Internal Intangible Asset Effect on Firm Valuation

Abstract

The concept that accounting represents the economics of the firm is a premise for the allocation of scarce resources. In recent years, firm intangible assets seem to have become an increasingly important driver of firm economic value, and yet they are difficult to measure. This study conducts an exploratory data analysis into currently unrecorded firm internal intangible value and then employs the insight to create system equations. Initially, a structural equation model (SEM) is utilized that employs a latent variable for the internally generated intangible value. The SEM analysis starts with a clean surplus model as a basis for the conceptual framework. The current study finds that a measure of internally generated intangible assets affects firm value. Then, this information is incorporated in a two equation simultaneous regression of firm value and net income. Both equations have explanatory power and the internally generated asset factors are significant. In the process, this study opens a new research frontier for SEM financial accounting research and internally-generated intangible asset valuation analyses.