Intangible Capital in Factor Models
65 Pages Posted: 23 Feb 2021 Last revised: 26 Feb 2021
Date Written: January 18, 2021
We incorporate intangible investment/capital into the empirical factor models of Fama and French (1993, 2015) and Hou, Xue, and Zhang (2015), and illustrate the distinctive effects of intangibles on expected stock returns via well-known return predictors such as book-to-market, investment, and profitability. Our frameworks highlight the importance of separating tangible from intangible investments and addressing the effects of intangible investment on profitability and other valuation measures. We show that incorporating intangibles significantly improves the Fama-French three- and five-factor models and the q-factor model, especially over recent decades. Additionally, we show that the adjusted value factor is no longer redundant.
Keywords: Intangible Investment/Capital, Factors, Factor Models
JEL Classification: G10, G11, G31, G32, O30, O34
Suggested Citation: Suggested Citation