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Sharpening the intangibles edge.

Baruch Lev1

  • 1Vincent C. Ross Institute for Accounting Research, New York University's Leonard N. Stern School of Business, USA.

Harvard Business Review
|June 19, 2004
PubMed
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ESG did not immunize stocks during the COVID-19 crisis, but investments in intangible assets did.

Journal of business finance & accountingยท2021
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Investors systematically misprice intangible assets, impacting company growth and capital costs. Improved information generation and disclosure on intangible investments are crucial for accurate valuation and efficient resource allocation.

Area of Science:

  • Financial Accounting and Reporting
  • Corporate Finance
  • Intellectual Capital Management

Background:

  • Intangible assets (e.g., patents, brands, human capital) drive company growth and shareholder value.
  • Investors systematically misprice shares of companies heavily reliant on intangible assets.
  • Current accounting practices obscure investments in intangibles, hindering accurate valuation.

Purpose of the Study:

  • To address the systematic mispricing of intangibles-intensive companies by investors.
  • To propose solutions for improving information generation and disclosure of intangible investments.
  • To encourage a shift in corporate mindset, viewing intangibles as assets rather than expenses.

Main Methods:

  • Analysis of current investor behavior and accounting practices regarding intangible assets.

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  • Conceptual framework for generating and disclosing better information on intangible investments.
  • Discussion of the necessity for corporations and accounting bodies to develop standardized reporting for intangibles.

    • Main Results:

    • Systematic mispricing leads to capital over- and under-allocation, raising the cost of capital.
    • Lack of visible markets and inadequate accounting treatment prevent accurate valuation of intangibles.
    • Breaking out and disclosing intangible spending is a minimum requirement for better market assessment.

    Conclusions:

    • Companies must treat intangible assets as investments, monitoring their returns.
    • Systematic efforts are needed from corporations and accounting bodies to develop reliable intangible asset information.
    • Addressing resource misallocations necessitates improved transparency and valuation of intangible assets.