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ABSTRACT
Goodwill represents value not recorded until a company is purchased by another company. The value of goodwill comes from intangibles such as location, superior market position or the skill and learning of management. Goodwill is the difference between the purchase price of a company and the fair value of its assets. The residual nature of goodwill makes measurement of its contribution to performance difficult. Two questions flow from this. The first is whether the contribution of goodwill is measurable. The second question is whether the contribution of goodwill varies from industry to industry. One way to measure contribution is return on assets. This study analyses 38,519 years of company operations in 48 industries and compares the return of companies with and without goodwill. For some, but not all industries, return on assets for companies with goodwill was higher that for companies without goodwill. The contributions of this study are to demonstrate whether goodwill contributes to performance and to analyze variability of performance by industry.
Keywords: Goodwill, return, rent, value, booked goodwill
I. INTRODUCTION
One difficulty in measuring the return on goodwill is that goodwill is a residual. Goodwill is the difference between the purchase price of a company and the fair value of its assets. This difference is booked as an asset under authority of Financial Accounting Standards Board (FASB) Statement of Accounting Standard (SFAS) No. 141 Business Combinations (2001) and Accounting Principals Board (ABP) Opinion 16, Business Combinations (1970) prior to that.
Goodwill has historically been a significant asset on the books of US corporations and with the implementation of SFAS 141 (2001), which requires all business combinations to be treated as purchases, it will become more significant. In 2005, the 4,815 largest companies on Compustat had $54.4 trillion of assets and $2.3 trillion of booked goodwill or about 4.23% of total assets. In 2006, the 4,815 largest companies had $62.7 trillion of assets and $2.4 trillion of booked goodwill or about 3.91% of total assets.
The argument for goodwill is that acquirers pay the fair market value of firms and the difference between the purchase price and the fair market value of acquired assets represents a premium for the skills of management and other value not captured by Generally Accepted Accounting...