Intangible Assets and Stock Prices in the Pre-SEC Era

Abstract

In this paper we investigate the relation between intangible assets and stock prices under a reporting regime which permits considerable flexibility for managers to capitalize such assets.' Our primary sample consists of 146 industrial corporations traded on the New York Stock Exchange (NYSE) which reported material amounts of intangible assets on their 1927 balance sheets. At that time, managers could capitalize a broad range of intangibles and determine subsequent amortization and revaluation policies. We estimate cross-sectional models where intangibles play two possible roles in equity valuation. The first is a direct role where they map positively into share price. If investors perceive intangibles to be legitimate assets, we predict a positive relation between their carrying values and stock price. The second is an interactive role where the level of capitalized intangibles conditions investor evaluation of reported earnings. If investors view capitalized intangibles as an indicator of cost deferrals which should have been expensed, then the earnings-intangibles interaction will