The impact of internally generated goodwill on financial performance of firms

Abstract

Internally generated goodwill comes from the intangibles not recognized in the financial statements. This paper examines the impact of internally generated goodwill on financial performance of firms. Data are collected from Compustat database for twenty years from 1991 to 2010. The final sample consists of 84,515 firm-year observations. The empirical results indicate that the firms with positive internally generated goodwill have significant better liquidity, profitability, and leverage ratios than those with negative internally generated goodwill. The results also show that positive internally generated goodwill firms have a stronger price-earnings association than negative internally generated goodwill firms. The findings are useful for standard setters, government regulators, practitioners, analysts, and academics to understand internally generated goodwill. © author(s) Creative Commons License CC-BY.