Equity Investing in the Age of Intangibles

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.Editor’s Note:Submitted 19 October 2020Accepted 30 December 2020 by Stephen J. BrownDisclosure: The authors report no conflicts of interest.This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. John Adams and one anonymous reviewer were the reviewers for this article.