The Effect of Identifying Intangible Assets in an Acquisition on Investors’ Judgments

Standard setters struggle with the costs and benefits of separate recognition of intangible assets in business combinations. In this study, we experimentally show that separately identifying intangibles enables investors to more easily envision how an acquiring company can benefit from an acquisition. When intangibles are subsumed into goodwill, though, we show that providing a narrative that describes the strategic reasons for the acquisition acts as a substitute for intangible identification, with similar effects on investors’ judgments. Thus, providing investors with either the separate identification of intangibles or a strategic narrative can help investors better understand and foresee the benefits of such business decisions. Given variation in the content of narrative disclosures in practice and the difficulty of mandating such content, our results suggest that requiring the identification of acquired intangibles may be the best approach for providing investors with useful information