Market Responses to Private and Public Targets: The Role of Goodwill Valuation*

Investors overprice goodwill value acquired from a private target during a merger and acquisition (M&A) announcement. However, the overpricing of goodwill is corrected in the years following the deal's completion. Our results show that investors predict the decreasing value of goodwill and promptly adjust their pricing regardless of goodwill impairment. The differential market reactions to goodwill between private and public targets are economically significant. The pricing on goodwill obtained from a private target is 47% higher around the announcements and 44% (33%) lower one (two) year(s) after the M&A completion than that from the public target.