Decomposing Firm Value

58 Pages Posted: 27 Jan 2018 Last revised: 21 Jul 2019

See all articles by Frederico Belo

Frederico Belo

University of Minnesota; INSEAD; National Bureau of Economic Research (NBER)

Vito Gala

The Wharton School, University of Pennsylvania

Juliana Salomao

University of Minnesota - Twin Cities - Carlson School of Management

Maria Ana Vitorino

INSEAD; University of Minnesota - Carlson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 2019

Abstract

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

Suggested Citation

Belo, Frederico and Gala, Vito and Salomao, Juliana and Vitorino, Maria Ana, Decomposing Firm Value (July 2019). Available at SSRN: https://ssrn.com/abstract=3104993 or http://dx.doi.org/10.2139/ssrn.3104993

Frederico Belo (Contact Author)

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Vito Gala

The Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Juliana Salomao

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Maria Ana Vitorino

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

HOME PAGE: http://www.maria-ana-vitorino.com/home.html

University of Minnesota - Carlson School of Management ( email )

3-150 Carlson School of Management
321 - 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.maria-ana-vitorino.com/home.html

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