Under time pressure, experimental subjects attached a higher valuation to acquiring firms
when the takeover premium was allocated to goodwill than when it was allocated to
amortizable and identifiable intangible assets.
The authors conduct an experiment in which 40 European professional analysts are asked to
attach a value to the real-world company Ericsson when it takes over a fictitious company,
XX Corp. Analysts who are presented with accounting information that allocates the
acquirer’s premium to nonimpaired goodwill attach a higher valuation to the combined
entity than those who are presented with information that allocates the premium to
identifiable intangible assets. In the experiment’s second stage—in which the
subjects are given a more sophisticated discounted cash flow model—the group exhibits
a general tendency to be “anchored” to their first-stage valuation.
How Is This Research Useful to Practitioners?
The authors use experimental evidence to provide behavioral insights into the consequences
of changes in accounting standards that complement similar studies based on archival
evidence. In contrast to empirical studies, in this study, the authors can implement
cross-subject and within-subject controls.
The authors consider the impact of the International Accounting Standards Board’s
2005 adoption of International Financial Reporting Standards (IFRS) 3 (Business
Combinations), which affords preparers some discretion in deciding whether to allocate
acquisition premiums to goodwill (with periodic impairment tests) or to amortizable,
identifiable intangible assets.
When under pressure to provide timely advice to clients, professional analysts use quick
methods that are influenced by accounting choice. When using sophisticated methods to arrive
at more-measured forecasts, analysts exhibit the psychological tendency to be anchored to
their initial judgments.
The authors conclude that their evidence suggests that IFRS 3 offers incentives for the
acquiring company to allocate takeover premiums to goodwill rather than to identifiable
How Did the Authors Conduct This Research?
The experiment is based on a web-based study involving 40 professional analysts drawn from
a diploma program at a European business school. All but one of the analysts had never given
a recommendation on Ericsson stock. A supplemental analysis involves sending the same case
study to 78 analysts who cover Ericsson stock; only 6 analysts responded.
The analysts are shown information on the real-world telecommunications company Ericsson
and a fictitious acquiree company, XX Corp. The experiment involves both a between-subjects
treatment based on the way the acquisition premium is presented in the accounts and a
within-subjects treatment based on the quantity of information presented in the
experiment’s two stages.
The authors confirm earlier findings in the accounting choice literature that suggest
analysts are heavily influenced by factors that affect short-term earnings information and
earnings-related valuation multiples. The analysts who took part in this study viewed the
acquisition as value enhancing when the acquisition premium was allocated to goodwill
(without impairment charges) but as value reducing when it was allocated to amortizable,
identifiable intangible assets.
This interesting case study complements archival research in the accounting choice
literature. The authors provide evidence that, under time pressure, professional
analysts’ valuation judgments are influenced by the way preparers account for
acquisition premiums. The authors also provide intriguing evidence of analysts’
reluctance to change their valuations after being provided with more-sophisticated
information. It is debatable whether this evidence indicates a psychological anchoring bias
or whether the experiment’s second stage unavoidably fails to capture the long periods
for which analysts make their more sophisticated long-term judgments.