The nature and implications of acquisition goodwill

Nir Yehuda, Linda Vincent and Thomas Lys

Asia-Pacific Journal of Accounting & Economics, 2019, vol. 26, issue 6, 709-730

Abstract: We investigate the conditions under which the accounting-based acquisition goodwill represents an economic asset. Analysis of the stock market reaction to 2123 acquisitions suggests that although investors perceive 41% of the acquisitions to have a negative net present value consistent with overpayment for the target, the acquirer records positive accounting goodwill. Adjusting the goodwill to eliminate any overpayment results in a better prediction of future operating performance. As a thought experiment, we also increase the recognized accounting goodwill for the remaining 59% of the sample. Again, we show that this goodwill construct is a better predictor of future operating performance.

Date: 2019
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DOI: 10.1080/16081625.2017.1414615

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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