Intangible Capital in Factor Models

Huseyin Gulen (), Dongmei Li (), Ryan Peters and Morad Zekhnini ()
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Huseyin Gulen: Mitchell E. Daniels, Jr. School of Business, Purdue University, West Lafayette, Indiana 47097
Dongmei Li: Darla Moore School of Business, University of South Carolina, Columbia, South Carolina 29208
Morad Zekhnini: Broad College of Business, Michigan State University, East Lansing, Michigan 48824

Management Science, 2025, vol. 71, issue 2, 1756-1778

Abstract: The transition from a traditional manufacturing-based economy to a knowledge- and service-based economy over recent decades resulted in a considerable rise in intangible capital, most of which is not reported on companies’ balance sheets. As a result, balance sheet-based valuation ratios, investment measures, and other firm characteristics that do not incorporate off-balance sheet (OBS) intangible capital suffer from significant measurement error problems. We incorporate a new measure of OBS intangible capital into firm characteristics, such as book to market, investment, and profitability, to address these measurement errors. These OBS intangible adjustments improve the performance of the Fama–French three- and five-factor models and the q -factor model, especially during recent decades. We further find that the value factor is no longer redundant in these empirical factor models.

Keywords: intangible investment/capital; factors; factor models (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:2:p:1756-1778

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