Valuation of the Components of Purchased Goodwill

Abstract

This paper examines whether investors distinguish among identifiable components of goodwill for valuation purposes, in the year of acquisition. Similar to Barth, Beaver, and Landsman's [1992] analysis of the value relevance of the components of pension expenses under Statement of Financial Accounting Standards No. 87, we use contemporaneous stock price and returns regressions to examine investors' valuation of the components of goodwill and their amortizations. Although current accounting practice does not require firms to disclose components of goodwillAccounting Principles Board Opinion No. 16: Accountingfor Business Combinations [1970] requires firms to record only the total excess of the purchase price over the fair value of identifiable assets and to amortize this asset over a period not to exceed 40 years-market participants can readily calculate goodwill components from publicly available data. As detailed in section 2, we decompose the difference between the acquisition price and the preacquisition book value of the target firm's assets into four components: (1) the write-up of the target firm's assets to fair market value (WRITEUP), calculated as the difference between