Working Paper: NBER ID: w26112
Authors: Frederico Belo; Vito Gala; Juliana Salomao; Maria Ana Vitorino
Abstract: What are the economic determinants of a firm's market value? We answer this question through the lens of a generalized neoclassical model of investment with physical capital, quasi-fixed labor, and two types of intangible capital, knowledge and brand capital as inputs. We estimate the structural model using firm-level data on U.S. publicly traded firms and use the estimated parameter values to infer the contribution of each input for explaining firm's market value in the last four decades. The model performs well in explaining both cross-sectional and time-series variation in firms' market values across industries, with a time-series R² of up to 61%, and a cross-sectional R² of up to 95%. The relative importance of each input for firm value varies across industries and over time. On average, physical capital accounts for 30% to 40% of firm's market value, installed labor force accounts for 14% to 22%, knowledge capital accounts for 20% to 43%, and brand capital accounts for 6% to 25%. The importance of physical capital for firm value decreased in the last decades, while the importance of knowledge capital increased, especially in high-tech industries. Overall, our analysis provides direct empirical evidence supporting models with multiple capital inputs as main sources of firm value, and shows the importance of the non-physical capital inputs for firm value.
Keywords: firm value; intangible capital; neoclassical model; investment
JEL Codes: D21; D22; E22; E24; G12; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Physical Capital (E22) | Firm Market Value (G32) |
| Installed Labor (J89) | Firm Market Value (G32) |
| Knowledge Capital (O36) | Firm Market Value (G32) |
| Brand Capital (G31) | Firm Market Value (G32) |
| Knowledge Capital Increase (D29) | Firm Market Value Increase (G19) |
| Physical Capital Decrease (E22) | Firm Market Value Decrease (G32) |
| Average Skill Level Increase (J24) | Contribution of Labor and Knowledge Capital Increase (J24) |