Should Intangibles Be Measured: What are the Economic Trade-Offs?

32 Pages Posted: 14 Jul 2004

See all articles by Chandra Kanodia

Chandra Kanodia

University of Minnesota - Carlson School of Management

Haresh Sapra

Booth School of Business, University of Chicago

Raghu Venugopalan

University of Illinois at Urbana-Champaign

Abstract

We investigate whether a firm's intangible investments should be measured and separated from operating expenses. We find that the information extracted from accounting reports of investments and earnings is different when intangibles are measured and identified separately from operating expenses than when intangibles are left commingled with operating expenses. This difference in the market's information causes a change in the behavior of market prices, inducing changes in the firm's investments and cash flows. Thus, from a perspective, measuring intangibles is not unambiguously desirable. We identify the conditions under which providing information on intangibles may be desirable. This study also shows the inadequacy of statistical associations between accounting numbers and prices as a basis for evaluating the desirability of measuring intangible investments. We show that the measurement of intangibles alters the very distribution of cash flows about which the measurement regime is seeking to provide information.

JEL Classification: M41, M44, G12

Suggested Citation

Kanodia, Chandra and Sapra, Haresh and Venugopalan, Raghu, Should Intangibles Be Measured: What are the Economic Trade-Offs?. Available at SSRN: https://ssrn.com/abstract=548065 or http://dx.doi.org/10.2139/ssrn.548065

Chandra Kanodia (Contact Author)

University of Minnesota - Carlson School of Management ( email )

321 19th Avenue South
674 Management and Economics
Minneapolis, MN 55455
United States
612-624-6880 (Phone)
612-626-7795 (Fax)

Haresh Sapra

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Raghu Venugopalan

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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