Higher Levels Of Intangible Assets Research Articles

The use of adjusted earnings in performance evaluation

We document widespread adoption of adjustments to earnings for performance evaluation; 84% of our sample of S&P 1500 firms use adjusted earnings for bonus compensation. We find that the transactions removed from adjusted earnings vary widely and include both transitory and nontransitory items. We examine the determinants of using adjusted earnings and find some evidence that boards are more likely to contract using adjusted earnings when firms have high levels of intangible assets, more volatile earnings, CEOs with shorter tenures, CEOs who also act as board chairperson, or larger compensation committees or are reporting losses. We find that firms with an independent chairperson or lead director are less likely to contract using adjusted earnings. We examine the compensation consequences of the use of adjusted earnings and find that CEOs compensated on adjusted earnings are less likely to miss minimum bonus thresholds, are less likely to meet maximum bonus thresholds, and have higher overall bonus compensation, controlling for firm performance. Taken together, our analyses suggest that both managerial power and efficient contracting concerns explain the use of adjusted earnings in CEO compensation contracts.

Environmental Concerns and Financial Performance: Evidence from the EU Regulatory Framework

We analyze the impact of carbon and greenhouse gas emissions on firms’ accounting and market performance. Over a sample of 115 non-financial firms from 9 European countries during the 2008-2016 period, our results suggest that higher volume of both country-level carbon and greenhouse emissions have, on average, a positive and statistically significant impact on firms’ accounting performance. However, no statistical effect is found in terms of stock market performance. The results are more relevant in the case of firms with higher levels of equity and higher levels of intangible assets. We document the existence of an inverse U-shaped relation between country-level greenhouse emissions and firms’ performance suggesting that, after a certain point, greenhouse gas emissions negatively affect firms’ performance. Our results are robust to different estimation technics and control variables, to the consideration of the financial crisis period, and to the inclusion of financial firms in the sample.

The Decline of British Manufacturing, 1973–2012: The Role of Total Factor Productivity

This paper uses plant-level estimates of total factor productivity covering 40 years to examine what role, if any, productivity has played in the decline of output share and employment in British manufacturing. The results show that TFP growth in British manufacturing was negative between 1973 and 1982, marginally positive between 1982 and 1994 and strongly positive between 1994 and 2012. Poor TFP performance therefore does not appear to be the main cause of the decline of UK manufacturing. Productivity growth decompositions show that, in the latter period, the largest contributions to TFP growth come from foreign-owned plants, industries that are heavily involved in trade, and industries with high levels of intangible assets.

Employee Treatment and Contracting with Bank Lenders: An Instrumental Approach for Stakeholder Management

Adopting an instrumental approach for stakeholder management, we focus on two primary stakeholder groups (employees and creditors) to investigate the relationship between employee treatment and loan contracts with banks. We find strong evidence that fair employee treatment reduces loan price and limits the use of financial covenants. In addition, we document that relationship bank lenders price both the levels and changes in the quality of employee treatment, whereas first-time bank lenders only care about the levels of fair employee treatment. Taking a contingency perspective, we find that industry competition and firm asset intangibility moderate the relationship between good human resource management and bank loan costs. The cost reduction effect of fair employee treatment is stronger for firms operating in a more competitive industry and having higher levels of intangible assets.

The role of toeholds on asymmetric information in mergers and acquisitions

PurposeThis paper aims to examine empirically the role of toeholds in reducing asymmetric information in mergers and acquisitions by establishing a relationship between the toehold and some relevant characteristics of the acquiring and the target firm.Design/methodology/approachA regression analysis is conducted to examine the relation between the dependent variable (the toehold) and a set of independent variables. A multinomial logit model is used to test for the occurrence of toeholds. A probit selection model and two-step Heckman correction tests are used to correct the data and to check for robustness of the results.FindingsThe regression results for acquisitions with prior toeholds are consistent with the studied hypotheses that asymmetric information is more observed in foreign acquisitions, in different industries, with tender offers and with higher levels of intangible assets. A negative relationship is found between toehold size and the number of competing bidders.Originality/valueConsistent with previous literature, the study finds that majority of bidders abstain from purchasing a toehold before entering a bid contest. The study also emphasizes the role of intangible assets in assessing the efficacy of toeholds under asymmetric information. The ratio of target intangible assets to target total serves as a proxy for asymmetric information. Regression results are consistent with the hypotheses that asymmetry of information is observed when the acquiring and the target firm operate in different countries and industries.

