Intangible Ironies: Investor Mispricing of Company Assets On and Off its Balance Sheet

Abstract

We examine how investors worldwide evaluate the mix of company assets both on and off its balance sheet. On aggregate, they appear to correctly value tangible assets but misprice intangible assets, with the possible exception of emerging market stocks. Investments in stakeholder capital—such as innovation, brand, and employees—often go unrecognized both on the balance sheet and by investors, despite their increased economic importance. In contrast, the premium paid for past acquisitions that is included on financial statements as goodwill generally fails to deliver on expectations, being written down too slowly by management and shareholders alike. These results are not explained by exposure to known systemic risk premia, limits to arbitrage, or data mining. Corroborating a recent surge of articles on this topic, we find that adjusting valuation metrics for the actual benefit of such intangibles improves performance in global equity markets. More impactfully, investors can diversify value exposure by targeting companies with latent such growth assets.