Intangible Assets and Stock Trading Strategies

intangible assets, stock returns, stock market overreaction, mean reversion of stock prices, book-to-market-equity ratio.

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  1. Firms book value of assets is used as a proxy for the replacement cost of assets here, which is consistent with what Bond and Cummins (2000) argues: the book value of tangible assets is typically the most readily available measure of the replacement cost of assets in company accounts data.
  2. One version of the mis-pricing hypothesis is momentum, which is the tendency for stocks that have recently performed well to continue outperforming.
  3. In order to diminish the measurement errors from individual stocks returns, I look for strategies based on trading portfolios of stocks rather than on trading individual stocks.
  4. There is literature that does not support this statement; as an example, Goyal and Santa-Clara (2002) finds that idiosyncratic risk matters for the market return.
  5. Among other possibilities are distress risk and noisy share prices.
  6. For example, an intangible asset, such as goodwill, has no limited term of existence and is not utilized or consumed in the earnings process.
  7. Strictly, the residual is not intangibles but intangibles subtracting stakeholders value. Since stakeholders value is stable relative to intangibles, its effect on the stock market value is neglected. Hereafter this residual value is referred to as intangibles. For details, see Hall (2001a).
  8. Theoretically, debt needs to be valued at the market value. However, much of a firm\’s debt may not be publicly traded; thus the book value of debt is used as a proxy for its market value.
  9. For details of this definition, see the accounting set-up in Hall (2001a).
  10. For a detailed discussion of portfolio formation and intangibles valuation, see Section 4.
  11. Market Equity refers to common equity at market value. The value of preferred stocks and other preferred equity is excluded.
  12. Annual market equity is available in COMPUSTAT. But because of its particular way of computation, a lot of missing data result. Thus I compute market equity using price and shares outstanding from COMPUSTAT.
  13. To save space, annual returns on the lowest-intan decile portfolio and the highest-intan decile portfolio in each year based on other Portfolio Formation Methods (2&3) are not reported, but the results are very similar.
  14. In Giffin and Lemmon (2002) growth opportunities are quantified by R&D, capital spending and sales growth, which are closely related to intangible assets.
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