Does purchased goodwill create shareholder value?

Abstract: In this paper we examine the relationship between the purchased goodwill proportion (PGP) and the long-term stock performance of US acquirers and how this relationship is moderated by industry classification. Our final sample consists of 676 M&As in the period 2007-2017. We apply the Buy-and-Hold Stock Return (BHSR) approach, two variations of the Buy-and-Hold Abnormal Return (BHAR) approach as well as the Fama French Three Factor Model. First, we find that acquirers with higher PGP, on average, experience lower incremental post-acquisition stock performance. Second, we find that the effect of PGP on company performance depends on what industry the acquirer belongs to. Our study consequently confirms the general perception that higher purchased goodwill is "bad", indicating that it is not a reliable measure of synergies and the going concern. Furthermore, certain industries such as Healthcare, Industrials, Financials, and Media and Entertainment significantly moderate PGP's relation to stock performance negatively compared to our baseline industry Consumer Products and Services.