Corporate Governance Mechanisms, Financial Risk, Industry Sector and Human Capital Investment as Determinants of Voluntary Disclosure of Intellectual Capital in UK Listed Firms

This research examines investment in human capital, financial risk, industry sector and corporate governance mechanisms as determinants of the voluntary disclosure of intellectual capital in a sample of 443 UK listed company annual reports for the year 2003/2004. This year precedes 2005 and the adoption of International Accounting Standards by European Union Member States thus providing the context for the study under reduced mandatory regulation. Voluntary disclosure is measured by an index based on intellectual capital attributes disclosed in the narratives and illustrations of the annual reports. The benefits of signalling intellectual capital are expected to outweigh proprietary costs due to these disclosures. These costs may be more prevalent in innovative and technological companies. Corporate governance mechanisms enhance voluntary disclosure and reduce information symmetry more specifically in those companies found to have higher levels of intangible assets in their resource base. The results suggest that companies associated with reduced financial risk and accompanied by growth are characterised with higher levels of voluntary disclosure of intellectual capital. Voluntary disclosure of intellectual capital is enhanced when large companies operating in high-tech and innovative industries are characterised by investments in human capital. The results suggest that companies that are able to maintain adequate governance systems through segregation of executive and non-executive duties and to a less extent through the presence of experienced non-executive directors exhibit higher levels of voluntary disclosure.

Organisation capital and sticky behaviour of selling, general and administrative expenses

This study investigates how a firm's view towards intangible-related economic sacrifices affects the stickiness of selling, general and administrative (SG&A) expenses. The sticky cost phenomenon is an alternative pattern of cost behaviour which attributes an explicit role to managerial deliberate resource-commitment decisions. We speculate that, in a sales decline, firms with high levels of intangible assets increase the slack of their unutilised resources more than firms with low levels of intangible assets. This is because a high level of intangible investments increases the level of adjustment costs and drives managers to shape more optimistic expectations regarding whether future sales growth will absorb the slack of unutilised resources. The level of organisation capital is selected as the primary variable of a firm's intensity of intangible investments in order to examine the relation between the cost behaviour of SG&A expenses and intangible investments. The data sample consists of 55,769 firm-year observations of US listed firms for the period 1979–2009. Our empirical findings suggest that in the case of firms with high (low) organisation capital, SG&A expenses exhibit sticky (anti-sticky) cost behaviour.

Intangible assets and market value of Japanese industries and firms

In this study, we examined whether the market value reflects the investment in intangible assets predicted by resource-based view (RBV) in a sample of public Japanese firms and industries. In particular, we tested whether the goodness of fit between prevailing industrial setting and firm’s resource endowment is associated with market value. Our findings suggest that while some industries are more valuable than other, intangible assets are not a necessary condition. The results also indicate that while there exists a strong positive effect of R&D on Tobin’s Q the evidence on the relationship between advertising and Tobin’s Q is mixed. The results also show that firms investing higher levels of intangible assets in low intangible-settings are more valuable.

