Security price reaction to tax law changes: A case of tax amortization of purchased goodwill

Abstract

This study examines the market reaction to the adoption of an allowance for tax amortization of purchased goodwill. Specifically, this study compares the market reaction between asset-acquiring firms with substantial purchased goodwill, which could most utilize this provision, and stock-acquiring firms, which could not benefit from this allowance, as well as firms with insubstantial purchased goodwill. The results of this study indicate that the market did react to the goodwill amortization provision. The market reaction for asset-acquiring firms with high goodwill, relative to total assets, experienced positive abnormal returns. A positive reaction also was observed for the Supreme Court's decision in Newark Morning Ledger and the vote in the House of Representatives on an earlier version of the legislation. The study provides evidence that there is a relationship between the type of acquisition and level of abnormal returns, but not between the magnitude of goodwill acquired and the level of abnormal returns.

Citation

Gara, S.C. and Karim, K.E. (2000), "Security price reaction to tax law changes: A case of tax amortization of purchased goodwill", Advances in Taxation (Advances in Taxation, Vol. 12), Emerald Group Publishing Limited, Bingley, pp. 77-104. https://doi.org/10.1016/S1058-7497(00)12016-2