Goodwill Accounting and Takeover Premiums: Pre- and Post-IFRS

Abstract

Prior US research indicates that acquiring firms pay an additional premium in acquisitions (i.e., pooling transactions) in which they do not need to amortise goodwill. The results of these studies however are subject to endogeneity problems as the accounting method choice and takeover premiums are jointly determined. As Australia has never permitted a choice of the pooling method, this study is able to take advantage of Australia’s adoption of IFRS in 2005 to examine the relationship between goodwill accounting and takeover premiums without concerns regarding endogeneity.

Our results show that bidding firms lower their takeover premium when there is greater target firm goodwill. This relationship however is eliminated after Australia adopted IFRS and no longer required goodwill amortisation. Furthermore, we show that this change in the relationship between takeover premiums and goodwill post- IFRS only exists for bidding firms that have a CEO accounting based performance plan in place.

Keywords: Goodwill, takeover premiums, IFRS

JEL Classification: G34, M40, M41