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

See all articles by Mark J. Kohlbeck

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Terry Warfield

University of Wisconsin - Wisconsin School of Business

Date Written: Janaury 9, 2002

Abstract

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

Kohlbeck, Mark J. and Warfield, Terry D., The Role of Unrecorded Intangible Assets in Residual Income Valuation: The Case of Banks (Janaury 9, 2002). UW-Madison AIS Working Paper No. KW2002. Available at SSRN: https://ssrn.com/abstract=296387 or http://dx.doi.org/10.2139/ssrn.296387

Mark J. Kohlbeck (Contact Author)

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Terry D. Warfield

University of Wisconsin - Wisconsin School of Business ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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