Recognized intangibles and the present value of growth options

Recognized intangibles and the present value of growth options We investigate the relation of recognized intangibles, defined as acquired intangibles net of goodwill, and the market’s perception of firm growth options (PVGO). We find that: (a) on average recognized intangibles are positively associated with PVGO after controlling for intangible expenditures immediately expensed, firm specific characteristics, industry membership and systematic risk (b) the said relation is highly non-linear (negatively skewed) and more strongly pronounced in companies with lower accumulation of R&D Capital; recognized intangibles are not that significant at higher levels of PVGO and whereas firms have committed to in-house technological development, and (c) while adjusted levels of recognized intangibles increase approximately tenfold over the last 35 years their explanatory power to PVGO over the period generally wanes. Our results are informative for the interpretation of recognized intangibles as a summary balance sheet item and therefore useful to users of financial statements forming investment and credit decisions, to policy makers aiming at stimulating firm growth and to standard setters aiming at improving value relevance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Recognized intangibles and the present value of growth options

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Publisher
Springer US
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-016-0552-6
Publisher site
See Article on Publisher Site

Abstract

We investigate the relation of recognized intangibles, defined as acquired intangibles net of goodwill, and the market’s perception of firm growth options (PVGO). We find that: (a) on average recognized intangibles are positively associated with PVGO after controlling for intangible expenditures immediately expensed, firm specific characteristics, industry membership and systematic risk (b) the said relation is highly non-linear (negatively skewed) and more strongly pronounced in companies with lower accumulation of R&D Capital; recognized intangibles are not that significant at higher levels of PVGO and whereas firms have committed to in-house technological development, and (c) while adjusted levels of recognized intangibles increase approximately tenfold over the last 35 years their explanatory power to PVGO over the period generally wanes. Our results are informative for the interpretation of recognized intangibles as a summary balance sheet item and therefore useful to users of financial statements forming investment and credit decisions, to policy makers aiming at stimulating firm growth and to standard setters aiming at improving value relevance.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Mar 2, 2016

References

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