Accounting for Goodwill

66 Pages Posted: 17 Oct 2023 Last revised: 10 Feb 2025

See all articles by Stefan Huber

Stefan Huber

Rice University

Charles McClure

University of Chicago Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 09, 2025

Abstract

A significant portion of a merger’s purchase price is allocated to goodwill. Currently, goodwill is not amortized but rather tested annually for impairment. When managers of acquiring firms care about earnings, goodwill’s accounting treatment can have large effects on future earnings and may influence how much a manager will bid for a target
company. We quantify the effects of goodwill accounting by estimating a structural model of corporate takeovers. Our estimates suggest accrual accounting increases buyout premia by an average of approximately 12 percentage points. If firms needed to amortize goodwill over 10 years, we estimate premia would reduce by 6 percentage points and M&A volume would shrink by 4.4% or $71 billion per year. Furthermore, the fraction of private equity acquirers would increase by 7.3 percentage points, shifting control over productive assets to the private and financial sector. Our results suggest the accounting treatment for goodwill has a meaningful effect on the market for corporate control.

Keywords: Goodwill, mergers and acquisitions, buyout premia, structural modeling

JEL Classification: D44, G32, G34, M40, M41

Suggested Citation

Huber, Stefan and McClure, Charles, Accounting for Goodwill (February 09, 2025). Chicago Booth Research Paper No. 23-20, Fama-Miller Working Paper , University of Chicago, Becker Friedman Institute for Economics Working Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4601786 or http://dx.doi.org/10.2139/ssrn.4601786

Stefan Huber

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Charles McClure (Contact Author)

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
449
Abstract Views
1,685
Rank
86,498
PlumX Metrics