Discussion of High‐Technology Intangibles and Analysts’ Forecasts

Abstract

Barron, Byard, Kile, and Riedl [2001] (henceforth BBKR) examine the relation between firms' intangible assets and various properties of analysts' forecasts. This is an important area of research as the New Economy of the 21st century is characterized by its increasing reliance on intangible assets for economic growth and societal wealth (Brookings Task Force [2000]). A recent estimate suggests that the annual U.S. investment in intangible assets is approximately $1 trillion (Nakamura [2001]). Furthermore, constituents from the investment, policymaking, and academic communities have expressed considerable concern over the perceived inadequacies of current measurement and reporting practices related to firms' assets (Lev [2001]). BBKR contribute to our knowledge and understanding of the role of financial analysts as intermediaries who potentially augment the arguably deficient reporting system for firms with high levels of intangibles vis a vis other firms in the economy. BBKR hypothesize that earnings forecasts for firms with higher levels of intangible assets will contain relatively more (or idiosyncratic) information, where private information refers to about future earnings that is unique to an individual analyst. They further hypothesize that the degree to which the mean forecast aggregates and is more accurate than an individual analyst's forecast increases with the firm's level of intangible assets. The authors interpret their empirical evidence as being consistent with each of the two preceding hypotheses, and further find that lower levels of analyst consensus are associated with the R&D expenditures of high-technology manufacturing companies.