Intangible Value

Abstract

Intangible assets are absent from traditional measures of value, despite their very large (and growing) importance in firms' capital stocks. As a result, the fundamental anchor for value that uses book assets is mismeasured. We propose a simple improvement to the classic value factor (HML^FF) proposed by Fama and French (1992, 1993). Our intangible value factor, HML^INT, prices assets as well as or better than the traditional value factor but yields substantially higher returns. This outperformance holds over the entire sample, as well as in more recent decades in which value has underperformed. We show that this is likely due to the intangible value factor sorting more effectively on productivity, profitability, financial soundness, and on other valuation ratios such as price to earnings or price to sales.

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Keywords: Value investing, value factor, intangible assets, intangible capital

JEL Classification: G1, G10, G11, E22