Intangibles: The Missing Ingredient in Book Value

Abstract

The author closely examines the impact of adding intangibles to traditional book equity as a more meaningful value measure. This intangibles-adjusted value metric subsumes the traditional book-to-price metric in explaining cross-sectional equity returns and improves value factor performance across subsample periods and geographic regions. The author finds that knowledge capital (capitalized research and development expenditures) plays a more important role than organization capital (capitalized partial selling, general, and administrative expenditures). The improved value premium comes from both the long and short sides of intangibles-adjusted high-minus-low (HML), which is good news for investors under a long-only constraint and provides useful information for investors who choose to short or underweight certain names.