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Past Issue • Oct-Dec 2013

Calculating Intangibles: Drivers of Firm Performance

The research featured in this issue is drawn from papers presented at the Summer Research Conference in Corporate Finance organised by the Centre for Analytical Finance at the ISB and the Wharton School of the University of Pennsylvania. Shedding new light on aspects as diverse as corporate boards, corporate philanthropy, political speech and innovation, together these four articles illuminate the intangible drivers of firm productivity and performance, and the economy at large. Professor Krishnamurthy Subramanian of the Indian School of Business, and the organiser of the conference, connects the dots. In developed economies, production not only requires traditional factors such as capital and labour, but also involves skills, organisational structures, know-how, information, and other factors that are collectively referred to as “intangible assets.” Detailed investigation of these types of assets has found that they are often large and have substantial productivity benefits. For example, an article in the October 20, 2005 issue of The Economist estimated that “as much as three-quarters of the value of publicly traded companies in America came from knowledge-based intangible assets, up from around 40% in the early 1980s.” Jorgenson and Fraumeni (1995) found that the stock of “human capital” in the United States (US) economy dwarfs the stock of physical capital and has grown substantially over time. Hall (1993), Griliches (1981) and Lev and Sougiannis (1996) have found that research and development (R&D) assets bring benefits in the form of positive market valuation. Results from analyses of market-to-book values of firms have shown that the stock market valuation of firms has increasingly diverged from their measured book value (Chan, Lakonishok and Sougiannis, 1999; Hall, 1999).

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