This paper analyses from an empirical perspective one of the most controversial of company assets, namely goodwill. The controversial nature of goodwill lies not only in its definition but also in its quantification and accounting treatment, giving rise in recent years to an important line of research centred on the value relevance of goodwill in particular and intangibles in general. The paper has a two-fold objective: First, to study the economic effects arising from different accounting treatments of goodwill, through analysis of the sensitivity of certain ratios to the diverse set of existing accounting options; and secondly to verify the value relevance of goodwill from the perspective of the capital markets. To undertake this work, we have used accounting information of Spanish group companies and corresponding stock market information for the period 1991-1997. The basic conclusions obtained concentrate on the ratio-based business analysis which can be seen to be affected by the accounting treatment applied to goodwill. On the other hand, there is evidence of an increase over time of the value relevance of goodwill in the Spanish capital market, as there is of the dependency of such relevance on certain contextual factors such as level of earnings, the percentage of goodwill over total assets, etc.
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