Intangible Assets Aligned: In Search of Return Predictability

In this paper, we propose a comprehensive intangible assets-related measure, I-SCORE, for the purpose of explaining the cross-sectional returns in the U.S. stock market. We apply the partial least squares approach to construct I-SCORE from 10 firm characteristics. The results show that the firms receiving the high I-SCORE generate substantially higher future returns than those with the low I-SCORE. The predictability of I-SCORE is robust after controlling for innovation- and R&D related factors, along with some famous asset pricing factors. We also find that I-SCORE is positively related to future earnings, intangible investments, and expected profitability. In addition, the positive relation between I-SCORE and future returns is stronger for the firms with higher financial constraints. Besides, investor attention helps dissect the premium generated by I-SCORE, which cannot be explained by the sentiment- and analyst forecast error-driven mispricing, however.

Keywords: Intangible assets, I-SCORE, Partial least squares, Risk-based theory, Sentiment

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Liao, Cunfei and Jiang, Fuwei and Jin, Fujing and Tang, Guohao, Intangible Assets Aligned: In Search of Return Predictability (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3692106 or http://dx.doi.org/10.2139/ssrn.3692106