The Effect of the Tax Deductibility of Goodwill on Purchase Price Allocations

This paper examines whether changes in the tax deductibility of goodwill affected the pricing of acquisitions during the early 1990s. We find that tax deductibility led to a change in purchase-price allocations across asset groups, since an increase in the amount allocated to goodwill was offset by...

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Bibliographic Details
Published in:The Journal of the American Taxation Association 2000-03, Vol.22 (1), p.18-37
Main Authors: Henning, Steven L., Shaw, Wayne H.
Format: Article
Language:English
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Summary:This paper examines whether changes in the tax deductibility of goodwill affected the pricing of acquisitions during the early 1990s. We find that tax deductibility led to a change in purchase-price allocations across asset groups, since an increase in the amount allocated to goodwill was offset by a decrease in the allocation to identifiable assets. Our evidence also suggests that some of the benefits accrued to the target since purchase price increased after the change in the tax status of goodwill. The failure to observe any change in the level or allocation of the purchase price for the tax carryover firms provides additional support that the change for step-up firms was attributable to changes in the tax law and not to other factors.
ISSN:0198-9073
1558-8017
DOI:10.2308/jata.2000.22.1.18