An empirical investigation of the accounting differences for goodwill in the United States and United Kingdom

Abstract

This study analyzes the financial characteristics of United States acquisition targets acquired by United States and United Kingdom firms. It seeks to determine whether United Kingdom firms are taking advantage of accounting standards pertaining to goodwill to acquire attractive United States targets. A probit model is employed in the study to determine if there is a difference in the goodwill amounts paid by the United States and United Kingdom acquirers and in the financial characteristics of the firms they acquire. The financial ratios chosen for this study have been used extensively in prior literature to predict acquisition targets. A sample of 153 acquired firms (126 United States and 27 United Kingdom) which were acquired between 1986-1989 is analyzed. The sample is tested using data from the year prior to the acquisition as well as an average of three years prior to the acquisition, and financial ratios are deflated by industry averages to try and minimize an effect of industry differences. The conclusions of the analysis are quite interesting. In the short and long-run univariate analysis the goodwill, profitability, price-earnings and liquidity variables all proved to be significantly different when the United States and United Kingdom firms were compared. The multivariate analysis demonstrated that the goodwill, profitability, valuation and liquidity variables were significantly different in either the short or long-run models when the two subsamples were compared.