Accounting for Goodwill
Chicago Booth Research Paper No. 23-20
University of Chicago, Becker Friedman Institute for Economics Working Paper Forthcoming
66 Pages Posted: 17 Oct 2023 Last revised: 10 Feb 2025
There are 2 versions of this paper
Accounting for Goodwill
Chicago Booth Research Paper No. 23-20, Fama-Miller Working Paper , University of Chicago, Becker Friedman Institute for Economics Working Paper Forthcoming
Number of pages: 66
Posted: 17 Oct 2023
Last Revised: 10 Feb 2025
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Accounting for Goodwill
University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2023-142
Number of pages: 53
Posted: 03 Nov 2023
Downloads
190
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: 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
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