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An Explanation of the Nature of Internally Generated Goodwill Based on Aggregation of Interacting Assets

Stolowy, Hervé; Luc, Paugam; Casta, Jean-François (2010-12), An Explanation of the Nature of Internally Generated Goodwill Based on Aggregation of Interacting Assets, 32ème congrès de l'AFC, 2011-05, Montpellier, France

Type
Communication / Conférence
Date
2010-12
Conference title
32ème congrès de l'AFC
Conference date
2011-05
Conference city
Montpellier
Conference country
France
Pages
49
Publication identifier
http://dx.doi.org/10.2139/ssrn.1833624
Metadata
Show full item record
Author(s)
Stolowy, Hervé
Luc, Paugam
Casta, Jean-François
Abstract (EN)
Increasing internally generated goodwill (IGG) is another way of depicting the rising gap between market and accounting values sometimes referred as the “book-to-market black box”. Existing methods propose to value internally generated goodwill as the present value of abnormal earnings (e.g., residual income models) or to measure it indirectly through the excess of the enterprise value over the fair value of assets in a business combination. The critical drawback of these approaches is that they do not explain how the goodwill is created. In other words they do not enter into the “black box”. We propose an alternative valuation method based on the recognition that using an asset in combination with other assets leads to an interaction affecting firm value. In this context IGG emerges from an inadequate theory of aggregation of assets. Using Choquet’s capacities, which are non-additive aggregation operators, allows solving this adequacy issue as IGG arises as a consequence of specific synergies between assets. Our model is tested on the U.S. High Technology sector and benchmarked against the residual income model. To the extent of the accuracy to forecast enterprise value, our model performs better than the standard residual income model.
Subjects / Keywords
Internally generated goodwill, Going concern goodwill; Synergy; Choquet integral; Residual income model
JEL
M40 - General
M41 - Accounting
G12 - Asset Pricing; Trading Volume; Bond Interest Rates

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