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An Intangible-Adjusted Book-to-Market Ratio Still Predicts Stock Returns

Hyuna Park

Critical Finance Review, 2022, vol. 11, issue 2, 265-297

Abstract: The book-to-market ratio has been widely used to explain the cross-sectional variation in stock returns, but the explanatory power is weaker in recent decades than in the 1970s. I argue that the deterioration is related to the growth of intangible assets unrecorded on balance sheets. An intangible-adjusted ratio, capitalizing prior expenditures to develop intangible assets internally and excluding goodwill, outperforms the original ratio significantly. The average annual return on the intangible-adjusted high-minus-low (iHML) portfolio is 5.9% from July 1976 to December 2017 and 6.2% from July 1997 to December 2017, vs. 3.9 and 3.6% for an equivalent HML portfolio.

Keywords: Research and development (RD); Goodwill; Price-to-book ratio; Value index fund (search for similar items in EconPapers)
JEL-codes: G12 M41 O3 (search for similar items in EconPapers)
Date: 2022
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