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Intangible capital, corporate valuation and asset pricing

  • Jean-Pierre Danthine

    ()

  • Xiangrong Jin

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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File URL: http://hdl.handle.net/10.1007/s00199-006-0176-5
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 32 (2007)
Issue (Month): 1 (July)
Pages: 157-177

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Handle: RePEc:spr:joecth:v:32:y:2007:i:1:p:157-177
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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Jean-Pierre Danthine & John B. Donaldson & Paolo Siconolfi, 2005. "Distribution Risk and Equity Returns," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.10, Université de Lausanne, Faculté des HEC, DEEP.
  3. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  4. 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.
  5. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
  6. Robert E. Hall, 1999. "The Stock Market and Capital Accumulation," NBER Working Papers 7180, National Bureau of Economic Research, Inc.
  7. Ellen R. McGrattan & Edward C. Prescott, 2001. "Is the Stock Market Overvalued?," NBER Working Papers 8077, National Bureau of Economic Research, Inc.
  8. 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.).
  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. 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.
  11. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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