The Effects of Goodwill Impairments on Stock Prices
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Stock price changes have a profound effect on the everyday lives of the general population. These fluctuations are heavily influenced by accounting practices because of their effects on earnings and company valuation. The behavior of stocks is complex and unpredictable, therefore it is important to study the individual factors that might influence them. One such factor is goodwill impairment, the stock market effects of which I examine in this thesis. Goodwill impairment results in the decrease of a company's book value and is generally regarded as an unfavorable adjustment to incur. Because of its effect on company value, my thesis examines whether or not goodwill impairment also affects company stock prices by examining impairments during the Great Recession of 2007. I hypothesize that the size of a goodwill impairment has a positive correlation with decreases in stock price, and that the later the goodwill impairment is incurred relative to the beginning of the Great Recession in September 2007, the larger the negative change in stock price will be. I conduct a statistical analysis and ordinary least square regression analyses with a sample of 30 companies to test this hypothesis. The results of my testing fail to support my hypothesis with statistically significant evidence. Though some companies saw significant changes in stock price in the period surrounding a goodwill impairment announcement, the regression analyses do not display any p-values below the determined significance level. Thus, there is no evidence to suggest that on average the size or timing of goodwill impairment is correlated with stock price fluctuations. Though the conclusiveness of my testing is limited by the small sample size used, the results of my thesis do not suggest that goodwill impairment has a significant effect on stock prices.