The importance of intangibles in the modern economy: accounting, strategic relevance, valuation

Intangible assets have been described by many authors as important value drivers for firms, being unique, context-dependent and difficult to imitate due to their complexity and immateriality (Amir and Lev, 1996; Edvinsson and Malone, 1997; Ittner et al., 1997; Stewart, 1997; Bontis, 2001). As analyzed in the first chapter, the accounting treatment of intangible assets allows the capitalization of externally acquired intangibles, whereas in the case of internally generated ones the criteria for recognition are stricter and rooted on a conservative approach based on the criterion of reliability, that hinder the capitalization of most of them.
The last chapter has underlined the strategic importance of intellectual capital in the creation and sustainment of competitive advantage, from the perspective of strategic management. Moreover, the analysis on intellectual capital has shown how all the components of human, organizational and relational capital are inextricably (and dynamically) related to each other and to the firm as a going concern and, therefore, not identifiable for measurement under accounting rules. The implication of this fact is twofold: from an investment perspective, as highlighted in the first chapter, all the efforts employed by a firm in increasing intellectual capital are expensed in the income statement leading to a notable decrease in the timeliness of earnings’ information. Earnings adjustments, in these cases, are required to assess the economic performance of the firm.
On the other side, on a valuation perspective, the contribute of intellectual capital to revenues is mostly indirect and firms must appropriately integrate conversion mechanisms (sales, licensing, joint ventures, strategic alliances or efficiency rents) to effectively exploit the source of value it represents (Sullivan and Sullivan, 2000). This fact adds to the difficulty in assessing the value contribution of intellectual capital.
From the analysis performed until now, it seems clear that any attempt of valuing intellectual capital should consider the perspective of firm valuation, and not the one of accounting. Holding these considerations, in the next section I discuss how academics have attempted to quantify the value of non-recognized intangibles1 from the perspective of firm valuation.

Proposed revenue-based valuation methods such as the premium price are only partially applicable to intellectual capital valuation, being related to a single product. Moreover, a firm exploiting its intangibles through other strategies such as cost efficiency would find premium price method misleading.
Since the literature on non-recognized intangibles valuation is heterogeneous, I focus on the studies that have used the firms’ stock market values as a proxy to estimate the value of non-recognized intangibles. In fact, while some specific methods for valuing non-recognized intangibles have been developed (VAIC™, EVVICAE™, The Value Explorer™, to name a few), there is an ongoing debate on the reliability of these methods: the lack of consensus around the proposals testify the premature state of the field. Moreover, the existing methods lack of wide-ranging empirical researches that demonstrate their applicability.
Therefore, to assess the contribution of non-recognized intangibles on firm valuation I decided to rely on studies that used the ex-post, indirect method of stock prices’ analysis. As it has been discussed, non-recognized intangibles contribute to the value of the firm as a going concern (internally generated goodwill), an asset that is not capitalized in the balance sheet but that reflects the value-generating capability of the firm, which therefore can be traced from the market prices. What follows is an analysis on the most used methods to address the value not reflected by the balance sheet information. First, the market-to-book and Tobin’s q ratios will be discussed. Second, an introduction on the Ohlson model will give the theoretical foundation for a review of the empirical researches on the value of non-recognized intangibles.