The Value of Software
71 Pages Posted: 18 Oct 2022 Last revised: 14 Apr 2023
Date Written: July 9, 2022
Software is one of the most important assets that needs to be priced in the digital economy. We find that various market participants have consistently undervalued software over the past two decades. Specifically, companies primarily valued for their software offerings experience large and persistent annual revenue growth surprises of over 40 percent. Additionally, their stock prices exhibit predictable positive drifts that align with these forecast errors generating buy-and-hold annualized alphas exceeding 350 basis points. Importantly, we observe significant predictable spillover effects on their principal customers. Our findings are consistent with Bayesian investors learning about software's high and persistent growth rates.
Keywords: Digital economy, software valuation, asset pricing
JEL Classification: D84, G11 ,G12
Suggested Citation: Suggested Citation