Goodwill accounting differences of the United States and United Kingdom and their effect on share prices

This study examines the relation between market values and acquired goodwill for a sample of firms from the United States and the United Kingdom that made acquisitions from 1985-1990. The empirical tests suggest that the differences in the accounting treatment for goodwill in the two countries led to differences in the post-acquisition association between market values and goodwill. Specifically, the post-acquisition association between the market values of US firms and acquired goodwill remained positive and significant for the first five years after an acquisition. Acquired goodwill did not significantly contribute to explaining the market values of the UK acquiring firms for any of the six years in which the relation between market values and goodwill was examined. This suggests that the accounting disclosure of the goodwill balance in the financial statements is an important factor in market valuation.