Inferring the Value of Intangible Assets

This paper develops a novel framework for characterizing firms with respect to their intangible assets and investigates their impact on market valuations and operating performance. Our framework is based on a contemporary theoretical Knowledge Management concept, namely Intellectual Capital. We show how to quantify a firm's Intellectual Capital based on publicly and widely available financials. When we characterize firms with respect to our measure, we find that the most Intellectual Capital intensive firms outperform their least Intellectual Capital intensive firms even two years after they have been characterized. Our measure for Intellectual Capital is also strongly associated with future operating performance. We conclude that investors fail to incorporate intangible assets related information in market valuations and that this failure is more pronounced when a firm possesses broader intangible value