This study investigates how the gap in goodwill accounting between Japanese Generally Accepted Accounting Principles (J-GAAP) and International Financial Reporting Standards (IFRS) is related to the likelihood of adopting IFRS and resulting merger and acquisition (M&A) transactions. We first investigate whether IFRS adoption in Japan is associated with the past M&A activities of adopters and their goodwill ratio. Second, to control for possible self-selection bias arising from the firms’ incentives to adopt IFRS, we select control firms that use J-GAAP and have a similar probability of IFRS adoption, by using propensity score matching (PSM). Third, we examine whether M&A transactions and the goodwill ratio change pre- to post- IFRS adoption.

Three main findings emerge as follows. First, firms that are actively involved in M&A transactions have a higher probability of voluntary IFRS adoption than J-GAAP users have. Second, voluntary IFRS adopters tend to increase the number of M&A transactions more than J-GAAP users do. Third, while the goodwill ratio is higher for IFRS adopters than for J-GAAP users before and after the adoption, we find no evidence that IFRS adopters increase the goodwill ratio after the adoption.

This study contributes to the related literature by using the Japanese setting. In particular, unlike previous studies, which examine the relationship between IFRS adoption and cross-border M&A, this study employs Japanese data, of which most M&A transactions are conducted between domestic firms. In other words, while previous studies analyze whether enhanced comparability of financial statements under IFRS can increase cross-border M&A transactions, this study investigates whether the difference in accounting standards can affect M&A transactions. Our findings are also important for accounting regulators, because the International Accounting Standards Board (IASB) has been discussing the issue of goodwill following the Post-implementation Review of IFRS 3 since 2015.