Professors Darrol Stanley and Michael Kinsman, authors of the October 2025 study “Excessive Valuation of Goodwill and Other Intangible Assets,“ set out to answer an interesting question: Do companies carrying high levels of goodwill and other intangible assets on their balance sheets perform differently than their peers? They analyzed 399 S&P 500 companies that remained in the index continuously from late 2018 through 2023. They divided these companies into two groups:
- The 49 companies whose goodwill and intangibles represented an unusually high percentage of their capitalization (one standard deviation or more above the mean).
- The remaining 350 companies with more typical asset structures.
The high-goodwill group reads like a who’s who of American business, including household names such as AT&T T, Disney DIS, Pfizer PFE, Comcast CMCSA, Delta Air Lines DAL, General Mills GIS, and Verizon VZ.
Why Goodwill Matters
Goodwill represents the premium a company pays above the fair value of assets when it acquires another business. It’s essentially a bet that the acquired company will generate future profits that justify the premium paid. Other intangible assets include things like brand names, patents, and customer relationships.
The trouble is, there’s no market where goodwill assets are traded. Their value is subjective, requiring significant judgment from management and auditors. And according to the researchers, about one-third of shareholder lawsuits in 2024 that alleged accounting errors cited asset valuation and impairment issues.
What They Found: A Consistent Pattern of Underperformance
The results were striking and consistent across every metric examined:
1. Companies with high goodwill showed inferior profitability:
- Gross margins were lower in all six years studied (2018-23).
- EBIT margins were dramatically lower—for example, in 2023, the high-goodwill portfolio averaged just 5.7% compared with 20.2% for the group with typical goodwill.
- Eight of 12 financial data points showed statistical significance at the strictest level tested.
2. Market performance told the same story:
Perhaps even more compelling, the market seemed to recognize the problem:
- Price/sales ratios were consistently lower for high-goodwill companies (1.35 versus 4.46 in 2023), suggesting investors valued these companies less.
- Five-year total returns were dramatically worse—the high-goodwill portfolio had a negative 0.7% annual return from 2019-23, while the low-goodwill portfolio gained 10.6% annually.
- Alpha (risk-adjusted excess returns) was negative for the high-goodwill group in every single year, while the low-goodwill group posted positive alpha in five of six years.
Crucially, both portfolios had essentially the same beta (risk level), meaning the underperformance wasn’t because investors were taking less risk—they were getting worse returns for the same level of risk.
Goodwill May Be Systematically Overvalued
An explanation for the underperformance of high-goodwill companies is that acquiring companies routinely overpay for their targets. Academic research has consistently documented this pattern. For example, one study found that acquiring firms’ shareholders lost $303.0 billion from 1980-2001, with an average loss of $25.2 million per acquisition. Another study found that acquirers generally experienced negative abnormal returns over three- to five-year periods after deal completion. And a third study found that firms completing stock mergers earned significantly negative excess returns of 25% over five years postacquisition.
The evidence suggests several reasons for overpayment:
- Winner’s curse: In competitive bidding situations, the winner often pays more than the target is worth.
- Managerial hubris: CEOs may overestimate their ability to realize synergies or turn around struggling businesses.
- Agency problems: Executives may pursue acquisitions that increase their personal power and compensation rather than shareholder value.
- Integration failures: Expected synergies fail to materialize due to cultural clashes, technology incompatibilities, or operational challenges.
When companies overpay, that excess payment gets recorded as goodwill on the balance sheet. Accounting rules require companies to test goodwill for impairment annually, but management has significant discretion in these assessments. Companies are often reluctant to write down goodwill because it signals that a previous acquisition was a mistake—reflecting poorly on management’s judgment and potentially triggering compensation clawbacks or shareholder lawsuits. This creates a troubling dynamic: Goodwill sits on balance sheets at inflated values, overstating a company’s true asset base and financial health, sometimes for years before reality forces an impairment charge.
The Bottom Line: Understand Acquisition-Heavy Companies
Companies that grow through acquisitions tend to accumulate goodwill. While acquisitions can create value, they can also destroy it—and the accounting may not reflect the destruction for years.
The market appears to be pricing in skepticism about goodwill-heavy companies—their lower valuations and worse returns suggest investors have doubts.
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