An Explanation of the Nature of Internally Generated Goodwill Based on Aggregation of Interacting Assets

49 Pages Posted: 29 Nov 2010 Last revised: 19 Jun 2015

See all articles by Jean-Francois Casta

Jean-Francois Casta

University Paris-Dauphine - DRM Finance

Luc Paugam

HEC Paris, Accounting and Management Control Department

Hervé Stolowy

HEC Paris - Accounting and Management Control Department

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Date Written: December 17, 2010

Abstract

Increasing internally generated goodwill (IGG) is another way of depicting the rising gap between market and accounting values sometimes referred as the “book-to-market black box”. Existing methods propose to value internally generated goodwill as the present value of abnormal earnings (e.g., residual income models) or to measure it indirectly through the excess of the enterprise value over the fair value of assets in a business combination. The critical drawback of these approaches is that they do not explain how the goodwill is created. In other words they do not enter into the “black box”. We propose an alternative valuation method based on the recognition that using an asset in combination with other assets leads to an interaction affecting firm value. In this context IGG emerges from an inadequate theory of aggregation of assets. Using Choquet’s capacities, which are non-additive aggregation operators, allows solving this adequacy issue as IGG arises as a consequence of specific synergies between assets. Our model is tested on the U.S. High Technology sector and benchmarked against the residual income model. To the extent of the accuracy to forecast equity value, our model performs better than the standard residual income model.

Keywords: Internally Generated Goodwill, Synergy, Choquet Integral, Residual Income

JEL Classification: M40, M41, G12

Suggested Citation

Casta, Jean-Francois and Paugam, Luc and Stolowy, Hervé, An Explanation of the Nature of Internally Generated Goodwill Based on Aggregation of Interacting Assets (December 17, 2010). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1716907 or http://dx.doi.org/10.2139/ssrn.1716907

Jean-Francois Casta

University Paris-Dauphine - DRM Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75775
France

Luc Paugam (Contact Author)

HEC Paris, Accounting and Management Control Department ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

Hervé Stolowy

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France
+33 1 39 67 94 42 (Phone)
+33 1 39 67 70 86 (Fax)

HOME PAGE: http://www.hec.fr/stolowy

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