A neglected relationship: The value relevance of goodwill-related accounting measures in the European banking industry

The study aims to contribute to the accounting and financial literature by focusing on the value relevance of goodwill-related accounting measures in the banking industry, which is somehow neglected in the literature and still a matter of debate. To this aim, the study analyzes a sample of 110 European banks from 2005 to 2015 (767 bank-year observations). The analysis is conducted by using well-accepted models of value relevance which are extended to account for banks industry-specific variables related with credit, liquidity and capital risks. The results suggest that goodwill recognition is positively and significantly associated with market prices, while impairment losses may be interpreted differently according to the bank’s performance. Indeed, bank’s financial performance moderates the association between goodwill impairment losses and stock prices, since goodwill write-offs are more informative (i.e. value relevant) in banks with negative earnings. Moreover, differently from previous empirical evidence in non-financial sectors, in the banking industry investors do not consider impairment losses as a sign of restructuring, yet as a forerunner of future unsatisfactory performance. Practical implications may be drawn by market participants from the empirical evidence provided.