Internally Developed Intangibles and Expected Stock Returns

Abstract

Intangible assets have always been part of the economic landscape. In this study we examine the impact of internally developed intangibles on our ability to identify differences in expected stock returns in US, developed ex US, and emerging markets. Our research does not find compelling evidence that we should include estimates of internally developed intangibles in company fundamentals such as book equity. The estimation of internally developed intangibles contains a lot of noise. Perhaps due to this high level of noise, we find that estimated internally developed intangibles provide little additional information about future firm cash flows beyond what is contained in current cash flows. Moreover, capitalizing estimates of internally developed intangibles does not yield consistently higher value and profitability premiums, and adjusting for sector differences largely eliminates premium differences in each of the three regions.

Keywords: intangibles, intangible assets, expected returns, equities, value, R&D, profitability, factor investing, research and development

JEL Classification: E22, G12, G14, G31, G32, M41, O33