INTANGIBLE ASSETS Measurement , Drivers , Usefulness

The measurement and valuation of intangible assets are a matter of considerable interest to managers, investors, and accounting-standard setters. Important decisions concerning intangibles are hampered by the lack of systematic and comparable measures for these increasingly important assets. In this study, we provide an approach to estimating the value of intangible assets that are not recorded on the firm’s balance sheet. The methodology is based on the economic notion of “production function,” where the firm’s economic performance is stipulated to be generated by physical, financial, and intangible assets. We estimate the contribution of intangible assets by subtracting the normal returns on physical and financial assets from an earnings-based economic performance measure. Capitalizing the expected value of this contribution over future years yields an estimate of intangible capital. We find compelling evidence that our approach provides economically meaningful estimates of intangible assets. Our results indicate that investments in R&D, advertising, brands, information technology, and human resource practices are important drivers of intangible capital, and in turn corporate value. We find that intangibles measures provide more value-relevant information than conventional performance measures, such as earnings and cash flows. Furthermore, the approach is shown to be useful to investors seeking information on future performance of valuable intangibles. We document extensive evidence that the intangibles-based measures can effectively distinguish between overvalued and undervalued stocks. We believe the intangibles measures described here can add an essential, and hitherto missing, valuation tool for managers and investors concerned with intangible assets. The results on the value drivers of intangible can also be potentially useful to regulators in identifying candidate disclosure items to be considered in their effort to improve disclosure on intangibles.