Download This PaperThe Intangibles Premium: Risk or Mispricing?
45 Pages Posted: 24 Sep 2021 Last revised: 25 Apr 2022
Date Written: March 21, 2022
Abstract
We examine whether intangible assets are priced in the cross-section of stock returns. Intangible asset intensity is strongly positively related to stock returns and has more explanatory power than size, value, profitability, and investment. An intangibles-based long- short factor has a higher Sharpe ratio than these established factors. Adding the intangibles factor to the Fama-French five-factor model improves the description of average returns and makes the investment factor redundant. Intangibles are priced as a characteristic rather than as a risk factor, consistent with intangibles-based mispricing. Intangible intensity also strongly predicts future gross profit growth in the cross-section. Overall, we interpret our evidence as consistent with investor underreaction to intangibles as a result of accounting mismeasurement.
Keywords: Intangible Assets, Knowledge Capital, Organization Capital, Asset Pricing, Factor Models, Information Complexity, Mispricing
JEL Classification: G10, G11, G12, G14, G32, G40, O30
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