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Intangible Capital, Corporate Valuation and Asset Pricing

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  • Jean-Pierre Danthine

    (University of Lausanne, Swiss Finance Institute and CEPR)

  • Xiangrong JIN

    (Hong Kong Monetary Authority)

Abstract

Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different from physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible levels of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-18.

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Length: 26 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:chf:rpseri:rp0618

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Web page: http://www.SwissFinanceInstitute.ch
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Keywords: Intangible capital; corporate valuation; stock return volatility;

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References

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  1. Robert E. Hall, 1999. "The Stock Market and Capital Accumulation," NBER Working Papers 7180, National Bureau of Economic Research, Inc.
  2. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
  3. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  4. Carol Corrado & Charles Hulten & Daniel Sichel, 2005. "Measuring Capital and Technology: An Expanded Framework," NBER Chapters, in: Measuring Capital in the New Economy, pages 11-46 National Bureau of Economic Research, Inc.
  5. Danthine, Jean-Pierre & Donaldson, John B, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 41-64, January.
  6. Jean-Pierre DANTHINE & John B. DONALDSON & Paolo SICONOLFI, 2005. "Distribution Risk and Equity Returns," FAME Research Paper Series rp161, International Center for Financial Asset Management and Engineering.
  7. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  8. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  9. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  10. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
  11. John Laitner & Dmitriy Stolyarov, 2003. "Technological Change and the Stock Market," American Economic Review, American Economic Association, vol. 93(4), pages 1240-1267, September.
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Cited by:
  1. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.
  2. Hiroki Arato & Katsunori Yamada, 2012. "Japan's Intangible Capital and Valuation of Corporations in a Neoclassical Framework," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 459-478, October.
  3. Che, Natasha Xingyuan, 2009. "Sectoral Structural Change in a Knowledge Economy," MPRA Paper 19653, University Library of Munich, Germany.
  4. Stephen Parente & Anne Villamil, 2007. "Edward C. Prescott’s contributions to economics: guest editors’ introduction," Economic Theory, Springer, vol. 32(1), pages 1-5, July.
  5. Che, Natasha Xingyuan, 2009. "The great dissolution: organization capital and diverging volatility puzzle," MPRA Paper 13701, University Library of Munich, Germany.

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