Intangible Capital in Factor Models

Posted: 23 Feb 2021 Last revised: 6 May 2022

See all articles by Huseyin Gulen

Huseyin Gulen

Purdue University - Krannert School of Management

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance

Ryan H. Peters

Tulane University - Finance & Economics

Morad Zekhnini

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: April 26, 2022

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 Hou, Xue, and Zhang (2015) model, especially during recent decades. We further find that the value factor is no longer redundant in empirical factor models based on the Fama and French (2015) and Hou, Xue, and Zhang (2015) frameworks.

Keywords: Intangible Investment/Capital, Factors, Factor Models

JEL Classification: G10, G11, G31, G32, O30, O34

Suggested Citation

Gulen, Huseyin and Li, Dongmei and Peters, Ryan H. and Zekhnini, Morad, Intangible Capital in Factor Models (April 26, 2022). Available at SSRN: https://ssrn.com/abstract=3725002 or http://dx.doi.org/10.2139/ssrn.3725002

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Ryan H. Peters

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Morad Zekhnini (Contact Author)

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,705
PlumX Metrics