Purchase Price Allocation and Goodwill Impairments

• In Event: Valuation and Measurement

Abstract

This study examines whether goodwill overstated by purchase price allocation after mergers and acquisitions is related to goodwill impairments. First, I introduce a new approach based on valuation technique to measure two possible sources of overstated goodwill: 1) allocation issue, 2) payment issue. I document that the allocation issue is closely correlated with goodwill impairments. I also find that investors do not value goodwill related to allocation issue as an asset in general, however investors valuations of goodwill from allocation are different around goodwill impairment year. Lastly, the allocation issue of goodwill has predictive power on future return up to 16 months after announcement of goodwill impairments. These findings suggest that investors do not fully understand the implications of allocation issue in goodwill accounting.

Author

• HYUNG IL OH, Columbia University