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Recognized intangibles and the present value of growth options

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  • Michalis Makrominas

    (Frederick University Cyprus)

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.

Suggested Citation

  • Michalis Makrominas, 2017. "Recognized intangibles and the present value of growth options," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 311-329, February.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:2:d:10.1007_s11156-016-0552-6
    DOI: 10.1007/s11156-016-0552-6
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    Cited by:

    1. Yasean A. Tahat & Ahmed H. Ahmed & Mohammad M. Alhadab, 2018. "The impact of intangibles on firms’ financial and market performance: UK evidence," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1147-1168, May.
    2. Peter M. Johnson & Thomas J. Lopez & Trevor L. Sorensen, 2021. "Did SFAS 141/142 improve the market’s understanding of net assets, goodwill, or other intangible assets?," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 891-915, April.
    3. Sudip Datta & Anand Jha & Manoj Kulchania, 2020. "On accounting’s twenty-first century challenge: evidence on the relation between intangible assets and audit fees," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 123-162, July.
    4. Debarati Bhattacharya & Wei-Hsien Li, 2020. "Wealth effects of relative firm value in M&A deals: reallocation of physical versus intangible assets," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1513-1548, November.
    5. Denise A. Jones, 2018. "Using real options theory to explain patterns in the valuation of research and development expenditures," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 575-593, October.
    6. Ijaz Hussain & Shaohong Mu & Muhammad Mohiuddin & Rizwan Qaiser Danish & Shrafat Ali Sair, 2020. "Effects of Sustainable Brand Equity and Marketing Innovation on Market Performance in Hospitality Industry: Mediating Effects of Sustainable Competitive Advantage," Sustainability, MDPI, vol. 12(7), pages 1-19, April.

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    More about this item

    Keywords

    Recognized-intangibles; Firm-growth; Growth-options;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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