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Should Intangibles Be Measured: What Are the Economic Trade-Offs?

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  • CHANDRA KANODIA
  • HARESH SAPRA
  • RAGHU VENUGOPALAN
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    Abstract

    We investigate whether a firm's intangible investments should be measured and separated from operating expenses. We find that the information extracted from accounting reports of investments and earnings is different when intangibles are measured and identified separately from operating expenses than when intangibles are left commingled with operating expenses. This difference in the market's information causes a change in the behavior of market prices, inducing changes in the firm's investments and cash flows. Thus, from a "real effects" perspective, measuring intangibles is not unambiguously desirable. We identify the conditions under which providing information on intangibles may be desirable. This study also shows the inadequacy of statistical associations between accounting numbers and prices as a basis for evaluating the desirability of measuring intangible investments. We show that the measurement of intangibles alters the very distribution of cash flows about which the measurement regime is seeking to provide information. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2004.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 42 (2004)
    Issue (Month): 1 (03)
    Pages: 89-120

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    Handle: RePEc:bla:joares:v:42:y:2004:i:1:p:89-120

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    Cited by:
    1. Robinson, Leslie A. & Sansing, Richard, 2008. "The effect of "invisible" tax preferences on investment and tax preference measures," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 389-404, December.
    2. Alfredo Martín-Oliver & Vicente Salas-Fumas, 2007. "How do intangible assets create economic value? an application to banks," Banco de Espa�a Working Papers 0730, Banco de Espa�a.
    3. Dye, Ronald A. & Sridhar, Sri S., 2008. "A positive theory of flexibility in accounting standards," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 312-333, December.
    4. Paugam, Luc, 2011. "Should Additional Disclosure be Mandated for Intangibles Assets? Insights from Purchase Price Allocations," Economics Papers from University Paris Dauphine 123456789/9228, Paris Dauphine University.
    5. Pierre Astolfi & Luc Paugam & Olivier Ramond, 2012. "Purchase Price Allocations: Do they Matter?," Post-Print halshs-00671611, HAL.
    6. Paugam, Luc, 2011. "Valorisation et reporting du goodwill : enjeux théoriques et empiriques," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8007 edited by Casta, Jean-François, September.
    7. P. Astolfi & Luc Paugam & Olivier Ramond, 2012. "Purchase Price Allocations: Do they Matter?," Post-Print hal-00934973, HAL.
    8. Gao, Pingyang, 2008. "Disclosure Quality, Cost of Capital, and Investors’ Welfare," MPRA Paper 9478, University Library of Munich, Germany, revised Jun 2008.
    9. Lähtinen, Katja & Toppinen, Anne, 2008. "Financial performance in Finnish large- and medium-sized sawmills: The effects of value-added creation and cost-efficiency seeking," Journal of Forest Economics, Elsevier, vol. 14(4), pages 289-305, November.

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