Intangible Assets and Cross-Sectional Stock Returns: Evidence from Structural Estimation

The relation between a firm’s stock return and its intangible investment ratio and asset tangibility is derived under the intangible-asset-augemnted (IAA) q-theory framework. Using firm level data and the Generalized Method of Moments (GMM), we estimate the model and three main results emerge. First, the IAA q-theory captures the value premium and the relation between R&D intensity and stock returns significantly better than the conventional q-theory. Two features of intangible assets, adjustment costs and investmentspecific-technological-change, are crucial to the improved model performance. Second, the relation between R&D intensity and stock return is similar to the relation between tangible investment and stock return, which is different from what the previous literature documents. Third, the IAA q-theory gives a more reasonable estimate of adjustment costs of tangible investments than the conventional q-theory does. Moreover, the magnitude of adjustment costs of intangible investments is estimated to be larger than that of tangible investments on average, providing supporting evidence that intangible assets are more crucial for firms to sustain their comparative advantages and helping to explain the higher autocorrelation of R&D expenditures than that of capital investments observed in the data. JEL Classification: G12, E21, D24, O31, O32