Goodwill amortization and the usefulness of earnings

This study provides evidence of the effect of goodwill amortization on the usefulness of earnings data as an indicator of share value for a large samp le of publicly traded companies over the 1993-98 period. This issue is of s pecial interest because the Financial Accounting Standards Board recently a dopted new accounting standards that eliminate the systematic amortization of goodwill in favor of a requirement to review, goodwill for impairment wh en circumstances warrant. We found that earnings before goodwill amortizati on explain significantly more of the observed distribution of share prices than earnings after goodwill amortization and that when share valuations ar e based on earnings alone, goodwill amortization simply adds noise to the m easure. These results suggest that eliminating good will amortization from the computation of net income will not reduce its usefulness to investors a nd analysts as a summary indicator of share value.