Intangible Assets, R&D Expenditures, and Price Momentum Strategies

Various models have been proposed to explain the short-term price momentum anomaly. And also various factors such as industry, trading volume, firm size, and analyst coverage that could affect the price momentum have been found. We introduce another two factors that could affect the momentum profits, Intangible Assets and R&D Expenditures. We find that the short-term momentum profits are decreasing with the intangibles intensities except for among the very small R&D and Intangible Assets intensities quintiles, which is totally contrary to our two hypotheses. The decreasing pattern means that the momentum would be stronger for firms with smaller R&D intensity and Intangible Assets intensity, which cannot be explained by two current popular theories that try to explain the price shortterm momentum, one is overconfidence model by Daniel, Hirshleifer, and Subrahmanyam (1998) and the other is the gradual-information-diffusion model by Hong, Lim, and Stein (1999). ∗ This paper has been accepted for presentation by European Financial Management Journal 2001 Annual Conference at Lugano of Switzerland. I am especially grateful to my second year paper supervisor, Dr. Sabrina Kwan, for her guidance on this paper. I also want to thank (alphabetically) Prof. Gary Biddle, Prof. Kevin Chen, Dr. Jong Choi, and Dr. Guochang Zhang for their helpful comments and suggestions. Comments are welcome and all errors are mine. Intangible Assets, R&D Expenditures, and Price Momentum Strategies Introduction Efficient market hypothesis says that market price should reflect all the information in public. But recent literature has documented many anomalies against the efficient market hypothesis. One of the anomalies is price short-term momentum. Price momentum means that the outperformed stock in the last period will outperform the average market in the next period. Then the investor can use the momentum strategy, buying the winners in the past and selling the losers in the past to earn arbitrary profits. This is called individual price momentum strategy. Some researchers have found that the individual momentum strategies exist not only in U.S. market but also in the other developed and emerging markets outside U.S. Then what’s the reason for the short-term price momentum? There are at least two explanations for this anomaly in the literature till now. One is that the investors underreact to the market information and then there is a positive autocorrelation for the market returns. The other is a behavioral theory that claims that investors are overconfidence and have selfattribution bias. Investors will be more overconfident if the feedback of the market information is more ambiguous. If the firms were harder to value for the investors then the feedback of the firms would be more ambiguous. Now we can expect more pronounced momentum effects for these firms that cannot be valued easily. It’s plausible to claim that firms with large intangible assets or R&D expenditures would be more difficult to value. Then we expect that the price momentum would be stronger for the firms with larger intangible assets and R&D expenditures. The value relevance of intangible assets and R&D expenditures has been widely documented in the literature. However, none of them has mentioned the relation between intangible assets/R&D expenditures and price momentum anomaly. If we could find the fact that the 1 The “short-term” here refers to 3 to 12 months and other literature may use “intermediate” or “medium” in order to differentiate from shorter horizon.