Research On Negative Goodwill From Acquisitions In The Short-term Market Reaction Perspective

China’s economy has developed vigorously over the past decade, as variousindustrial output value demonstrates robust growth. While maintaining the higheconomic growth, most industries initiates structural adjustment in our country, alongwith the frequent occurrence of inter-industry and intra-industry mergers andacquisitions (M&A).There is no lack of low-cost M&A among the numerousenterprise M&A, which leads to negative goodwill. China’s new accountingstandards, issued in2006, however, define simple methods of accounting generally toreplace the definition of cost-book value differentials in low-cost M&A instead ofgiving a clear definition of negative goodwill. The standards stipulates that cost-bookvalue differentials in M&A must be counted into current profit (non-operating income)all at once, after the double-check and adjustment for identifiable assets, liabilities andcontingent liabilities of the merged party. This no doubt provides enterprises with thespace to manipulate surplus. Therefore, research on the difference of negativegoodwill definition and accounting methods in our country and internationalaccounting standards, as well as the market reaction to the negative goodwill M&Acases, can help investors, companies and policymakers to better understand theinfluence of negative goodwill, is of great significance.At present research data related to negative goodwill is not enough at home andabroad. Two outstanding empirical studies emerged in recent years, while the lack ofresearch on practical cases still continues. I selected two typical companies as theobjects of case study through plenty of data filtering, BOE Technology Group andFujian Yuanli Activated Carbon CO., Ltd., intending to set a precedent of case study.Firstly, this paper sorts through the system knowledge and literature reviews includingthe discussion about existence of negative goodwill and analysis of the differencesbetween our accounting methods and international ones. Afterwards, this papercollates the strategic goals and the negative goodwill M&A cases of these two targetcompanies. A total of6cases, it takes whether the M&A target is the affiliated/joint venture company of the merging party as the division standard to generate two groups,3cases for each group. Through the research it is found that:(1) The market hasshort-term rapid response to the negative goodwill M&A;(2) The market showsdifferent reaction according to the different relationships between the merged partyand the merging one. The market has short-term negative response as the mergedparty is the affiliated/joint venture company of the merging company, while thecontrary is the case when they are not affiliated. This demonstrates that the market hasjudgment on the source of negative goodwill in certain degree. Although consistentappearance has been observed in these6cases, given the lack of study on largersample, this paper cannot jump to the conclusion, which turned out to be thelimitation of this study. Nevertheless, this paper still provides much further evidencefor later research on dividing standards of negative goodwill.At the end of this paper, the author summarizes four common sources of negativegoodwill and short-term market reaction effect after the negative goodwill cases. Thispaper also points out the shortages of our current accounting rules about negativegoodwill, advocates discriminating the sources of negative goodwill carefully bylearning from the classification methods of goodwill at home and abroad. Further, ithelps improve the M&A circumstances in our country and create healthy and stableeconomic development.