The Operating Returns to Acquired Intangible Assets

Abstract

There is a long-standing debate on the recognition of intangible assets. Proponents of recognition argue intangibles are a key source of value and profitability, while opponents note that recognizing intangibles involves considerable measurement uncertainty. Using a broad sample of business combinations in the U.S. from 2003 to 2014, we find that the recorded values of acquired intangibles are a significant predictor of future operating income at one-, three-, five-, and seven-year horizons, using both in- and out-of-sample tests. Further, the predictive ability of intangibles dominates that of acquired tangibles, with goodwill being more important, but identifiable intangibles contributing as well. However, in cross-sectional tests we find that the predictive ability of intangibles weakens in settings where the relevance and measurement reliability of intangibles are lower. These results are informative to policy makers considering whether the costs of identifying and valuing intangible assets are justified.