The Appearance of Impairment: Veblen and Goodwill-Financed Mergers
During a bull stock market, accounting rules favor firms that engage in aggressive mergers. In the 1990s, this process helped reorganize the industries of media, telecommunications, and the Internet. In the aftermath and slow deflation of equity prices since 2000, some firms have not met their expectations of higher returns and have begun shedding the goodwill that inflated their asset accounts during the 1990s. WorldCom's write-down of its entire stock of goodwill, $45 billion, is only one example of this phenomenon. Applying Thorstein Veblen's theory of corporate finance to the current era of mergers and recent evolution of accounting standards provides insight into the accounting mechanisms that allow for the expansion, reorganization, and ultimate consolidation of ownership structures. Despite its original formulation to explain the circumstances of the late nineteenth century, Veblen's theory of corporate finance can still be usefully applied to the American economy of the late twentieth century. While the corporation of the late twentieth century is in many respects a much advanced legal creature, Veblen's analysis retains its usefulness because it explores the fundamental features of the corporation and corporate finance-qualitative features that have not changed during its evolution by degree. His theory of capital explains the positive relationship between stock market prices and the value of balance sheet assets that allows the expansion and contraction of corporate assets over the business cycle. In this paper, Veblen's theory of corporate finance will be developed and used to explain the inflation and deflation of goodwill and stock prices associated with the late 1990s business cycle expansion and following contraction. Specific attention will be given to the recent evolution of accounting standards and the