We empirically estimate the extent of overbidding for each M&A transaction using the first-order-condition of bidder’s profit maximization problem, and test whether overbidding can explain goodwill allocated to the deal, in contrast to the deal synergy. We find that higher goodwill is significantly associated with overbidding while synergy is not. In particular, a 10% decrease in the bidder’s marginal profit caused by overbidding leads to an increase of about 261 thousands of goodwill allocated per million total transaction value. Higher goodwill is also associated with lower post-announcement returns: 10% increase in the goodwill is associated with a reduction of 5.6% (10%) decrease in the post-announcement returns in 6 months (12 months after the merger announcement. Moreover, we find that SFAS 141, which mandated the allocation of goodwill in purchase price, significantly increases overbidding.