Financial Analysts Journal 18 March 2021 Volume 77 Issue 2
Equity Investing in the Age of Intangibles
The value relevance of financial variables, such as book value and earnings, has decreased for particular industries of high “intangible intensity.”
Expenditures on the creation of intangible capital have increased, but accounting standards have not kept pace. We investigated whether this has affected the value relevance of book value and earnings. We constructed a composite measure of intangible intensity by which to classify industries. The measure is based on intangible assets capitalized on the balance sheet; research and development expenditures; and sales, general, and administrative expenditures. We show that the value relevance of book value and earnings has declined for high-intangible-intensity companies in the United States and abroad, but for the low-intangible-intensity group, it has remained stable in the United States while increasing internationally.
About the Authors
Amitabh Dugar is a research analyst at Bridgeway Capital Management, Houston.
Jacob Pozharny is head of international equity at Bridgeway Capital Management, Houston.