Decomposing Firm Value
58 Pages Posted: 27 Jan 2018 Last revised: 21 Jul 2019
Date Written: July 2019
What are the economic determinants of a firm's market value? We answer this question through the lens of a generalized neoclassical model of investment with physical capital, quasi-fixed labor, and two types of intangible capital, knowledge and brand capital as inputs. We estimate the structural model using firm-level data on U.S. publicly traded firms and use the estimated parameter values to infer the contribution of each input for explaining firm's market value in the last four decades. The model performs well in explaining both cross-sectional and time-series variation in firm's market values across industries, with a time-series R2 of up to 61%, and a cross-sectional R2 of up to 95%. The relative importance of each input for firm value varies across industries and over time. On average, physical capital accounts for 30% to 40% of firm's market value, installed labor force accounts for 14% to 22%, knowledge capital accounts for 20% to 43%, and brand capital accounts for 6% to 25%. The importance of physical capital for firm value decreased in the last decades, while the importance of knowledge capital increased, especially in high-tech industries. Overall, our analysis provides direct empirical evidence supporting models with multiple capital inputs as main sources of firm value, and shows the importance of the non-physical capital inputs for firm value.
Keywords: Valuation, Neoclassical Investment, Structural Estimation
JEL Classification: D21, D22, E22, E24, G12, G32
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