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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page A New Approach to the Valuation of Intangible Capital
Jason G. Cummins

Abstract: Intangible capital is not a distinct factor of production as is physical capital or labor. Rather it is the "glue" that creates value from other factor inputs. This perspective naturally suggests an empirical model in which intangible capital is defined in terms of adjustment costs. My estimates of these adjustment costs from firm-level panel data suggest that no appreciable intangibles are associated with R&D and advertising, whereas information technology creates intangibles with a 72% annual rate of return--a sizable figure that is nevertheless much smaller than that reported in previous studies. To build a bridge to previous research, I show that much larger estimates can be obtained with ordinary least squares, a method that ignores the possibility that the value of the firm and its investment policy are simultaneously determined.

Keywords: Organizational capital, intellectual property, adjustment costs.

Full paper (345 KB PDF)

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Last update: April 22, 2004