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

54 Pages Posted: 19 Aug 2019 Last revised: 19 Sep 2019

See all articles by Zachary King

Zachary King

University of Wisconsin - Madison

Thomas Linsmeier

University of Wisconsin-Madison

Daniel Wangerin

Wisconsin School of Business

Date Written: September 18, 2019

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

Suggested Citation

King, Zachary and Linsmeier, Thomas and Wangerin, Daniel D., Differences in the Value Relevance of Identifiable Intangible Assets Acquired in Business Combinations (September 18, 2019). Available at SSRN: https://ssrn.com/abstract=3438250 or http://dx.doi.org/10.2139/ssrn.3438250

Zachary King (Contact Author)

University of Wisconsin - Madison ( email )

Madison, WI
United States

Thomas Linsmeier

University of Wisconsin-Madison ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Daniel D. Wangerin

Wisconsin School of Business ( email )

975 University Avenue
4104 Grainger Hall
Madison, WI 53706
United States

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