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Intangible Capital in Factor Models

Author

Listed:
  • Huseyin Gulen

    (Mitchell E. Daniels, Jr. School of Business, Purdue University, West Lafayette, Indiana 47097)

  • Dongmei Li

    (Darla Moore School of Business, University of South Carolina, Columbia, South Carolina 29208)

  • Ryan H. Peters

    (Freeman School of Business, Tulane University, New Orleans, Louisiana 70118)

  • Morad Zekhnini

    (Broad College of Business, Michigan State University, East Lansing, Michigan 48824)

Abstract

The transition from a traditional manufacturing-based economy to a knowledge- and service-based economy over recent decades resulted in a considerable rise in intangible capital, most of which is not reported on companies’ balance sheets. As a result, balance sheet-based valuation ratios, investment measures, and other firm characteristics that do not incorporate off-balance sheet (OBS) intangible capital suffer from significant measurement error problems. We incorporate a new measure of OBS intangible capital into firm characteristics, such as book to market, investment, and profitability, to address these measurement errors. These OBS intangible adjustments improve the performance of the Fama–French three- and five-factor models and the q -factor model, especially during recent decades. We further find that the value factor is no longer redundant in these empirical factor models.

Suggested Citation

  • Huseyin Gulen & Dongmei Li & Ryan H. Peters & Morad Zekhnini, 2025. "Intangible Capital in Factor Models," Management Science, INFORMS, vol. 71(2), pages 1756-1778, February.
  • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:2:p:1756-1778
    DOI: 10.1287/mnsc.2022.01261
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