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Intangible Capital, Corporate Valuation and Asset Pricing

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  • Jean-Pierre Danthine

    (University of Lausanne, Swiss Finance Institute and CEPR)

  • Xiangrong JIN

    (Hong Kong Monetary Authority)

Abstract

Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different from physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible levels of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.

Suggested Citation

  • Jean-Pierre Danthine & Xiangrong JIN, 2006. "Intangible Capital, Corporate Valuation and Asset Pricing," Swiss Finance Institute Research Paper Series 06-18, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0618
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    Cited by:

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    2. Keqiang Hou & Alok Johri, 2018. "Intangible Capital, the Labor Wedge and the Volatility of Corporate Profits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 216-234, July.
    3. Malik, Kashif Zaheer & Ali, Syed Zahid & Khalid, Ahmed M., 2014. "Intangible capital in a real business cycle model," Economic Modelling, Elsevier, vol. 39(C), pages 32-48.
    4. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.
    5. Stephen Parente & Anne Villamil, 2007. "Edward C. Prescott’s contributions to economics: guest editors’ introduction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(1), pages 1-5, July.
    6. Che, Natasha Xingyuan, 2009. "Sectoral Structural Change in a Knowledge Economy," MPRA Paper 19839, University Library of Munich, Germany.
    7. Hiroki Arato & Katsunori Yamada, 2012. "Japan's Intangible Capital and Valuation of Corporations in a Neoclassical Framework," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 459-478, October.
    8. Keqiang Hou & Alok Johri, 2018. "Intangible Capital, the Labor Wedge and the Volatility of Corporate Profits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 216-234, July.
    9. Che, Natasha Xingyuan, 2009. "The great dissolution: organization capital and diverging volatility puzzle," MPRA Paper 13701, University Library of Munich, Germany.
    10. Munkacsi, Zsuzsa, 2015. "Fiscal austerity, unemployment and family firms," Discussion Papers 06/2015, Deutsche Bundesbank.

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    More about this item

    Keywords

    Intangible capital; corporate valuation; stock return volatility;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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