The invisible burden

Xin Liu; Chengxi Yin; Weinan Zheng

doi:10.1016/j.finmar.2020.100561

The invisible burden

Xin Liu, Chengxi Yin, Weinan Zheng

Management

Research output: Contribution to journal › Article › peer-review

2 Citations (SciVal)

Abstract

We study the role of goodwill, an important form of intangible assets arising from merger and acquisitions (M&As), on asset pricing. We find that goodwill-to-sales strongly and negatively predicts the cross-section of U.S. stock returns, especially among firms with cross-industry M&As and firms with overconfident CEOs. It remains an economically and statistically significant predictor of stock returns after adjustment for common factors. Our results suggest that goodwill-to-sales subsumes information on firm value, and stock markets underreact to this information because the fair value of goodwill is unobservable and hard to evaluate.

Original language	English
Article number	100561
Journal	Journal of Financial Markets
Volume	52
Early online date	23 Apr 2020
DOIs	https://doi.org/10.1016/j.finmar.2020.100561
Publication status	Published - 31 Jan 2021

Bibliographical note

Funding Information:
The feedback and advice from Tarun Chordia (the editor) and an anonymous referee are gratefully acknowledged. We thank Shiyang Huang, Dong Lou, Mike Adams, Xiaoran Ni, Vesa Pursiainen, Hanwen Sun, Chi-Yang Tsou, Hong Xiang, Ru Xie, Tong Zhou, all seminar participants at FMA Asia-Pacific Conference 2019, FMA European Conference 2019, British Accounting and Finance Association Annual Conference 2019, Queen Mary University of London, University of Bath, and The University of Hong Kong for helpful comments and suggestions. This paper was previously circulated under the title “The Invisible Burden: Goodwill and the Cross-Section of Stock Returns.” Xin Liu acknowledges seed corn funding support from the School of Management, University of Bath.

Funding Information:
The feedback and advice from Tarun Chordia (the editor) and an anonymous referee are gratefully acknowledged. We thank Shiyang Huang, Dong Lou, Mike Adams, Xiaoran Ni, Vesa Pursiainen, Hanwen Sun, Chi-Yang Tsou, Hong Xiang, Ru Xie, Tong Zhou, all seminar participants at FMA Asia-Pacific Conference 2019, FMA European Conference 2019, British Accounting and Finance Association Annual Conference 2019, Queen Mary University of London, University of Bath, and The University of Hong Kong for helpful comments and suggestions. This paper was previously circulated under the title “The Invisible Burden: Goodwill and the Cross-Section of Stock Returns.” Xin Liu acknowledges seed corn funding support from the School of Management, University of Bath .

Publisher Copyright:
© 2020 Elsevier B.V.

Funding

The feedback and advice from Tarun Chordia (the editor) and an anonymous referee are gratefully acknowledged. We thank Shiyang Huang, Dong Lou, Mike Adams, Xiaoran Ni, Vesa Pursiainen, Hanwen Sun, Chi-Yang Tsou, Hong Xiang, Ru Xie, Tong Zhou, all seminar participants at FMA Asia-Pacific Conference 2019, FMA European Conference 2019, British Accounting and Finance Association Annual Conference 2019, Queen Mary University of London, University of Bath, and The University of Hong Kong for helpful comments and suggestions. This paper was previously circulated under the title “The Invisible Burden: Goodwill and the Cross-Section of Stock Returns.” Xin Liu acknowledges seed corn funding support from the School of Management, University of Bath. The feedback and advice from Tarun Chordia (the editor) and an anonymous referee are gratefully acknowledged. We thank Shiyang Huang, Dong Lou, Mike Adams, Xiaoran Ni, Vesa Pursiainen, Hanwen Sun, Chi-Yang Tsou, Hong Xiang, Ru Xie, Tong Zhou, all seminar participants at FMA Asia-Pacific Conference 2019, FMA European Conference 2019, British Accounting and Finance Association Annual Conference 2019, Queen Mary University of London, University of Bath, and The University of Hong Kong for helpful comments and suggestions. This paper was previously circulated under the title “The Invisible Burden: Goodwill and the Cross-Section of Stock Returns.” Xin Liu acknowledges seed corn funding support from the School of Management, University of Bath .

Keywords

Cash flows
Goodwill
Market inefficiency
Return predictability
Underreaction

ASJC Scopus subject areas

Finance
Economics and Econometrics

Access to Document

10.1016/j.finmar.2020.100561

Cite this

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title = "The invisible burden",

abstract = "We study the role of goodwill, an important form of intangible assets arising from merger and acquisitions (M&As), on asset pricing. We find that goodwill-to-sales strongly and negatively predicts the cross-section of U.S. stock returns, especially among firms with cross-industry M&As and firms with overconfident CEOs. It remains an economically and statistically significant predictor of stock returns after adjustment for common factors. Our results suggest that goodwill-to-sales subsumes information on firm value, and stock markets underreact to this information because the fair value of goodwill is unobservable and hard to evaluate.",

keywords = "Cash flows, Goodwill, Market inefficiency, Return predictability, Underreaction",

author = "Xin Liu and Chengxi Yin and Weinan Zheng",

note = "Funding Information: The feedback and advice from Tarun Chordia (the editor) and an anonymous referee are gratefully acknowledged. We thank Shiyang Huang, Dong Lou, Mike Adams, Xiaoran Ni, Vesa Pursiainen, Hanwen Sun, Chi-Yang Tsou, Hong Xiang, Ru Xie, Tong Zhou, all seminar participants at FMA Asia-Pacific Conference 2019, FMA European Conference 2019, British Accounting and Finance Association Annual Conference 2019, Queen Mary University of London, University of Bath, and The University of Hong Kong for helpful comments and suggestions. This paper was previously circulated under the title “The Invisible Burden: Goodwill and the Cross-Section of Stock Returns.” Xin Liu acknowledges seed corn funding support from the School of Management, University of Bath. Funding Information: The feedback and advice from Tarun Chordia (the editor) and an anonymous referee are gratefully acknowledged. We thank Shiyang Huang, Dong Lou, Mike Adams, Xiaoran Ni, Vesa Pursiainen, Hanwen Sun, Chi-Yang Tsou, Hong Xiang, Ru Xie, Tong Zhou, all seminar participants at FMA Asia-Pacific Conference 2019, FMA European Conference 2019, British Accounting and Finance Association Annual Conference 2019, Queen Mary University of London, University of Bath, and The University of Hong Kong for helpful comments and suggestions. This paper was previously circulated under the title “The Invisible Burden: Goodwill and the Cross-Section of Stock Returns.” Xin Liu acknowledges seed corn funding support from the School of Management, University of Bath . Publisher Copyright: {\textcopyright} 2020 Elsevier B.V.",

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AB - We study the role of goodwill, an important form of intangible assets arising from merger and acquisitions (M&As), on asset pricing. We find that goodwill-to-sales strongly and negatively predicts the cross-section of U.S. stock returns, especially among firms with cross-industry M&As and firms with overconfident CEOs. It remains an economically and statistically significant predictor of stock returns after adjustment for common factors. Our results suggest that goodwill-to-sales subsumes information on firm value, and stock markets underreact to this information because the fair value of goodwill is unobservable and hard to evaluate.

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The invisible burden

Abstract

Bibliographical note

Funding

Keywords

ASJC Scopus subject areas

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