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A New Approach to the Valuation of Intangible Capital

  • Jason G. Cummins

In this paper, I argue that intangible capital is not a distinct input to production like physical capital or labor but rather it is the glue that creates value from other inputs. This perspective naturally leads to an empirical model in which intangible capital is defined in terms of adjustment costs. Estimates of these adjustment costs using firm-level panel data suggest that there are no appreciable intangibles associated with R&D and advertising whereas information technology creates intangibles with a 70% annual rate of return a sizable figure that is nevertheless much smaller than reported in previous studies. As a bridge to previous research, I show that much larger estimates can be obtained by using ordinary least squares, which ignores the possibility that the value of the .rm and its investment policy are simultaneously determined. Larger estimates can also be obtained by ignoring the possibility that the stock market overstates the value of intangible-intensive companies.

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File URL: http://www.nber.org/papers/w9924.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9924.

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Date of creation: Aug 2003
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Publication status: published as A New Approach to the Valuation of Intangible Capital , Jason G. Cummins. in Measuring Capital in the New Economy , Corrado, Haltiwanger, and Sichel. 2005
Handle: RePEc:nbr:nberwo:9924
Note: EFG PR
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  3. Mark E. Doms & Wendy E. Dunn & Stephen D. Oliner & Daniel E. Sichel, 2004. "How Fast Do Personal Computers Depreciate? Concepts and New Estimates," NBER Working Papers 10521, National Bureau of Economic Research, Inc.
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  5. Hempell, Thomas, 2003. "Do Computers Call for Training? Firm-level Evidence on Complementarities Between ICT and Human Capital Investments," ZEW Discussion Papers 03-20, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Jerry Hausman, 2001. "Mismeasured Variables in Econometric Analysis: Problems from the Right and Problems from the Left," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 57-67, Fall.
  7. Bernstein, Jeffrey I & Nadiri, M Ishaq, 1989. "Research and Development and Intra-industry Spillovers: An Empirical Application of Dynamic Duality," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 249-67, April.
  8. 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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  10. 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.
  11. Fumio Hayashi & Tohru Inoue, 1990. "The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," NBER Working Papers 3326, National Bureau of Economic Research, Inc.
  12. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers 1320, Econometric Society.
  13. Z, Griliches & Jacques Mairesse, 1997. "Production Functions : The Search for Identification," Working Papers 97-30, Centre de Recherche en Economie et Statistique.
  14. Timothy F. Bresnahan & Erik Brynjolfsson & Lorin M. Hitt, 2002. "Information Technology, Workplace Organization, And The Demand For Skilled Labor: Firm-Level Evidence," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 339-376, February.
  15. 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.
  16. Jaffe, Adam B, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value," American Economic Review, American Economic Association, vol. 76(5), pages 984-1001, December.
  17. 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.
  18. Robert E. Hall, 2001. "The Stock Market and Capital Accumulation," American Economic Review, American Economic Association, vol. 91(5), pages 1185-1202, December.
  19. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  20. Leonard Nakamura, 1999. "Intangibles: what put the new in the new economy?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 3-16.
  21. 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.
  22. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-61, June.
  23. Martin Neil Baily, 1981. "Productivity and the Services of Capital and Labor," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 1-66.
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