Managerial Ability and Intangible Assets: Evidence from Purchase Price Allocation in M&A

• In Event: Financial II

Abstract

This study examines the relationship between managerial ability and the recognized amount of intangible assets, including goodwill and other assets acquired in M&A. Estimating the benefits of acquired goodwill and other intangible assets requires the valuation of the entire or parts of the firm, which cannot easily be verified (Watt 2003, 2006). This indicates that the estimation and recognition of intangible assets in financial statements are affected by the manager’s subjectivity and ability to a large extent. Thus, we expect and find that managerial ability is positively associated with the amount of intangible assets while using managerial ability scores by Demerjian et al. (2012). Furthermore, we find that the purchase price allocation of acquired intangible assets is also affected by the manager’s ability and that managerial ability is more positively related to goodwill than other intangible assets, suggesting that more able managers seek and recognize more goodwill than other intangible assets. Finally, our cross-sectional analyses real that the relationship between managerial ability and intangible assets acquired by M&A is mainly driven by acquirers with domestic, public or related targets. This shows that managers can use their skills and ability for intangible assets when they can easily obtain targets’ information.

Authors

• Shin Hyoung Kwon, Penn State University - Erie

• Tingting Ye, Boston University