A Better Estimate of Internally Generated Intangible Capital

Aneel Iqbal (), Shiva Rajgopal (), Anup Srivastava () and Rong Zhao ()
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Aneel Iqbal: Thunderbird School of Global Management, Arizona State University, Phoenix, Arizona 85004
Shiva Rajgopal: Columbia Business School, Columbia University, New York, New York 10027
Anup Srivastava: Haskayne School of Business, University of Calgary, Calgary, Alberta T2N 1N4, Canada
Rong Zhao: Haskayne School of Business, University of Calgary, Calgary, Alberta T2N 1N4, Canada

Management Science, 2025, vol. 71, issue 1, 731-752

Abstract: Internally developed intangibles are not included in reported assets under U.S. generally accepted accounting principles. The omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis, conducted with reported values of equity and assets. Recent studies overcome this deficiency by capitalizing research and development (R&D) expenses to estimate the value of knowledge capital and by capitalizing selling, general, and administrative (SG&A) expenses to estimate the value of organization capital. Those two estimates are then added to reported values for financial statement analysis. For convenience, many studies rely on two rules of thumb and assume them to be equally applicable in all instances: (1) 30% of SG&A and 100% of R&D expenses are investments, and (2) the useful life of SG&A and R&D investments is three and five years, respectively. We propose a more flexible approach by estimating the capitalization and amortization parameters on an industry–year–specific basis. Our modified values of total assets and equity, inclusive of the value of capitalized intangibles, exhibit greater association with future returns and investments compared with as-reported values and values estimated with uniform rules of thumb. We provide a better estimate of intangible capital for the consumers of financial statements.

Keywords: intangibles; book value; financial statement analysis; valuation (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:1:p:731-752

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