IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/14548.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Charles R. Hulten & Xiaohui Hao, 2008. "What is a Company Really Worth? Intangible Capital and the "Market to Book Value" Puzzle," NBER Working Papers 14548, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14548 Note: PR
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w14548.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Ayanian, Robert, 1983. "The Advertising Capital Controversy," The Journal of Business, University of Chicago Press, vol. 56(3), pages 349-364, July.
    2. 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.
    3. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1351-1408.
    4. Carol A. Corrado & Charles R. Hulten & Daniel E. Sichel, 2006. "Intangible Capital and Economic Growth," NBER Working Papers 11948, National Bureau of Economic Research, Inc.
    5. Sandra E. Black & Lisa M. Lynch, 2005. "Measuring Organizational Capital in the New Economy," NBER Chapters,in: Measuring Capital in the New Economy, pages 205-236 National Bureau of Economic Research, Inc.
    6. Robert E. Hall, 2000. "E-Capital: The Link between the Stock Market and the Labor Market in the 1990s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 73-118.
    7. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
    8. Carol Corrado & John Haltiwanger & Dan Sichel, 2005. "Measuring Capital in the New Economy," NBER Books, National Bureau of Economic Research, Inc, number corr05-1, January.
    9. Black, Sandra E & Lynch, Lisa M, 1996. "Human-Capital Investments and Productivity," American Economic Review, American Economic Association, vol. 86(2), pages 263-267, May.
    10. 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.
    11. 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(1), pages 1-50.
    12. Bernstein, Jeffrey I. & Mamuneas, Theofanis P., 2006. "R&D depreciation, stocks, user costs and productivity growth for US R&D intensive industries," Structural Change and Economic Dynamics, Elsevier, vol. 17(1), pages 70-98, January.
    13. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carol A. Corrado & Charles R. Hulten, 2014. "Innovation Accounting," NBER Chapters,in: Measuring Economic Sustainability and Progress, pages 595-628 National Bureau of Economic Research, Inc.
    2. Fındık, Derya & Tansel, Aysit, 2013. "Intangible investment and technical efficiency: The case of software-intensive manufacturing firms in Turkey," MPRA Paper 66165, University Library of Munich, Germany, revised 05 Aug 2014.
    3. Emanuela Marrocu & Raffaele Paci & Marco Pontis, 2012. "Intangible capital and firms' productivity," Industrial and Corporate Change, Oxford University Press, vol. 21(2), pages 377-402, April.
    4. Carol A. Corrado & Charles R. Hulten, 2014. "Financial Intermediation in the National Accounts: Asset Valuation, Intermediation, and Tobin′s q," NBER Chapters,in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, pages 125-147 National Bureau of Economic Research, Inc.
    5. Szalavetz, Andrea, 2012. "Az immateriális beruházások és a nem közvetlenül a termelésben foglalkoztatottak szerepe a gazdasági felzárkózásban
      [The role intangible investments and non-production workers play in economic catc
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 1187-1206.
    6. Wen Chen & Robert Inklaar, 2016. "Productivity spillovers of organization capital," Journal of Productivity Analysis, Springer, vol. 45(3), pages 229-245, June.
    7. Goodridge, PR & Haskel, J, 2015. "How does big data affect GDP? Theory and evidence for the UK," Working Papers 25156, Imperial College, London, Imperial College Business School.
    8. Carol A. Corrado & Charles R. Hulten, 2010. "How Do You Measure a "Technological Revolution"?," American Economic Review, American Economic Association, vol. 100(2), pages 99-104, May.
    9. MIYAGAWA Tsutomu & TAKIZAWA Miho & EDAMURA Kazuma, 2013. "Does the Stock Market Evaluate Intangible Assets? An empirical analysis using data of listed firms in Japan," Discussion papers 13052, Research Institute of Economy, Trade and Industry (RIETI).
    10. Derya Findik & Aysit Tansel, 2015. "​ Intangible Investment and Technical Efficiency: The Case of Software-Intensive Manufacturing Firms in Turkey," Working Papers 2015/11, Turkish Economic Association.
    11. Guillaume Garnotel & Patrick Loux, 2011. "Définition des bonus des dirigeants et performance des entreprises de haute technologie," Revue Finance Contrôle Stratégie, revues.org, vol. 14(3), pages 119-150, September.
    12. Rahaman, Mohammad M. & Zaman, Ashraf Al, 2013. "Management quality and the cost of debt: Does management matter to lenders?," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 854-874.

    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14548. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.