Working Paper: NBER ID: w25960
Authors: Michael Ewens; Ryan H. Peters; Sean Wang
Abstract: Accounting standards prohibit internally created knowledge and organizational capital from being disclosed on firm balance sheets. As a result, balance sheets exhibit downward biases that have become exacerbated by increasing levels of intangible investments. To offset these biases, researchers must estimate the value of these off-balance sheet intangibles by capitalizing prior flows of R&D and SG&A. In doing so, a set of capitalization parameters must be assumed, i.e., the R&D depreciation rate and the fraction of SG&A that represents a long-lived asset. We estimate these parameters using market prices from firm exits and use them to capitalize intangibles for a comprehensive panel of firms from 1978-2017. We then use a series of validation tests to examine the performance of our intangible capital stocks versus those developed from commonly used parameters. On average, our estimates of intangible capital are 15% smaller than estimates from status-quo parameters while exhibiting larger variation across industry. Intangible capital stocks derived from exit price parameters outperform existing measures when explaining market enterprise values and identifying human capital risk. Adjusting book values with exit-based intangible capital stocks markedly attenuates well-documented biases in market-to-book and return on equity ratios while increasing the precision of the HML asset pricing factor. We conclude that our capitalization parameters create intangible stocks that perform equal to or better than status-quo measures in various applications.
Keywords: Intangible Capital; Market Prices; Corporate Finance; Asset Pricing
JEL Codes: G30; G32; G34; O3; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adjusting book values for intangible capital (E22) | return on equity (ROE) calculations (G12) |
| organizational capital measures (D29) | human capital risks (J24) |
| intangible capital measures (E22) | patent valuations (O34) |
| intangible capital measures (E22) | trademark filings (O34) |
| exit-based intangible capital stocks (E22) | market enterprise values (P12) |