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 real effects 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.
Journal of Accounting Research – Wiley
Published: Mar 1, 2004
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