Parallel Session IARIW 2014

1. Does the Stock Market Evaluate
Intangible Assets?
An Empirical Analysis Using Data of Listed Firms in Japan
Authors:
Tsutomu Miyagawa
Miho Takizawa
Kazuma Edamura
Discussant:
Bernd Görzig
33rd IARIW General Conference
24-30 August 2014, Rotterdam

2. o Several hints in the literature that divergence between
market value of a company and its asset value might
be related to unaccounted intangible capital.
o This interesting paper has the focus on
 Tobins Q and how
 Intangibles affect it
Does the Stock Market Evaluate
Intangible Assets?

3. Tobin‘s Q
Q =
𝑴𝒂𝒓𝒌𝒆𝒕 𝒗𝒂𝒍𝒖𝒆
𝑨𝒔𝒔𝒆𝒕𝒔 𝒗𝒂𝒍𝒖𝒆
Q = 𝟏
Stock market value + net liabilities
Book value of assets (tangible stocks +
inventories) at replacement prices
Equilibrium model expects:
 Market value = Assets value

4. What if Market value differs from Assets
value?
o Proposition: Markets fail to value a firm
adequately
 Inherent position of stock market analysts
 Overvaluation of a firm:
 Q > 1 → Sell signal
 Undervaluation of a firm:
 Q < 1 → Buy signal
o Alternative: Measurement error
 Position of this paper

5. o Book values are the challenge
 Depreciation
…Firm specific influences
…Impact of tax legislation
 Valuation
 Book values are at historical prices
 Replacement prices are needed
o Insufficient coverage of assets
 In particular of intangibles
Markets can’t be wrong:
It’s measurement

6. o Conventional Q:
o Revised Q:
Expected result:
Revised Q will be lower than conventional Q
Conventional and Revised Q
𝑄 𝑐 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒
𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 𝑣𝑎𝑙𝑢𝑒
𝑄 𝑅 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒
(𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒+𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒) 𝑎𝑠𝑠𝑒𝑡𝑠 𝑣𝑎𝑙𝑢𝑒
Book value of tangible and intangible
assets at replacement prices

7. o Years 2000 - 2009
o Balance sheet data for nearly 3000 Japanese Listed
Firms
o Caution:
 Firm level means cannot be compared with results from
aggregated studies
 Firms characteristics differ with the size of firms.
Firm level data

8. o Standardized perpetual inventory methodology based
on firm level investment data
o Advantages:
 Consistent capital accounts and valuation possible
 Same methodology as applied for Intangibles
o However:
 Depreciation rates have to be assumed
No balance sheet book values for
tangible assets, instead:

9. Tangible investment
Types of Assets (δ= depreciation rate)
• Non-residential buildings, δ= 4.7%
• Construction, δ= 5.6%
• Machinery, δ= 9.5%
• Ship/vehicle/transportation equipment,
δ=14.7%
• Tool appliance equipment, δ= 8.8%
• Other tangible assets, δ= 8.8%

10. Intangible investment
Follows the well known classification and
depreciation rates:
 Software, δ=31,5%
 R&D, δ=15%
 Brand equity, δ=55%
 Firm specific human capital, δ=40%
 Organisational change, δ=40%

11. Asset type
Main indicators (not
comprehensive)
Primary Secondary
Deflators
Source
Software
Share of information
workers
Basic Survey of
Business Activities of
Enterprises
JIP data
base
R&D R&D expenditures
Brand equity
Advertising
expenditures
(DBJ)
Corporate
Financial
Databank
Firm specific human
capital
Share of employee
training cost
General
Survey of
Working
Conditions
Organisational
change
Fixed share of
CEO's
compensation
Intangible investment data sources

12. Density of Tobin‘s Q
𝑄 𝑅
=
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒
(𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒+𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒) 𝑎𝑠𝑠𝑒𝑡𝑠 𝑣𝑎𝑙𝑢𝑒
𝑄 𝑐
=
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒
𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 𝑣𝑎𝑙𝑢𝑒

13. Description of the sample
Coefficient of variation: 0.816 0.749
The dispersion of revised Q is lower than that of conventional Q

