Review of Quantitative Finance and Accounting, 20: 315–333, 2003
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Is the Selection of the Amortization Period for Goodwill
a Strategic Choice?
STEVEN L. HENNING AND WAYNE H. SHAW
Edwin L. Cox School of Business, Southern Methodist University, P.O. Box 75033, Dallas, TX 75275-0333, USA
Tel.: +1 214 768 3053, Fax: + 1 214 768 4099
Abstract. This study examines whether the choice of amortization life for purchased goodwill is predictive
of the ﬁrm’s post-acquisition earnings levels, given that shorter lives could lead to a dilution in earnings. Our
ﬁndings support this interpretation. Further, consistent with Andrade (2001), we demonstrate a link between post-
acquisition earnings changes and stock performance. These results suggest that the amortization life chosen is a
reliable predictor of the success of the acquisition both in terms of earnings changes and future stock performance.
These ﬁndings are relevant since the information concerning the life chosen was eliminated by the adoption of
SFAS No. 142.
Key words: business combinations, goodwill, amortization
JEL Classiﬁcation: M41, G34
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 142, Goodwill and Intangible Assets, that requires goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. Given the only effect of this change in
practice is that post-acquisition earnings will be higher due to the absence of amortization
charges, it appears on face to have marginal, if any, impact on stock prices of acquiring
ﬁrms. This position is supported by most prior academic studies. For example, Jennings
et al. (1996), Vincent (1997), and Henning, Lewis and Shaw (2001) have found no consistent
link between amortization charges and changes in ﬁrms’ market values. Two explanations
support this ﬁnding. First, the majority of ﬁrms amortize goodwill over 40 years.
the choice has no cash ﬂow implications since ﬁrms amortize intangibles over a 15-year
life for tax purposes.
However, recent articles in the popular press suggest otherwise. Weil (2001) documents
that market participants view the increase in earnings due to the elimination of goodwill
amortization will have a positive impact on ﬁrm valuation. For example, he cites Merrill
Lynch analyst Phua Young, who upon observing Tyco International’s earnings would in-
crease by 30 cents because of the change, stated that “(i)n our view, the shares of Tyco were
inexpensive before the proposal. However, the new FASB proposal would make the shares