Intangible Capital in Factor Models

65 Pages Posted: 23 Feb 2021 Last revised: 21 Jun 2021

See all articles by Huseyin Gulen

Huseyin Gulen

Purdue University - Krannert School of Management

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance

Ryan H. Peters

Tulane University - Finance & Economics

Morad Zekhnini

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: June 20, 2021

Abstract

Fully expensing intangible investments has potential distorting effects on factor investing based on book-to-market, investment, and profitability. Incorporating intangible investment/capital into the conceptual frameworks and empirical factor models of Fama and French (1993, 2015) and Hou, Xue and Zhang (2015) highlights the importance of separating tangible from intangible investments and addressing the effects of intangible investment on profitability and other valuation metrics. We show that existing empirical factor models grossly understate the relative importance of the value factor. Incorporating intangibles significantly improves these factor models, especially over recent decades during which intangible investments have become increasingly important.

Keywords: Intangible Investment/Capital, Factors, Factor Models

JEL Classification: G10, G11, G31, G32, O30, O34

Suggested Citation

Gulen, Huseyin and Li, Dongmei and Peters, Ryan H. and Zekhnini, Morad, Intangible Capital in Factor Models (June 20, 2021). Available at SSRN: https://ssrn.com/abstract=3725002 or http://dx.doi.org/10.2139/ssrn.3725002

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Ryan H. Peters

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Morad Zekhnini (Contact Author)

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

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