Intangible Capital in Factor Models

65 Pages Posted: 23 Feb 2021 Last revised: 26 Feb 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: January 18, 2021

Abstract

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

Gulen, Huseyin and Li, Dongmei and Peters, Ryan H. and Zekhnini, Morad, Intangible Capital in Factor Models (January 18, 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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