Market Valuation of Intangible Assets

Whether information on intangible assets reported under current financial reporting requirements conveys information that is relevant to market participants' valuation of firms' equity has long been a question of interest to accounting policymakers and researchers. This study provides empirical evidence on the relationship between the reported value of intangible assets, the associated amortization expense, and firms' equity market values. These relationships are examined using a matched pair portfolio analysis and multiple regression analysis that has been used in prior research on this topic. The results indicate that the financial market positively values reported intangible assets. Furthermore, consistent with theoretical predictions, the market's valuation of a dollar of intangible assets is lower than its valuation of other reported assets. The results also indicate that, although the market values amortization expense differently from other expenses reported in the income statement, it does not negatively value amortization expense. These results support the current requirement that intangible assets be reported in firms' balance sheets. However, they do not support the current requirement that intangible assets be periodically amortized to reflect the assumed decline in their value.