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The invisible burden

Xin Liu, Chengxi Yin and Weinan Zheng

Journal of Financial Markets, 2021, vol. 52, issue C

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: Goodwill; Return predictability; Cash flows; Underreaction; Market inefficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 G34 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.finmar.2020.100561

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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