Intangibles: The Missing Ingredient in Book Value

Join us and Feifei Li, Partner, Head of Equities at Research Affiliates, for this interactive event on January 13.

Abstract
We closely examine the impact of adding intangibles to traditional book equity as a more meaningful value measure. Our intangibles-adjusted value metric subsumes the traditional book-to-price metric in explaining cross-sectional equity returns and improves value factor performance across subsample periods and geographic regions. We find knowledge capital (capitalized R&D expenditures) plays a more important role than organization capital (capitalized partial SG&A expenditures). The improved value premium comes from both the long and short sides of intangibles-adjusted HML (iHML), which is good news for investors under a long-only constraint and provides useful information for investors who choose to short or underweight certain names.