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What is a Company Really Worth? Intangible Capital and the "Market to Book Value" Puzzle

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Author Info
Charles R. Hulten
Xiaohui Hao
Abstract

"What is a company really worth?" is a question asked repeatedly during the recent financial crisis. Attention has been focused on short-term valuation issues, like the "mark-to-market" controversy. Sorting out these issues is complicated by the fact that the market puts a value on shareholder equity that is consistently more than twice the reported book value of a company. Numerous observers have pointed to the absence of most intangible assets from financial statements as an important source of this puzzle. We use Compustat financial data for 617 R&D intensive firms to test this possibility. We find that conventional book value alone explains only 31 percent of the market capitalization of these firms in 2006, and that this increases to 75 percent when our estimates of intangible capital are included. The debt-equity ratio also falls from 1.46 to 0.61. These findings suggest that financial reports tend to substantially understate the long-run intrinsic value of corporate America.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14548.

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Date of creation: Dec 2008
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Handle: RePEc:nbr:nberwo:14548

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Find related papers by JEL classification:
G3 - Financial Economics - - Corporate Finance and Governance
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
O30 - Economic Development, Technological Change, and Growth - - Technological Change - - - General

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  1. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September. [Downloadable!]
  2. Ayanian, Robert, 1983. "The Advertising Capital Controversy," Journal of Business, University of Chicago Press, vol. 56(3), pages 349-64, July. [Downloadable!] (restricted)
  3. Baruch Lev, 2003. "Remarks on the measurement, valuation, and reporting of intangible assets," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 17-22. [Downloadable!]
  4. Bronwyn H. Hall & Robert E. Hall, 1993. "The Value and Performance of U.S. Corporations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-1), pages 1-50. [Downloadable!]
  5. Henry G. Grabowksi & Dennis C. Mueller, 1978. "Industrial Research and Development, Intangible Capital Stocks, and Firm Profit Rates," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 328-343, Autumn. [Downloadable!] (restricted)
  6. Carol Corrado & Charles Hulten & Daniel Sichel, 2006. "Intangible capital and economic growth," Finance and Economics Discussion Series 2006-24, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March. [Downloadable!] (restricted)
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