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A new approach to the valuation of intangible capital

  • Jason G. Cummins

Intangible capital is not a distinct factor of production as is physical capital or labor. Rather it is the "glue" that creates value from other factor inputs. This perspective naturally suggests an empirical model in which intangible capital is defined in terms of adjustment costs. My estimates of these adjustment costs from firm-level panel data suggest that no appreciable intangibles are associated with R&D and advertising, whereas information technology creates intangibles with a 72% annual rate of return--a sizable figure that is nevertheless much smaller than that reported in previous studies. To build a bridge to previous research, I show that much larger estimates can be obtained with ordinary least squares, a method that ignores the possibility that the value of the firm and its investment policy are simultaneously determined.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2004-17.

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Date of creation: 2004
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Handle: RePEc:fip:fedgfe:2004-17
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  8. Steve Bond & Jason Cummins, 2001. "Noisy share prices and the Q model of investment," IFS Working Papers W01/22, Institute for Fiscal Studies.
  9. Bronwyn H. Hall., 1993. "Industrial Research During the 1980s: Did the Rate of Return Fall?," Economics Working Papers 93-217, University of California at Berkeley.
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  11. Jacques Mairesse & Bronwyn H. Hall, 1996. "Estimating the Productivity of Research and Development: An Exploration of GMM Methods Using Data on French & United States Manufacturing Firms," NBER Working Papers 5501, National Bureau of Economic Research, Inc.
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  17. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
  18. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
  19. Erik Brynjolfsson & Loren Hitt & Shinkyu Yang, 2002. "Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 137-198.
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  22. Leonard Nakamura, 1999. "Intangibles: what put the new in the new economy?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 3-16.
  23. Michael T. Kiley, 2000. "Stock prices and fundamentals in a production economy," Finance and Economics Discussion Series 2000-05, Board of Governors of the Federal Reserve System (U.S.).
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