Intangible Assets and Cross-Sectional Stock Returns: Evidence from Structural Estimation

Abstract

The relation between a rm’s stock return and its intangible investment ratio and asset tangibility is derived under the intangible-asset-augemnted (IAA) q-theory framework. The structural estimation of the model leads to three main results. First, the IAA q-theory captures the value premium and the relation between R&D intensity and stock returns significantly better than the conventional q-theory. Two features of intangible assets, adjustment costs and investment-specic-technologicalchange, are crucial to the improved model performance. Second, the relation between R&D intensity and stock return is similar to the relation between tangible investment and stock return, which is dierent from what the previous literature documents. Third, the IAA q-theory gives a more reasonable estimate of adjustment costs of tangible investments than the conventional q-theory does. Moreover, the magnitude of adjustment costs of intangible investments is estimated to be larger than that of tangible investments.