The Rise of Goodwill
Peter Chen, Finance PhD student
As a share of total assets, Goodwill rose from less than 5 percent in 1985 to nearly 20 percent in 2015, as shown in Figuire 1. This rise is both smooth and pervasive across countries and industries. I argue that this macro trend reflects both firms' increasing reliance on mergers to expand, as well as the rising importance of off-balance sheet characteristics in determining firm value. Then, I document both the time series and the cross-sectional properties of goodwill accumulation, with the goal of understanding how much of aggregate goodwill can be attributed to target firms' off-balance sheet capital, the synergies that arise from the merger, or the gaining of market power. Lastly, I plan to quatify the impact of aggregate investment and capital stock if one treats goodwill as a form of intangible capital that has grown in tandem with merger activity.