Working Paper: CEPR ID: DP5897
Authors: Jean-Pierre Danthine; Xiangrong Jin
Abstract: Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different form physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible level of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.
Keywords: corporate valuation; intangible capital; stock return volatility
JEL Codes: D24; D50; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Accumulation of intangible capital (stochastic) (E22) | Increased macroeconomic volatility (E32) |
| Accumulation of intangible capital (stochastic) (E22) | Variability in corporate valuations (G32) |
| Increased macroeconomic volatility (E32) | Increased volatility of stock market returns (G17) |
| Accumulation of intangible capital (stochastic) (E22) | Increased volatility of market capitalization to GDP ratio (E32) |
| Accumulation of intangible capital (stochastic) (E22) | Increased volatility of price-earnings ratio (G17) |