Should Intangible Investments Be Reported Separately or Commingled with Operating Expenses? New Evidence

Abstract

We propose a new method to estimate intangible investment outlays, other than expenditures on advertising and research and development, that are reported on a commingled basis with operating expenses in the selling, general, and administrative category of expenses. These outlays, aimed at improving organizational knowledge and capabilities, are the largest category of intangible investments and the fastest-growing category of operating investments. They affect future firm performance and risk. Predictability of future earnings and stock returns improves when these outlays are distinguished from operating expenses. Thus, benefits could accrue from reporting them separately. The SAS program to divide MainSG&A into investment and consumption portions is available at https://doi.org/10.1287/mnsc.2017.2769 . This paper was accepted by Suraj Srinivasan, accounting.