A New Accounting Approach to Evaluate M&A Prices and Goodwill Allocations
Coauthor(s): Hyung Il Oh
This study introduces a new method of evaluating merger and acquisition (M&A) deals. This method differs from Generally Accepted Accounting Principles (GAAP), which estimate the sum of the fair value of net identifiable assets using only balance sheet information, and recognizes the remainder of the purchase price as goodwill. The new method uses balance sheet and income statement information to estimate the value of a target as a business, and treats the remainder of the purchase price as the uncertain growth expectation. Using the new method, I document that uncertain growth expectations in M&A prices (1) are negatively related to acquirer's long-term returns, (2) predict future goodwill impairments, and (3) are superior to event-date market reactions and premiums as a predictor of acquirers' future performance.
Hyung Il Oh "A New Accounting Approach to Evaluate M&A Prices and Goodwill Allocations." , Columbia Business School, (2013).