Goodwill impairment as a determinant of share repurchases

Abstract

RESEARCH OBJECTIVES:

The aim of this study is to find whether the companies with goodwill impairments repurchase shares more than other firms. Prior research reveals that the market revises its expectations downward when a firm announces a goodwill impairment loss. On the other hand, earlier findings document that companies repurchasing shares experience an increase in stock price. Thus, due to the undervaluation following goodwill impairment, companies may have incentives to repurchase shares. The further analysis concentrates on finding whether the companies with impaired goodwill and a below one market-to-book ratio repurchase stock more than other firms.

DATA AND METHODOLOGY:

The final sample of the research consists of 25 334 observations. The data is collected from Compustat North America database from years 2003-2013. The data includes observations that report goodwill excluding financial institutions and utility companies. The research questions are examined using logistic and Tobit regressions. Logistic regression tests whether the recognition of goodwill impairment loss leads to a firm's decision to repurchase shares. Tobit regression is used to find whether the magnitude of goodwill impairment is associated with an increased amount of stock buybacks.

RESULTS:

The results indicate that the recognition of goodwill impairment, on average, does not seem to have an impact on the companies' decision to repurchase shares. Neither the magnitude of goodwill write-off is associated with a higher amount of repurchases. However, the results suggest that if a firm reports goodwill impairment and its market-to-book value is below one, it is likely to repurchase stock more than other companies.