Differences in the Value Relevance of Identifiable Intangible Assets Acquired in Business Combinations

Abstract

Some investors assert there are weaknesses in the current accounting model for business combinations that limit the usefulness of information reported for acquired identifiable intangibles. Organically replaced intangible assets require future ongoing expenditures to maintain or enhance their value, creating uncertainty about the amount and timing of future cash flows. Wasting intangible assets have identifiable revenue streams that do not require future investment and often have definite lives that are legally or contractually determined. The current accounting model for business combinations also requires recognition of identifiable intangibles that are not strategically important sources of economic benefits from the acquisition. Motivated by these claims, we develop testable hypotheses and examine differences in the associations between post-acquisition equity prices and different types of acquired intangibles. We predict and find that both wasting and organically replaced intangibles are positively associated with post-acquisition equity prices. However, we predict and find that the association is less positive for organically replaced intangibles than wasting intangibles. In addition, we predict and find that organically replaced intangibles exhibit a similar association with equity prices to goodwill. We also predict and find that strategically important intangibles are positively associated with post-acquisition equity prices, but find no association for other intangibles. Our findings highlight how differences in the underlying economic characteristics of acquired intangibles are reflected in the usefulness of financial reporting information for business combinations.

Keywords: mergers and acquisitions, intangible assets, purchase price allocations, fair value

JEL Classification: D82, G34, M41