Accounting for Goodwill on the Acquisition of Corporate Subsidiaries

Abstract

Despite the existence of regulation, Australian firms retain considerable discretion over the amount of goodwill recorded on the acquisition of corporate subsidiaries. The acquisition of a corporate subsidiary is a significant transaction that represents an incremental change to the investment opportunity set of a firm. This isolation of a subset of the firm's investment opportunity set provides a unique opportunity to address the endogeneity problem encountered by other studies that attempt to isolate the incremental importance of ex ante and ex post explanations for accounting policy choice. The findings support the conclusion that the proportion of the purchase price allocated to goodwill is ex ante related to the investment opportunity set of the target company and ex post determined by the firm wide characteristics, leverage and the investment opportunity set of the acquiring company.