What is a Company Really Worth? Intangible Capital and the "Market to Book Value" Puzzle

Charles R. Hulten and Xiaohui Hao

No 14548, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: "What is a company really worth?" is a question asked repeatedly during the recent financial crisis. Attention has been focused on short-term valuation issues, like the "mark-to-market" controversy. Sorting out these issues is complicated by the fact that the market puts a value on shareholder equity that is consistently more than twice the reported book value of a company. Numerous observers have pointed to the absence of most intangible assets from financial statements as an important source of this puzzle. We use Compustat financial data for 617 R&D intensive firms to test this possibility. We find that conventional book value alone explains only 31 percent of the market capitalization of these firms in 2006, and that this increases to 75 percent when our estimates of intangible capital are included. The debt-equity ratio also falls from 1.46 to 0.61. These findings suggest that financial reports tend to substantially understate the long-run intrinsic value of corporate America.

JEL-codes: G3 M41 O30 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-acc, nep-bec and nep-rmg
Note: PR
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Citations: View citations in EconPapers (45)

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