australiaen
Adjusting the Value factor for intangibles

Adjusting the Value factor for intangibles

19-02-2020 | From the field
The standard academic definition for the Value factor is the ratio of book-value-to market-value (B/M). This paper 1 observes that the performance of B/M has weakened substantially in recent decades, and argues that this deterioration is related to the growth of intangible assets unrecorded on balance sheets.
  • David Blitz
    David
    Blitz
    Head of Quant Research

The author proposes an intangible-adjusted version of the B/M ratio to define value, which capitalizes the investments in knowledge capital and organizational capital that need to be treated as expenses in official financial statements. An example of an investment in knowledge capital is R&D, i.e. research and development.

The author finds that the intangible-adjusted B/M ratio outperforms the original ratio significantly, and also remained effective in recent decades. At Robeco’s quantitative research group, where we also like to think of ourselves as an asset to the firm rather than an expense, we are currently looking into this idea, and the initial results look promising indeed.

1 Park, H., 2019, ‘An Intangible-adjusted Book-to-market Ratio Still Predicts Stock Returns’, Critical Finance Review (forthcoming).

Now also follow us on Instagram
Now also follow us on Instagram
Follow
From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

Read all articles
Subjects related to this article are:
Logo

Disclaimer

BY CLICKING ON “I AGREE”, I DECLARE I AM A WHOLESALE CLIENT AS DEFINED IN THE CORPORATIONS ACT 2001.

What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
I Disagree