Influence Of Purchased Goodwill On Financial Performance And Market Value

It has always been a controversial issue regarding the connotation and accounting treatment of goodwill.Especially in recent years the importance of goodwill accounting is becoming more apparent due to the escalating trend of goodwill figures in listed companies and the rising share in companies' total assets with the merger and acquisition boom.Different accounting treatments towards goodwill have great impact on company's financial performance and market value.We calculate the financial statements of one company under 3 circumstances: acquisition premium allocated to goodwill without amortization,goodwill amortized and acquisition premium allocated to identifiable intangible assets without goodwill,finding that the impairment-only treatment of purchased goodwill significantly improves the company's ROA,profit ratio while decreasing leverage rate and asset turnover rate by influencing cost,expenses and asset.Based on the research of the GEM,companies with goodwill tend to have better financial performance and higher valuation in PB.Compared with acquisitions without goodwill,acquisitions with goodwill also show better financial performance and higher cumulative abnormal return after the acquisition was announced based on data from 2011 to 2014.For companies with acquisition goodwill,further regression analysis shows that the more goodwill the acquisition recognized,the better year-end financial performance and better cumulative abnormal return the company will achieve days after the announcement.Through the acquisition boom in GEM,large amounts of goodwill promote companies' financial performance and market value,thus resulting in the high valuation of GEM.Large amounts of goodwill were recognized through the acquisition boom in GEM.Companies tend to make use of the accounting treatment to recognize all acquisition premium to goodwill instead of recognizing the FV of identifiable intangible assets,in order to achieve better financial performance and higher market value.Thus the accounting treatment of goodwill has great impact on GEM high valuation.