Relevance of acquired goodwill to net residual and additional earnings: theoretical relationship and empirical study on the french market

Summary In this paper, we investigate whether acquired goodwill carried on the balance sheet generates future earnings in two components: net and additional (other comprehensive income). By decomposing acquired goodwill as in Johnson and Petrone (1998) and using the IVR of Ohlson's (1995) model, we formalize a theoretical link between the goodwill carried on the balance sheet of listed companies and their subsequent earnings capacities, as measured by their residuals. The generalized least squares regressions conducted on the SBF 120 firms for the period 2005 to 2008 show a significant association, with the expected sign, between the goodwill and the consecutive residual earnings of the acquirers, on both earnings components, as well as with the Market to Book ratio.