The effect of identifying intangible assets in an acquisition on investors’ judgments
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Standard setters struggle with the costs and benefits of requiring separate recognition of intangible assets in business combinations. Scholarly research on the consequences of separately identifying intangible assets versus subsuming intangibles into goodwill is limited. In this study, I experimentally test the effect of separately identifying intangibles on investors’ judgments about an acquisition, and whether this effect is moderated by providing a narrative disclosure that contains the strategic reasons for the acquisition. I predict and find that separately identifying intangibles enables investors to more easily envision how an acquiring company can benefit from an acquisition, increasing investors’ judgments about the valuation, future prospects, and investment desirability of the acquiring company. When intangibles are subsumed into goodwill, though, providing a strategic narrative acts as a substitute for intangible identification, with similar effects on investors’ judgments. Thus, my results show that providing investors with either the separate identification of what the companies acquire or the strategic reasons for the combinations can help investors better understand and foresee the favorableness of such business decisions. These results should be informative to standard setters, managers, and researchers.