This document discusses how corporate value is increasingly derived from intangible assets like intellectual property, brand recognition, and organizational capital rather than tangible assets. It notes that intangible investments by US corporations now exceed tangible investments annually but are not fully captured by traditional accounting systems. To address short-termism and more accurately value firms, the "intangibles information gap" must be closed by better identifying, measuring, and reporting intangible capital and knowledge assets.

1. Response to New School discussion on
US Corporations in the Recovery and Beyond
Friday, April 23, 2010
The Role of the
Intangibles Information Gap in
the Financialization of the
American Corporation
Mary Adams
I-Capital Advisors
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2. Corporate value is increasingly
intangible
Components of S&P 500® Market Capitalization
14,000
Market Premium
12,000
Intangible Book Value
Tangible Book Value
10,000
8,000
S&P 500 Market Cap ($ billions)
6,000
4,000
2,000
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1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Research: Ned Davis
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3. This change touches all sectors
Intangible Value as a % of Total Market Capitalization
by Sector
100%
90%
80%
70%
60%
1975
50%
2005
40%
30%
20%
10%
0%
ner
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um C u ni ma
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4. Here’s the
calculation:
• Total corporate value per the stock
market
• Minus: tangible assets at historical cost
• Minus: intangibles on the balance sheet
from mergers
• Equals: “market premium” or
“unrecognized intangibles”
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5. Global mergers – 2007
(mergers are the one time these intangibles
hit the balance sheet)
Tangible, 30%
Goodwill, 47%
Intangible, 23%
E&Y: Acquisition Accounting – What’s Next for You?
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6. The gap is not “goodwill”
• This large amount of intangibles in
business is not the result of some abstract
market “feeling”
• It is the result of 30+ years of investment
in the knowledge infrastructure of
American corporations (people,
processes, info tech, networks)
• Annual investment in knowledge
intangibles now exceeds tangible
investment….
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7. U.S. corporate investments - 2007
Tangible $1.2
trillion, 43%
Intangible $1.6
trillion, 57%
Business Week, October 29, 2009 (using unpublished data from Corrado, Hulten and Sichel)
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8. What are intangible investments?
Calculations extrapolate from currently-available
data including:
– Software
– R&D
– Advertising
– Training
But not everything is counted because current
measurement systems (both economic and
accounting/financial) were built for a tangible,
industrial economy
And most of these investments are treated (at both
macro and firm level) as current-year expenses
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9. What it all really means
• Analysts and investors cannot rely on the
balance sheet to help them value stocks
• So they have to rely on the income
statement but this is a very short-term
source of information
• Financialization reflects this short-term
view
• Financialization cannot be fixed without
also closing the intangibles information
gap
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10. Filling in the gap
• Field of intellectual or intangible capital
emerged to study this information gap
• IC field—strong following in Europe & Asia
• Focus is primarily on:
– Identifying intangibles
– Understanding link to value creation
– Reporting to stakeholders
• Generally identifies three classes of
intangibles….
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11. Knowledge
Assets
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12. Structural capital is special…
• Paul Romer calls it software
• Arnold Kling and Nick Schulz call it recipes
• John Zysman calls it the algorithmic
revolution
…Structural Capital is operationalized
knowledge in a highly scalable, enduring
form that is not subject to the laws of
scarcity—it changes everything
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13. The economic opportunity of the
knowledge era?
…creating value by leveraging
human + relationship
+ structural capital
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14. To end financialization…
…and take advantage of the potential of the
knowledge era, we need to:
– Close the intangibles information gap
– Offset the short term view of the income
statement
– Give investors and stakeholders a view
previously provided by the balance sheet of
the productive capacity and potential of the
firm…its intangible capital
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15. • A manager’s guide to
identifying, managing and
measuring intangibles
• Goal is to leverage the
knowledge and
competencies of firms for
greater value, performance
and innovation
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16. Resources
Book: www.intangiblecapitalbook.com
Community: www.icknowledgecenter.com
Blog: www.smartercompaniesblog.com
Mary Adams, 781-729-9650
adams@i-capitaladvisors.com
Twitter: maryadamsica
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