Intangible Liabilities: The Hidden Risks That Shape Firm Value

For many modern companies, the most important assets are not factories, machines, or buildings, but things such as know-how, human capital, and brands. Although these assets often account for a large share of a firm’s value, they are often not reported on the balance sheet because their value is uncertain and difficult to measure reliably. These assets are commonly called intangible assets. 

But there is another side to this story. Just as companies can have valuable assets that are not recorded on the balance sheet, they can also have economically important obligations, risks, or commitments that are not recorded as liabilities. We call these intangible liabilities.

Intangible liabilities can arise from lawsuits, product liability claims, environmental matters, patent or copyright disputes, false advertising, regulatory investigations, and other legal or reputational risks. A notable example is 3M, which had not recorded any accounting reserve for major earplug litigation risks at the time, even as investors worried that these issues could impose billions of dollars in future costs (2). In its filings, 3M stated that it had not recorded any reserve because the liability was not probable and the potential costs could not be reasonably estimated.

Such cases may not show up as numbers on the balance sheet, but public companies must still disclose important risks and contingencies in their annual reports. We use this disclosure text to construct a firm-level, text-based measure of intangible liabilities (1).

We analyse the annual reports of U.S.-listed firms (3) since the mid-1990s when electronic filings became mandatory. We build an intangible liabilities dictionary containing 569 words and phrases related to potential obligations, including “class action,” “product liability,” “environmental liability,” “infringement,” and “settlement.” We then use the frequency of these terms to measure intangible liabilities for more than 112,000 firm-year observations. 

Our premise is simple, transparent, and yet very informative: companies with higher intangible liabilities will have higher frequencies of these related terms in their disclosures. 

The measure behaves in intuitive ways. It is higher in industries such as tobacco, insurance, healthcare, pharmaceuticals, and utilities, but there is also substantial variation among firms within the same industry. Importantly, intangible liabilities predict real future outcomes. Firms with higher measured exposure are more likely to face future class action lawsuits and reputational damage, as reflected in negative media coverage. They also face a higher probability of future stock price crashes.

The stock market appears to price these risks. Companies with greater intangible liabilities trade at lower valuation ratios, and investors demand higher expected returns to hold their stocks. A portfolio that buys stocks with high intangible liabilities and sells stocks with low intangible liabilities earns about 3% per year in abnormal returns after accounting for common risk factors and industry effects.

The main implication is simple: some of the most important risks and liabilities companies face are not visible in accounting numbers. They are often hidden in the text of corporate disclosures. Reading and measuring that text can help investors, managers, auditors, regulators, and other stakeholders better understand the legal, reputational, and financial risks that may shape a firm’s future value.

We view our work on Intangible Liabilities as a first step toward drawing attention to these hidden obligations, which may affect important corporate decisions, including financing, acquisitions, compensation, and risk management.

References

(1) Hamid Boustanifar, Arnt Verriest (2026) Intangible Liabilities. Management Science 0(0) - https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2023.03619

(2) “3M Faces Potentially Billions in Liabilities Over $7.63 Earplugs”, Wall Street Journal, June 26, 2022 - https://www.wsj.com/business/3m-faces-potentially-billions-in-liabilities-over-7-63-earplugs-11656250200

(3) Listed domestic companies, total - United States - https://data.worldbank.org/indicator/CM.MKT.LDOM.NO?locations=US

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