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Intangible Capital, Corporate Valuation and Asset Pricing

  • Danthine, Jean-Pierre
  • Jin, Xiangrong

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 form 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 level of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5897.

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Date of creation: Oct 2006
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Handle: RePEc:cpr:ceprdp:5897
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  1. 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.
  2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  3. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  4. Robert E. Hall, 1999. "The Stock Market and Capital Accumulation," NBER Working Papers 7180, National Bureau of Economic Research, Inc.
  5. Danthine, Jean-Pierre & Donaldson, John B & Siconolfi, Paolo, 2005. "Distribution Risk and Equity Returns," CEPR Discussion Papers 5425, C.E.P.R. Discussion Papers.
  6. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
  7. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  8. John Laitner & Dmitriy Stolyarov, 2003. "Technological Change and the Stock Market," American Economic Review, American Economic Association, vol. 93(4), pages 1240-1267, September.
  9. 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.
  10. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  11. 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.).
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