Accounting for Goodwill

53 Pages Posted: 17 Oct 2023

See all articles by Charles McClure

Charles McClure

University of Chicago Booth School of Business

Stefan Huber

Rice University

Date Written: December 5, 2023


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 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 nearly 10 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 4.29% or $68.6 billion per year. Furthermore, the fraction of private equity acquirers would increase by 7.74 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

McClure, Charles and Huber, Stefan, Accounting for Goodwill (October 13, 2023). Chicago Booth Research Paper No. 23-20, Fama-Miller Working Paper Forthcoming, University of Chicago, Becker Friedman Institute for Economics Working Paper Forthcoming, Available at SSRN: or

Charles McClure (Contact Author)

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Stefan Huber

Rice University ( email )

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

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