Recognized intangibles and the present value of growth options
We investigate the relation of recognized intangibles, defined as acquired intangibles net of goodwill, and the market’s perception of firm growth options (PVGO). We find that: (a) on average recognized intangibles are positively associated with PVGO after controlling for intangible expenditures immediately expensed, firm specific characteristics, industry membership and systematic risk (b) the said relation is highly non-linear (negatively skewed) and more strongly pronounced in companies with lower accumulation of R&D Capital; recognized intangibles are not that significant at higher levels of PVGO and whereas firms have committed to in-house technological development, and (c) while adjusted levels of recognized intangibles increase approximately tenfold over the last 35 years their explanatory power to PVGO over the period generally wanes. Our results are informative for the interpretation of recognized intangibles as a summary balance sheet item and therefore useful to users of financial statements forming investment and credit decisions, to policy makers aiming at stimulating firm growth and to standard setters aiming at improving value relevance.
KeywordsRecognized-intangibles Firm-growth Growth-options
JEL ClassificationM41 M48 M49
I am grateful to an anonymous referee for critical comments and suggestions. I thank Nicos Koussis for useful discussions. This paper has evolved from an unpublished manuscript initially co-authored by Koussis and Makrominas.
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Conflict of interest
The author declares that he has no conflict of interest.
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