Intangible assets are often overlooked in traditional valuation metrics despite being a meaningful measure of ‘firm footprint’. Generally accepted accounting practices often expense rather than capitalise investments into Research and Development (R&D) and marketing.

Summary

Intangible assets are often overlooked in traditional valuation metrics despite being a meaningful measure of ‘firm footprint’. Generally accepted accounting practices often expense rather than capitalize investments into Research and Development (R&D) and marketing.

However, acquired firms have their internally generated research and brand footprints realised through the acquirer’s goodwill. This creates a discrepancy between internally generated intangibles versus externally generated intangibles with only the latter being realised on the balance sheet (and subsequently in Book Value). 

For consistency, we examine adding unrealized intangibles back into Book Value. We show that provides a better measure of firm footprint in a world where intangible assets are increasingly important. Furthermore, we show an improvement in performance across global markets. 

Motivation

Corporate investment in intangibles have outstripped tangible assets (see Figure 1). Lev (2018) shows that aggregate spending in intangibles (R&D, patents, marketing, etc.) has outstripped fixed asset capex (PPE). The World Intellectual Property Organization claims that whilst intangible assets accounted for 20% of firm value in the 1980s, they now account for 80%. Corrado et al. (2009) show that only 8% of economic growth was attributed to “bricks and mortar” capital.