Return On Goodwill

Goodwill represents value not recorded until a company is purchased by another company. The value of goodwill comes from intangibles such as location, superior market position or the skill and learning of management. Goodwill is the difference between the purchase price of a company and the fair value of its assets. The residual nature of goodwill makes measurement of its contribution to performance difficult. Two questions flow from this. The first is whether the contribution of goodwill is measurable. The second question is whether the contribution of goodwill varies from industry to industry. One way to measure contribution is return on assets. This study analyses 38,519 years of company operations in 48 industries and compares the return of companies with and without goodwill. For some, but not all industries, return on assets for companies with goodwill was higher that for companies without goodwill. The contributions of this study are to demonstrate whether goodwill contributes to performance and to analyze variability of performance by industry.