The Usefulness of Acquired Intangible Asset Fair Values in Predicting Future Payoffs

There is a long-standing debate on the recognition of intangible assets and whether they can be measured reliably. Most recognized intangibles are acquired in business combinations, and estimating their fair values is highly subjective. Using a broad sample of business combinations in the U.S. from 2003 to 2014, we find that the recorded values of acquired intangibles are a reliable predictor of future operating income at one-, three-, five-, and seven-year horizons, using both in- and out-of-sample tests. Further, the predictive ability of intangibles dominates that of acquired tangibles, with goodwill being more important, but identifiable intangibles contributing as well. However, in cross-sectional tests we find that the superior predictive ability of intangibles disappears in settings where measurement uncertainty is higher. These results are informative to policy makers considering whether the costs of identifying and valuing intangible assets are justified