The impact of the goodwill non-amortization approach of IFRS 3 on overbidding in mergers and acquisitions: Evidence from European markets
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School of Business |
Master's thesis
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Date
2024
Department
Major/Subject
Mcode
Degree programme
Accounting
Language
en
Pages
152+3
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Abstract
Accounting for mergers and acquisitions has undergone significant changes over the last few decades under both IFRS and U.S. GAAP. An M&A transaction is arguably one of the most momentous events during a firm’s lifecycle, making its accounting treatment a subject of considerable interest to managers. This study explores the introduction of the goodwill non-amortization regime, which was implemented in 2004 in the form of IFRS 3. The abolishment of periodic goodwill amortization was pivotal, as it directly impacts firm earnings. Indeed, IFRS 3 has garnered an abundance of criticism from practitioners and academics alike, who claim that it threatens the fundamental principles of accounting, namely the presentation of a true and fair view. Furthermore, emerging literature has begun to claim that non-amortization regimes lead to overbidding in M&A, a direct representation of shareholder value destruction. This outcome violates the principle of efficient capital markets, one of the IASB’s cardinal missions, and distorts market dynamics. In response to the overwhelmingly critical evidence, the IASB is currently reconsidering IFRS 3, making this study very timely and important. Hence, the purpose of this study is to explore the potential effects the introduction of the goodwill non-amortization regime has had on overbidding in mergers and acquisitions in European markets. This study utilizes a novel empirical measure for estimating the magnitude of overbidding in M&A transactions. Given its novelty, the measure has been employed in only a couple of prior studies, and this research is the first to apply the measure to a multi-national sample of European markets. This study examines transactions from 23 countries that were members of the EU at the time of the mandatory IFRS adoption in 2005, ranging over the years from 1995 to 2015. The data used for this study is obtained from the Thomson Reuters SDC Platinum database. This study involves the use of several samples, but the primary sample consists of 362 observations after filtering for a host of necessary qualities. The methodology this paper follows is composed of three steps: In the first step, a probit model is used to predict the probability of acquisition success. In the second, two identical SUR specifications are employed to model the movements of the probability of success and the bidder’s profits. Finally, an OLS regression is applied to determine the real effect of IFRS 3 on the extent of overbidding in Europe. The main finding of this paper is that the level of overbidding in Europe has decreased since the IFRS intervention, and IFRS has not been a significant factor in the shift in bidding behavior. In fact, the results direct attention towards the possibility of other changes brought about by IFRS 3 or changing firm characteristics as explanatory factors. Additionally, the results unveil the bidder’s negatively biased trade-off in the bidding process, as incrementally increasing the bid premium leads to a mild increase in the probability of acquisition success but a significant decrease in the bidder’s profits. These findings contrast with prior research which unequivocally demonstrates that goodwill non-amortization regimes do lead to overbidding. These differing outcomes from near-identical standards raise the question whether the regulation has succeeded in its objectives. In addition to filling a gap in the prior academic literature, the findings of this study are useful to IASB in their redeliberation of IFRS 3 as it offers new evidence on the real effects of the standard on M&A practices. Furthermore, the results contribute valuable insights to corporate boards, enabling them to refine and optimize their M&A strategy.Description
Thesis advisor
Niemi, LassePham, Ly
Keywords
IFRS 3, goodwill, periodic amortization, impairment test, overbidding, M&A