Intangible factor and idiosyncratic volatility puzzles

Abstract

In this paper, we explore whether intangible capital (IC) can help explain idiosyncratic volatility puzzles. The underlying assumption is that firms produce and accumulate IC as part of their normal operations. Investments in IC can either raise a company's future ability to produce or lower its cost of production. The applied model finds empirical support for the hypothesis that IC can help explain idiosyncratic volatility puzzles, especially for firms with higher IC-to-total asset ratios. This paper contributes to existing literature on idiosyncratic volatility puzzles from an IC investment perspective and provides implications for IC on stock markets.