On the Value Relevance of Banks’ Valuation of Goodwill in Times of Financial Turmoil

Abstract

Banks’ valuation of goodwill has been questioned by analysts and the media. Analysts suggest that bank management as of the inception of the financial crisis have exploited the unverifiable fair value goodwill accounting opportunistically. This suggestion implicitly implies that bank management was more likely than management of other industries to exploit goodwill accounting during the financial turmoil. In this thesis, I test whether the value relevance of banks’ valuation of goodwill was affected differently than other industries during the financial turmoil. To do so, I use the value relevance of the pharmaceutical industry’s valuation of goodwill as a control group for banks. Further, I hypothesize that (1) banks’ valuation of goodwill was value irrelevant since investors should have impounded the information of the analysts in the stock price; (2) pharmaceutical industry’s valuation of goodwill was value relevant since the financial turmoil did not severely affect its core business. The empirical result of the study suggests that the goodwill valuation of both banks and pharmaceuticals was value relevant. Moreover, the empirical result indicates that banks’ valuation of goodwill was not less value relevant than the pharmaceuticals’ valuation of goodwill. In summary, banks’ valuation of goodwill seems to have been value relevant during the financial turmoil.