International Acquisition Accounting Method and Corporate Multinationalism: Evidence from Foreign Acquisitions

Abstract

This paper examines the effect of different international accounting and tax treatments for goodwill on targets shareholders' wealth. The evidence shows that foreign companies that write off goodwill against a reserve account transfer more wealth to the target shareholders than those that amortize goodwill against income. Further analysis reveals that foreign acquires that deduct goodwill for tax purposes transfer more wealth to the target stockholders at the acquisition announcement than other acquires. Such wealth transfers are precipitated by the competition for corporate control. Thus, the more advantageous international accounting and tax treatments for goodwill may leave U.S. bidders at a disadvantage as they compete with foreign acquirers for corporate control.

Furthermore, contrary to the multinational network hypothesis, the study shows that for the firms in the sample, the acquirers with previous experience in the U.S. market transfer more wealth to target shareholders than those entering the U.S. market for the first time. On the other hand, the results for the relationship between industrial relatedness of merger partners and abnormal returns to target shareholders is mixed.