Intangibles to Tangible: In Search of Firm Value Creation
51 Pages Posted: 29 Sep 2020 Last revised: 3 Mar 2021
Date Written: March 10, 2020
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 method to construct I-SCORE from 15 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. I-SCORE is positively related to the future profitability and cash flow growth. The positive relation between I-SCORE and future returns is stronger for the firms with higher limits to arbitrage and higher valuation uncertainty, which is consistent with behavioral mispricing explanations. The risk-based theory also explains the corresponding investment strategy, since firms with higher information uncertainty risk have significantly stronger I-SCORE premium.
Keywords: Intangible Assets, I-SCORE, Partial Least Squares, Mispricing, Risk-based Theory
JEL Classification: G12, G14
Suggested Citation: Suggested Citation