Intangibles: The Missing Ingredient in Book Value

Abstract

We closely examine the impact of adding intangibles to traditional book equity as a more meaningful value measure. Our intangibles-adjusted value metric subsumes the traditional book-to-price metric in explaining cross-sectional equity returns and improves value factor performance across subsample periods and geographic regions. We find knowledge capital (capitalized R&D expenditures) plays a more important role than organization capital (capitalized partial SG&A expenditures). The improved value premium comes from both the long and short sides of intangibles-adjusted HML (iHML), which is good news for investors under a long-only constraint and provides useful information for investors who choose to short or underweight certain names.

Keywords: Intangibles, value investing, value factor, value premium, R&D, organization capital, knowledge capital, HML, iHML

JEL Classification: G