Equity Investing in the Age of Intangibles

Expenditures on creation of intangible capital have increased but accounting standards have not kept pace. We investigate whether this has affected the value relevance of book value and earnings. We construct a composite measure of intangible intensity based on intangible assets capitalized on the balance sheet, research and development expenditures, and sales, general & administrative expenditures to classify industries by intangible intensity. We show that the value relevance of book value and earnings has declined for high intangible intensity companies in USA and abroad, but for the low intangible intensity group it has remained stable in USA and increased internationally.