Researchers from University of Bath, working in conjunction with a team at the University of Hong Kong, find that investors underreact to high goodwill-to-sales ratios. In The Invisible Burden: Goodwill and the Cross-Section of Stock Returns, the research shows stocks with high goodwill-to-sales ratios underperform for the first three years after acquisition, compared to their peers. Not surprisingly (except apparently to investors), firms with higher goodwill are more likely to experience impairment—and they’re less profitable.
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