What is a Company Really Worth? Intangible Capital and the "Market to Book Value" Puzzle

38 Pages Posted: 15 Jan 2009 Last revised: 29 Oct 2014

See all articles by Charles R. Hulten

Charles R. Hulten

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Xiaohui (Janet) Hao

The Conference Board

Date Written: December 2008

Abstract

"What is a company really worth?" is a question asked repeatedly during the recent financial crisis. Attention has been focused on short-term valuation issues, like the "mark-to-market" controversy. Sorting out these issues is complicated by the fact that the market puts a value on shareholder equity that is consistently more than twice the reported book value of a company. Numerous observers have pointed to the absence of most intangible assets from financial statements as an important source of this puzzle. We use Compustat financial data for 617 R&D intensive firms to test this possibility. We find that conventional book value alone explains only 31 percent of the market capitalization of these firms in 2006, and that this increases to 75 percent when our estimates of intangible capital are included. The debt-equity ratio also falls from 1.46 to 0.61. These findings suggest that financial reports tend to substantially understate the long-run intrinsic value of corporate America.

Suggested Citation

Hulten, Charles R. and Hao, Xiaohui (Janet), What is a Company Really Worth? Intangible Capital and the "Market to Book Value" Puzzle (December 2008). NBER Working Paper No. w14548, Available at SSRN: https://ssrn.com/abstract=1327221

Charles R. Hulten (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xiaohui (Janet) Hao

The Conference Board ( email )

845 Third Avenue
New York, NY 10022
United States

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