The Usefulness of Goodwill Information to Financial Analysts : A Qualitative Approach

This paper investigates how financial analysts use goodwill information in their firm valuation. Analysts are disappointed with goodwill information because it does not seem to fit their valuation purposes. Interestingly, however, although the goodwill asset initially disappoints, it can become a catalytic asset, which helps mediate relations among other assets. Based on our field study findings, we suggest that aided by goodwill impairment testing information, analysts can conduct reflexive modelling to forecast the firm’s future and develop an entity perspective on it. In reflexive modelling, analysts check their estimates about the valuation model’s outcome against the firm’s. As our main contribution, we extend prior literature about the usefulness of goodwill information for analysts by demonstrating how analysts use this information in reflexive modelling for firm valuation. We maintain that contrary to suggestions by scholars, goodwill accounting numbers are not necessarily ignored in firm valuation but can have economic significance for analysts.