The Role of Unrecorded Intangible Assets in Residual Income Valuation: The Case of Banks
UW-Madison AIS Working Paper No. KW2002
37 Pages Posted: 11 Jan 2002
Date Written: Janaury 9, 2002
This paper examines the impact of bank unrecorded intangible assets on equity valuation in the context of abnormal earnings and the residual income model ("RIM"). We hypothesize that the level of unrecorded intangible assets affects the implementation of the RIM and we document a significant and positive association between levels of bank unrecorded intangible assets and abnormal earnings. We also find that the pricing multiples for abnormal earnings increase from lower to higher levels of unrecorded intangible assets. Subsequent tests on the components of abnormal earnings and on adjusted book value and abnormal earnings corroborate the earlier findings of a relationship between abnormal earnings and unrecorded intangible assets. We provide evidence to assist in the implementation of the RIM and in better understanding of the determinants of abnormal earnings, consistent with the perceived importance of intangible assets in the current marketplace.
Keywords: Intangible assets, Residual income model, Abnormal earnings
JEL Classification: M41, G12, G21
Suggested Citation: Suggested Citation