Intangible Value

Abstract

Intangible assets are absent from traditional measures of value despite their growing importance in firms' capital stocks. We propose a simple improvement to the classic Fama and French (1992, 1993) value factor that incorporates intangibles and accounts for differences in accounting practices across industries. 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 the intangible value factor sorts more effectively within industries on productivity, profitability, financial soundness, and on other valuation ratios such as price-to-earnings.

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

JEL Classification: G1, G10, G11, E22