The Intangibles Premium

Abstract

We investigate the nature of cross-sectional asset pricing effects of intangibles. Intangible asset intensity relates strongly positively to stock returns and has more explanatory power than size, value, profitability, and investment. Adding an intangibles factor improves the Fama-French five-factor model and makes the investment factor redundant. Importantly, intangibles matter more as a characteristic than as a risk factor. Further, intangibles hardly predict future earnings and EBITDA growth (valuation-relevant performance metrics affected by accounting conservatism concerning intangibles) but strongly predict gross profit growth (unaffected by such accounting practices). Our evidence is consistent with investor underreaction to intangibles resulting from accounting conservatism.

Keywords: Intangible Assets, Asset Pricing, Information Complexity, Mispricing, Investor Underreaction.