Inferring the Value of Intangible Assets

We measure the intangible value by means of a firm’s Intellectual Capital, which encompasses the intangible assets and the organizational knowledge of a firm that are not reported directly by financial statements. Our analysis decomposes Intellectual Capital into its three primary components: Human Capital, Structural Capital, and Relational Capital. We study each component separately and create an aggregate index, the IC_SCORE, which classifies firms relative to their Intellectual Capital. We find that the IC_SCORE is a significant predictor of the future cross-section of equity returns. Firms with high Intellectual Capital outperform firms with low Intellectual Capital for up to two years in the future. A longshort strategy based on the IC_SCORE earns significant excess returns of the magnitude of over a minimum of 0.84 percent per month. The results are robust for alternative risk adjustment procedures and in partitions of size and book-to-market.