Should Intangibles be Measured: What are the Economic Trade-Offs?
University of Minnesota - Carlson School of Management
University of Chicago - Booth School of Business
University of Illinois at Urbana-Champaign
We investigate whether a firm's intangible investments should be measured and separated from operating expenses. We find that the information extracted from accounting reports of investments and earnings is different when intangibles are measured and identified separately from operating expenses than when intangibles are left commingled with operating expenses. This difference in the market's information causes a change in the behavior of market prices, inducing changes in the firm's investments and cash flows. Thus, from a perspective, measuring intangibles is not unambiguously desirable. We identify the conditions under which providing information on intangibles may be desirable. This study also shows the inadequacy of statistical associations between accounting numbers and prices as a basis for evaluating the desirability of measuring intangible investments. We show that the measurement of intangibles alters the very distribution of cash flows about which the measurement regime is seeking to provide information.
Number of Pages in PDF File: 32
JEL Classification: M41, M44, G12working papers series
Date posted: July 14, 2004
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