The Investment Opportunity Set and Acquired Goodwill
Posted: 28 Jun 1998
Date Written: February 1996
This paper examines how managers allocate the cost of firms' investments in subsidiaries between net tangible assets and acquired goodwill. We find a negative relation between acquired goodwill and leverage, and this could be interpreted as the result of managers of acquiring firms opportunistically allocating a lower portion of the acquisition price to acquired goodwill. However, this analysis, like much of the research on accounting choice, suffers from an omitted variables problem. We present evidence that the observed negative relation between acquired goodwill and leverage is likely to stem from each variable's relation to the acquiring firm's investment opportunity set. Further, we find that acquired goodwill is not related to the existence of debt covenants. Together, these results suggest an endogenous relation between the firm's asset structure, its financing policy, and acquired goodwill.
JEL Classification: M41
Suggested Citation: Suggested Citation