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Intangible Capital, Corporate Valuation and Asset Pricing

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  • Jean-Pierre DANTHINE
  • Xiangrong JIN

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 Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 06.05.

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Length: 26 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:lau:crdeep:06.05

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: intangible capital; corporate valuation; stock return volatility;

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  1. 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.
  2. Robert E. Hall, 2001. "The Stock Market and Capital Accumulation," American Economic Review, American Economic Association, vol. 91(5), pages 1185-1202, December.
  3. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
  4. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  5. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  6. 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.
  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. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  9. John Laitner & Dmitriy Stolyarov, 2003. "Technological Change and the Stock Market," American Economic Review, American Economic Association, vol. 93(4), pages 1240-1267, September.
  10. Carol Corrado & Charles Hulten & Daniel Sichel, 2004. "Measuring capital and technology: an expanded framework," Finance and Economics Discussion Series 2004-65, Board of Governors of the Federal Reserve System (U.S.).
  11. Ellen R. McGrattan & Edward C. Prescott, 2001. "Is the Stock Market Overvalued?," NBER Working Papers 8077, National Bureau of Economic Research, Inc.
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Cited by:
  1. 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.
  2. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.
  3. 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.
  4. Che, Natasha Xingyuan, 2009. "The great dissolution: organization capital and diverging volatility puzzle," MPRA Paper 13701, University Library of Munich, Germany.
  5. Che, Natasha Xingyuan, 2009. "Sectoral Structural Change in a Knowledge Economy," MPRA Paper 19653, University Library of Munich, Germany.

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