Working Paper: NBER ID: w14548
Authors: Charles R. Hulten; Xiaohui Hao
Abstract: "What is a company really worth?" is a question asked repeatedly during the recent financial crisis. Attention has been focused on short-term valuation issues, like the "mark-to-market" controversy. Sorting out these issues is complicated by the fact that the market puts a value on shareholder equity that is consistently more than twice the reported book value of a company. Numerous observers have pointed to the absence of most intangible assets from financial statements as an important source of this puzzle. We use Compustat financial data for 617 R&D intensive firms to test this possibility. We find that conventional book value alone explains only 31 percent of the market capitalization of these firms in 2006, and that this increases to 75 percent when our estimates of intangible capital are included. The debt-equity ratio also falls from 1.46 to 0.61. These findings suggest that financial reports tend to substantially understate the long-run intrinsic value of corporate America.
Keywords: Intangible Assets; Market Valuation; Financial Accounting
JEL Codes: G3; M41; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Conventional book value (G32) | Market capitalization (G10) |
| Intangible assets (O34) | Market capitalization (G10) |
| Intangible assets (O34) | Debt-equity ratio (G32) |
| Recognition of intangible assets (O34) | Understanding of market value (D46) |
| Intangible assets (O34) | Misinterpretation of financial health and valuation (G32) |