Intangible ironies: investor mispricing of company assets on and off its balance sheet

Abstract

We examine how investors 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, which have increased in economic importance. In particular, investments in stakeholder capital such as innovation, brand, and employees often go unrecognized both on the balance sheet and by investors. In contrast, the premium paid for past acquisitions which is included on the financial statements as goodwill generally fails to deliver on expectations, being written down too slowly by management and shareholders alike. Corroborating a recent surge of papers on this topic, we find that adjusting valuation metrics for the actual benefit of such intangibles leads to better performance thereof in global equity markets. More impactfully, investors can diversify value exposure by targeting companies with latent such growth assets. Our findings suggest market efficiency would be served by better accounting standards for intangible assets, allowing more flexibility on what types of investment may be capitalized while simultaneously tightening rules around impairment and amortization.