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
    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).

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

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