Hunting for goodwill in de-SPAC transactions

The two permissible accounting treatments (acquisition and reverse merger methods) in a de-SPAC transaction (SPAC merger with a target firm) permit us to explore answers to three key questions. First, we find that only one in every five de-SPAC transactions use the acquisition method. Because under the acquisition method a de-SPAC can record goodwill, but not under the reverse merger method, any goodwill impairment is limited to the small subset of de-SPACs using the acquisition method. Second, we investigate the determinants of the two accounting treatments and find that while compliance with accounting rules determine the accounting treatment, agency conflicts and premiums are higher in de-SPACs using the reverse merger method than the acquisition method. Finally, we find that long-term stock returns are poorer for de-SPACs using the reverse merger method than the acquisition method, suggesting greater agency conflicts and potential overpayment under the reverse merger method. Our results indicate that even though the pooling-of-interest method has been disallowed in business combinations since 2001, the majority of de-SPACs employ a disguised version of this accounting method.