CMSA Social Science Applications Forum: Measuring Intangible Capital with Market Prices
Michael Ewens - Caltech
Despite the importance of intangibles in today's economy, current standards prohibit the capitalization of internally created knowledge and organizational capital, resulting in a downward bias of reported assets. As a result, researchers estimate this value by capitalizing prior flows of R&D and SG&A. In doing so, a set of capitalization parameters, i.e. the R&D depreciation rate and the fraction of SG&A that represents a long-lived asset, must be assumed. Parameters now in use are derived from models with strong assumptions or are ad hoc. We develop a capitalization model that motivates the use of market prices of intangibles to estimate these parameters. Two settings provide intangible asset values: (1) publicly traded equity prices and (2) acquisition prices. We use these parameters to estimate intangible capital stocks and subject them to an extensive set of diagnostic analyses that compare them with stocks estimated using existing parameters. Intangible stocks developed from exit price parameters outperform both stocks developed by publicly traded parameters and those stocks developed with existing estimates. (Joint work with Ryan Peters and Sean Wang.)
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