DP5897 Intangible Capital, Corporate Valuation and Asset Pricing

Author(s): Jean-Pierre Danthine, Xiangrong Jin
Publication Date: October 2006
Keyword(s): coporate valuation, intangible capital, stock return volatility
JEL(s): D24, D50, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5897

Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different form physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible level of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.