Accounting- versus economic-based rates of return: Implications for profitability measures in the pharmaceutical industry

Background: Accounting-based profits have indicated that pharmaceutical firms have achieved greater returns relative to other sectors. However, partially due to the theoretically inappropriate reporting of research and development (R&D) expenditures according to generally accepted accounting principles, evidence suggests that a substantial and upward bias is present in accounting-based rates of return for corporations with high levels of intangible assets. Given the intensity of R&D in pharmaceutical firms, accounting-based profit metrics in the drug sector may be affected to a greater extent than other industries. Objective: The aim of this work was to address measurement issues associated with corporate performance and factors that contribute to the bias within accounting-based rates of return. Methods: Seminal and broadly cited works on the subject of accounting- versus economic-based rates of return were reviewed from the economic and finance literature, with an emphasis placed on issues and scientific evidence directly related to the drug development process and pharmaceutical industry. Results: With international convergence and harmonization of accounting standards being imminent, stricter adherence to theoretically sound economic principles is advocated, particularly those based on discounted cash-flow methods. Researchers, financial analysts, and policy makers must be cognizant of the biases and limitations present within numerous corporate performance measures. Furthermore, the development of more robust and valid economic models of the pharmaceutical industry is required to capture the unique dimensions of risk and return of the drug development process. Conclusions: Empiric work has illustrated that estimates of economic-based rates of return range from ∼2 to ∼11 percentage points below various accounting-based rates of return for drug companies. Because differences in the nature of risk and uncertainty borne by drug manufacturers versus other sectors make comparative assessments of performance challenging and often inappropriate, continued work in this area is warranted.

Discussion of High‐Technology Intangibles and Analysts’ Forecasts

Barron, Byard, Kile, and Riedl [2001] (henceforth BBKR) examine the relation between firms' intangible assets and various properties of analysts' forecasts. This is an important area of research as the New Economy of the 21st century is characterized by its increasing reliance on intangible assets for economic growth and societal wealth (Brookings Task Force [2000]). A recent estimate suggests that the annual U.S. investment in intangible assets is approximately $1 trillion (Nakamura [2001]). Furthermore, constituents from the investment, policymaking, and academic communities have expressed considerable concern over the perceived inadequacies of current measurement and reporting practices related to firms' assets (Lev [2001]). BBKR contribute to our knowledge and understanding of the role of financial analysts as intermediaries who potentially augment the arguably deficient reporting system for firms with high levels of intangibles vis a vis other firms in the economy. BBKR hypothesize that earnings forecasts for firms with higher levels of intangible assets will contain relatively more (or idiosyncratic) information, where private information refers to about future earnings that is unique to an individual analyst. They further hypothesize that the degree to which the mean forecast aggregates and is more accurate than an individual analyst's forecast increases with the firm's level of intangible assets. The authors interpret their empirical evidence as being consistent with each of the two preceding hypotheses, and further find that lower levels of analyst consensus are associated with the R&D expenditures of high-technology manufacturing companies.

High‐Technology Intangibles and Analysts’ Forecasts

This study examines the association between firms’ intangible assets and properties of the information contained in analysts’ earnings forecasts. We hypothesize that analysts will supplement firms’ financial information by placing greater relative emphasis on their own private (or idiosyncratic) information when deriving their earnings forecasts for firms with significant intangible assets. Our evidence is consistent with this hypothesis. We find that the consensus in analysts’ forecasts, measured as the correlation in analysts’ forecast errors, is negatively associated with a firm’s level of intangible assets. This result is robust to controlling for analyst uncertainty about a firm’s future earnings, which we also find to be higher for firms with high levels of internally generated (and expensed) intangibles. Given that analyst uncertainty increases and analyst consensus decreases with the level of a firm’s intangible assets, we also expect and find that the degree to which the mean forecast aggregates private information and is more accurate than an individual analyst’s forecast increases with a firm’s intangible assets. Finally, additional analysis reveals that lower levels of analyst consensus are associated with high‐technology manufacturing companies, and that this association is explained by the relatively high R&D expenditures made by these firms. Overall, our results are consistent with financial analysts augmenting the financial reporting systems of firms with higher levels of intangible assets (in terms of contributing to more accurate earnings expectations), particularly R&D‐driven high‐tech manufacturers.

