Differences in the Value Relevance of Identifiable Intangible Assets Acquired in Business Combinations

Some investors assert there are weaknesses in the current accounting model for business combinations that limit the usefulness of information reported for acquired identifiable intangibles. Organically replenished intangible assets require future ongoing expenditures to replenish or maintain their value, creating uncertainty about the amount and timing of future cash flows. Wasting intangible assets do not require future investment and have definite lives that are legally or contractually determined. The current accounting model for business combinations also requires recognition of identifiable intangibles that are not strategically important sources of economic benefits from the acquisition. Motivated by these claims, we develop testable hypotheses and examine differences in the associations between post-acquisition equity prices and different types of acquired intangibles. We predict and find that both wasting and organically replenished intangibles are positively associated with post-acquisition equity prices. However, we also find that the association is less positive for organically replenished intangibles than wasting intangibles. We also predict and find that strategically important intangibles are positively associated with post-acquisition equity prices, but find no association for other intangibles. Our findings highlight how differences in the underlying economic characteristics of acquired intangibles are reflected in the usefulness of financial reporting information for business combinations.