The usefulness of goodwill information to financial analysts: a qualitative approach

This paper studies financial analysts’ uses of goodwill information. While other research on financial accounting’s uses has focused on the magnitude or relevance of items in financial accounting, our study adopts a practice perspective, analysing how analysts make sense of financial accounting. We investigate this phenomenon in the context of goodwill accounting and pose the research question: How do financial analysts use goodwill information in firm valuation processes? Drawing on the ideas of reflexive modelling, the paper analyses how financial analysts use accounting. Analysts are disappointed with goodwill information because it does not seem to fit their valuation purposes. Interestingly, however, although the goodwill asset initially disappoints them, it appears to have the capacity to turn into a catalytic asset, which helps mediate relations among other assets. Namely, goodwill impairment testing (GIT) is typically conducted in a value-in-use format as it is analogous to a company’s DCF valuation, with the most common valuation method by financial analysts. Based on our field study findings, we suggest that with the aid of GIT information, analysts can conduct reflexive modelling to say something about the firm’s future and develop an entity perspective on the firm. In reflexive modelling, analysts check their estimates about the model’s outcome against the firm’s. This checking considers available public information but co-occurs in private dialogues with the firm’s managers. A dissonance in estimates prompts doubt, stimulating additional search to evaluate the company’s value. As our main contribution, we extend prior literature about the usefulness of goodwill information for analysts. More specifically, we add nuance to the literature by demonstrating how analysts use this information by reflexive modelling. Accordingly, we maintain that contrary to suggestions by the scholars, goodwill accounting numbers are not necessarily just ignored in firm valuation but can have economic significance for analysts.