Intangible Assets and Firms' Disclosures: An Empirical Investigation

This study examines how research and development (R&38;D) and advertising expenditures affect firms' disclosures. Generally accepted accounting principles (GAAP) mandate that these expenditures be immediately expensed in financial reports, despite the fact that they often benefit the firm for longer periods. Prior studies find, however, that investors consider intangible assets in their valuation of firms. These studies argue that current GAAP, by not recognizing the value generated by these assets, severely impairs the usefulness of accounting reports. I investigate if firms with higher levels of R&38;D and advertising expenditures place greater reliance on voluntary, and therefore more flexible, disclosures such as voluntary publications and investor relations. Using analysts' ratings of firms' disclosures, I find that firms with higher levels of intangible assets are more likely to receive significantly higher ratings for their investor relations programs or voluntary publications than for their annual reports. These findings suggest that firms with higher levels of intangible assets emphasize supplemental disclosures because mandated accounting disclosures inadequately present their financial performance. These results have important policy implications for regulators and investors since they indicate that voluntary disclosures, which are unregulated and unaudited, are an important means of disclosure for these firms.

The Operational Hedging Properties of Intangible Assets: The Case of Non-Voluntary Foreign Asset Selloffs

In this paper we examine the valuation effects and long-term performance of U.S. multinational firms involved in forced transfers of their foreign operating assets during the 1965-1988 period. The evidencesuggests that the operational hedging ability of the firm to address country risk (nationalization threats) is related to the level of its intangible assets. While it is well known that firms with high levels of intangible assets prefer foreign direct investment, our results show that intangible assets have hidden properties of protection against country risk as well. We document significantly negative abnormal returns only for divesting firms with low levels of intangible assets, but not for firms with high levels of intangible assets. Inaddition, we show that low (high) growth firms are involved in partial (complete) withdrawals, and show that the long-term economic performance of firms choosing the complete withdrawal strategy is better than those that opt to remain. We argue that management's attempt to maintain economic links in a hostile foreign environment can be attributed in part to the firm's low growth opportunities, performance, and lack ofcontingent plans to address country risk.

The Operational Hedging Properties of Intangible Assets: the Case of Non–voluntary Foreign Asset Selloffs

In this paper we examine the valuation effects and long–term performance of US multinational firms involved in forced transfers of their foreign operating assets during the 1965–88 period. The evidence suggests that the operational hedging ability of the firm to address country risk (nationalization threats) is related to the level of its intangible assets. While it is well known that firms with high levels of intangible assets prefer foreign direct investment, our results show that intangible assets have hidden properties of protection against country risk as well. We document significantly negative abnormal returns only for divesting firms with low levels of intangible assets, but not for firms with high levels of intangible assets. In addition, we show that low (high) growth firms are involved in partial (complete) withdrawals, and show that the long–term economic performance of firms choosing the complete withdrawal strategy is better than those that opt to remain. We argue that management’s attempt to maintain economic links in a hostile foreign environment can be attributed in part to the firm’s low growth opportunities, performance, and lack of contingent plans to address country risk.

Relatedness and corporate venturing: Does it really matter?

