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What drives the allocation of the purchase price to goodwill?

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  • Bugeja, Martin
  • Loyeung, Anna

Abstract

This study examines the proportion of the purchase price allocated to goodwill after the successful acquisition of a publicly listed firm. Using hand collected data we document that 42% of acquirers record a nil amount for goodwill. We find that the amount allocated to goodwill is generally unrelated to target firm economic characteristics. In contrast, consistent with managerial opportunism, we find a positive association between the use of accounting based bonus plans to compensate acquiring firm CEOs and the amount allocated to goodwill. The amount allocated to goodwill also increases after Australia adopted IFRS which no longer required goodwill to be systematically amortised. Other variables associated with goodwill recognition include the acquiring firm's leverage, the takeover premium, whether the target and the bidder operate in the same industry, existing goodwill in the target firm before the takeover announcement and the method of payment used in the acquisition.

Suggested Citation

  • Bugeja, Martin & Loyeung, Anna, 2015. "What drives the allocation of the purchase price to goodwill?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(3), pages 245-261.
    • Handle: RePEc:eee:jocaae:v:11:y:2015:i:3:p:245-261
    DOI: 10.1016/j.jcae.2015.10.002
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    Cited by:

    1. Roncagliolo, Elisa & Avallone, Francesco, 2022. "Recognition of provisional goodwill: Real need or communication strategy?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).
    2. Sunghee Ahn & Youngsoon S. Cheon & Moonchul Kim, 2020. "Determinants of initial goodwill overstatement in affiliated and non‐affiliated mergers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 587-614, May.
    3. Spasić Dejan, 2018. "Do Serbian Companies Provide Relevant Disclosures About Goodwill?," Economic Themes, Sciendo, vol. 56(1), pages 127-138, April.
    4. Runesson, Emmeli & Samani, Niuosha, 2023. "Goodwill or “No-will”: Hubris in the tone at the top," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(1).
    5. Atanasov, Atanas, 2019. "Репутацията Като Обект На Счетоводството: Признаване, Оценяване, Оповестяване [Goodwill as an accounting object: initial recognition, measurement, disclosure]," MPRA Paper 97938, University Library of Munich, Germany.
    6. Bagna, Emanuel & Ramusino, Enrico Cotta & Ogliari, Matteo, 2023. "The impact of different goodwill accounting methods on stock prices: A comparison of amortization and impairment-only methodologies," International Review of Financial Analysis, Elsevier, vol. 85(C).
    7. Bhushan Lohar & John Wade & Sean Walker, 2024. "Valuation of Goodwill for an Engineering Firm," JRFM, MDPI, vol. 17(5), pages 1-13, May.
    8. d'Arcy, Anne & Tarca, Ann, 2018. "Reviewing IFRS Goodwill Accounting Research: Implementation Effects and Cross-Country Differences," The International Journal of Accounting, Elsevier, vol. 53(3), pages 203-226.

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