STRUCTURE OF THE THESIS ........................................................................................................... 8 2. INTRODUCTION TO...