Intangibles to Tangible: In Search of Firm Value Creation

51 Pages Posted: 29 Sep 2020 Last revised: 3 Mar 2021

See all articles by Cunfei Liao

Cunfei Liao

Hunan University - College of Finance and Statistics

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Fujing Jin

Central University of Finance and Economics (CUFE); Macquarie University, Macquarie Business School

Guohao Tang

Hunan University - College of Finance and Statistics

Date Written: March 10, 2020

Abstract

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

Liao, Cunfei and Jiang, Fuwei and Jin, Fujing and Tang, Guohao, Intangibles to Tangible: In Search of Firm Value Creation (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3692106 or http://dx.doi.org/10.2139/ssrn.3692106

Cunfei Liao

Hunan University - College of Finance and Statistics ( email )

2 Lushan South Rd
Changsha, CA Hunan 410082
China

Fuwei Jiang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Fujing Jin

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Guohao Tang (Contact Author)

Hunan University - College of Finance and Statistics ( email )

Lushan Road (S), Yuelu District
Changsha, Hunan 410006
China

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