Although many studies have focused on the issue of relatedness in corporate venturing, it is still unclear whether high or low levels of relatedness between a new venture and the parent firm leads to success as measured by venture performance. In this study, we raise the question of whether or not relatedness plays a determinant role in affecting success at the venture level. The study analyzes data on 88 new industrial product corporate ventures from STR4, the corporate start-up database of the PIMS project. Based on a review of the strategic management and corporate entrepreneurship literature, this study generates five hypotheses concerning the relationships among relatedness, the intangible assets of the parent firm, the entry strategy of the new venture, and the venture's market share. Two rival hypotheses on the general impact of relatedness on venture performance are generated. Theoretical and empirical evidence suggest that highly related ventures benefit from existing resources, exploiting corporate know-how, and sharing experience effects. This leads to the first hypothesis which states that high-related ventures achieve higher market shares relative to low-related ventures. On the other hand, the disadvantages generally associated with high levels of relatedness—such as higher coordination costs, political problems associated with resource sharing—appear to negatively affect the profitability (e.g.,R01) or the direct costs of the venture, leading to the rival hypothesis. Results indicate that there are no significant differences in the market shares achieved by high-, medium- and low-related ventures and that, therefore, relatedness does not affect venture performance. The third hypothesis predicts that, given the parent firm has developed high levels of intangible assets, high-related ventures achieve higher market shares than low-related ventures. Prior research has shown that intangible assets have a positive effect on venture performance. High-related ventures make possible higher levels of exploitation of the intangible assets held by the parent firm than low-related ventures, other things being equal. If well managed, these assets can neutralize the negative effects of high-relatedness, thus a positive interaction between relatedness and intangible assets should take place. Results support the hypothesis and show that the highest market shares are achieved by those ventures with high levels of relatedness and high levels of intangible assets. Two rival hypotheses concerning relatedness and its effects on the aggressiveness of entry strategy of the venture (as measured by relative price, relative promotional effort, and relative product quality) are generated. The first hypothesis states that the more related the venture, the more aggressive the entry strategy. High-relatedness implies high levels of resource sharing that should decrease the incremental costs needed to launch the venture. Thus high-related ventures have greater amounts of resources to be used for aggressive entry strategies than low-related ventures. The rival hypothesis states that the less related the venture, the more aggressive the entry strategy. There is empirical evidence that increased resource sharing is associated with increased direct costs. Thus, as compared with low-related ventures, high-related ventures might be handicapped in pursuing aggressive entry strategies. Results indicate that there is no significant relationship between relatedness and the aggressiveness of the entry strategy. Overall, this study suggests that the decision concerning the degree of relatedness does not explain, by itself, venture performance—nor does it explain the entry strategy chosen at the venture level. Only when combined with the intangible assets held by the firm at the corporate level does relatedness appear to determine venture success. Implications for practioners are: top management cannot decide a priori whether or not a new corporate venture should be highly related to the parent firm; high image firms should only venture in highly related businesses. Building image at the corporate level pays if various high-related ventures are present. Suggestions for further research are also offered.

Intangible assets, entry strategies, and venture success in industrial markets

This study assesses the impact of intangible assets on the venture success of firms as they enter into industrial markets that are new to them. A “new” market is one that is geographically new for the firm or is a product market where this firm did not originally compete. The analysis is based on the Profit Impact of Market Strategy database, which contains information on 91 new ventures into industrial markets. Five hypothesis were tested in this study: 1. H1: High levels of intangible assets will be positively associated with performance of firms entering new markets. 2. H2: High levels of intangible assets increase the likelihood of success, regardless of the timing of entry. 3. H3: In explaining venture performance, there will be a positive interaction effect between promptness of entry and level of intangible assets. Pioneer entrants will benefit substantively more from high levels of intangible assets then will later entrants. 4. H4: High levels of intangible assets enhance success irrespective of aggressiveness of entry. 5. H5: In explaining performance, there will be a positive interaction between level of intangible assets and aggressiveness of entry—firms with high levels of intangible assets will gain substantively more from aggressive pricing, promotion, and high quality, than firms with low levels of intangible assets. One specific intangible asset (corporate image) is empirically analyzed, and the results support our hypotheses. A strong corporate image enables the firm to achieve greater success when they enter into new ventures, and the interaction of image with aggressive promotional, pricing, and quality strategies is significant in explaining this success. Implications for practioners are: high-image firms reap enormous benefits from increased promotional efforts, high quality, and aggressive entry. Low-image firms are severely penalized when they aggressively enter a market and may he better off entering the market slowly and at low prices.