Determinants of initial goodwill overstatement in affiliated and non-affiliated mergers

This study examines the determinants of goodwill overstatement at the time of mergers in a Korean setting. In the Korean M&A market, there are two types of mergers: mergers between independent companies (non-affiliated mergers) and mergers between companies under common control (affiliated mergers). This study extends the literature by examining the factors likely to cause goodwill overstatement in both types of mergers. The results reveal that in affiliated mergers, goodwill at the time of a merger tends to be overstated when controlling owners have higher equity ownership in the target than in the acquirer. By contrast, information uncertainty in the target value causes initial goodwill overstatement in non-affiliated mergers. We also find that monitoring of independent institutional investors with concentrated holdings against overpaying for the target is more pronounced when controlling owners in affiliated mergers have incentives to overpay for the target. In affiliated mergers, acquirers tend to write off goodwill more frequently when controlling owners have higher equity ownership in the target than in the acquirer. In non-affiliated mergers, information uncertainty in the target value is significantly associated with subsequent goodwill write-offs. These results suggest that the type of merger has important consequences for initial goodwill recognition and subsequent impairment.