Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Finance | Finance | 2015
Thesis number: 14080
How is goodwill associated with acquisition premiums before and after IFRS? - Evidence from U.K. listed acquisitions of control
|Title:||How is goodwill associated with acquisition premiums before and after IFRS? - Evidence from U.K. listed acquisitions of control|
|Year:||2015 Language: eng|
|Department:||Department of Finance|
|Index terms:||rahoitus; financing; standardit; standards; tilinpäätös; balances of books; liikearvo; goodwill; johtajat; managers; palkkiot; remuneration|
» hse_ethesis_14080.pdf size:2 MB (1976186)
|Key terms:||IFRS; goodwill; CEO compensation; organisational complexity; acquisition premium|
PURPOSE OF THE STUDY:
This master's thesis examines whether the change from local U.K. GAAP to IFRS has any impact on acquisition premiums paid in the U.K. The purpose of the study is to identify critical changes in acquisition accounting and study whether related changes in future reported earnings are likely to impact premiums paid despite zero impact on the intrinsic target firm value.
DATA AND METHODOLOGY:
The main sample consists of 178 acquisitions of control among firms listed in the U.K. between announcement dates of 1999 and 2012. Deal data is gathered from SDC, financial data from Worldscope and stock data from Datastream. The data is further complemented manually with CEO compensation, board stock holdings and purchase price allocation information from the annual reports of the acquirer for each transaction.
The effect of variables related to IFRS is investigated using OLS regression with and without year fixed effects. The Baseline model is built from scratch by combining relevant literature and statistical methods to maximize adjusted r-square. The dependent variable in cross-sectional regressions is acquisition premium. The main hypothesis suggests that goodwill has a negative correlation with the premium paid and that effect is decreased after the adoption of IFRS. In addition the impact of CEO bonuses, managerial discretion in avoiding goodwill write-offs and the recognition of acquired finite life intangibles to acquisition premium is studied.
FINDINGS OF THE STUDY:
Before IFRS, goodwill variables correlate negatively and significantly with acquisition premiums. Although after the adoption of IFRS this association stays negative it is not significant anymore. Subsample analysis reveals that goodwill variables have significantly negative coefficients under U.K. GAAP only for transactions where CEOs have reported earnings related incentives. Goodwill recognised in business combinations is further significantly and positively correlated with acquisition premium for same transactions under IFRS. Results, however, do not support the view that organisationally complex firms could pay higher premiums after adopting IFRS due to increased managerial discretion in purchase price allocations. Results are relatively robust to an exhaustive number of control variables, alternative model specifications and variable transformations including Inverse Hyperbolic Sine transformations, as well as eliminations of statistically significant outliers.
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