The invisible burden

We study the role of goodwill, an important form of intangible assets arising from merger and acquisitions (M&As), on asset pricing. We find that goodwill-to-sales strongly and negatively predicts the cross-section of U.S. stock returns, especially among firms with cross-industry M&As and firms with overconfident CEOs. It remains an economically and statistically significant predictor of stock returns after adjustment for common factors. Our results suggest that goodwill-to-sales subsumes information on firm value, and stock markets underreact to this information because the fair value of goodwill is unobservable and hard to evaluate. (C) 2020 Elsevier B.V. All rights reserved.