14. ICT and Non-ICT firms
Firms of ICT using and
ICT producing industries
(32)
Ca 60 industries?

15. … But can they also explain the gap between Market
and Asset value?
 Estimation equation from the literature:
Intangibles change the value of Q
Intangible assets /
Tangible assets
Tangible investment /
Tangible assets
Intangible investment /
Tangible assets
PCM: Price Cost Margin
CC: External Finance
Dependence
Gap
between
conventional
Q and 1

16. Statistics of the sample
Intangible assets /
Tangible assets
Tangible investment /
Tangible assets
PCM: Price Cost Margin
CC: External Finance
Dependence
Intangible investment /
Tangible assets
Intangible investment /
Tangible assets

17. o OLS estimates – 4 models
o Instrumental variables estimates – 3 models
 All Sectors
 ICT
 Non ICT sectors
o Panel estimates - 3 models
 All Sectors
 ICT
 Non ICT sectors
o Quantile regression – 4 models
Estimation methodologies

18. Methodology OLS
Instrument
al variable
Panel
estimate
Quantile
regression
Model no. 1 2 3 4 1 2 3 1 2 3 1 2 3 4
Intangible Assets divided by
Tangible
Assets
N/K *** *** *** *** ** *** *** *** *** *** *** *** *** ***
Tangible Investment I/K ** *** *** *** ***
Intangible Investment O/K *** --- - * * ***
External Finance
Dependence
CC --- *** ---
Price Cost Margin PCM --- - *** ***
Constant const. --- - --- --- --- ---
Overview of results for all industries
Positiv
coefficien
Negativ
coefficienNot defined Not
significant

19. o Similar results for ICT firms, but not necessarily for
Non-ICT firms
o Sample size varies depending on estimation
approach or model between 2882 and 1211
o All estimates with industry and year dummies
o Instrumental variables: CC and Skilled labour ratio
o Puzzling: Not all types of intangibles do influence
market values. Only
 Total intangible assets and
 Software
Additional estimation remarks

20. Does the Stock Market Evaluate Intangible Assets?
The paper shows:
Across different models and methodologies, a positive
impact from intangible assets on conventional Tobin’s
Q can be concluded
Conclusion

21. o Valuable contribution on the role of intangibles
o Policy conclusions on growth should be better
supported by the study
o Two important aspects
 Depreciation rates for tangibles
 The firm size aspect
Comments

22. Depreciation rates for tangibles
Depreciation rates applied
Structures: 4.7% - 5.6%
Equipment: 8.8% - 14.7%
Macro level Reference: KLEMS depreciation rates for
Japan
Structures: 2.3% - 4.4%
Equipment: 10.4% - 22.9%
High depreciation rates reduce
Asset value and hence increase Q
What about land?
Neglecting land reduces
Asset value and increase Q

23. o Firm level means cannot be compared with results
from aggregated studies
o Firms’ characteristics differ with the size of firms.
o Small firms determine the averages
Wishes for assessing the Macro impact:
o Weighted means (with firm size) for
 Q (conventional and revised)
 Intangible assets/Tangible assets
o Role of firm size in the estimates
Firm size

24. Does the Stock Market Evaluate
Intangible Assets?
An Empirical Analysis Using Data of Listed Firms in Japan
Authors:
Tsutomu Miyagawa
Miho Takizawa
Kazuma Edamura
Discussant:
Bernd Görzig
Thank you for listening

25. o Basically, estimates of q using data from individual
companies listed on the Tokyo Stock Exchange are
close to unity, while those estimated using aggregate
data are significantly less than unity.
o Both aggregate and micro data require many
adjustments and imputations for the purpose of
estimating q,
Hoshi and Kashyap (1990)

26. NBER Working Paper No. 9444
January 2003
ABSTRACT
The value of corporate equity in Japan is dramatically
smaller than that implied by the sum of the reproduction
cost of accumulated investment and the market value of
land owned by corporations (that is, the Tobin's average
"q" is much smaller than unity).
Inefficiency of Corporate Investment and
Distortion of Savings Behavior in Japan
Albert Ando, Dimitrios Christelis, and Tsutomu
Miyagawa

27. Buy and Sell signals from Tobin‘s Q

28. Economic depreciation and technical progress affect the
relationship between book value and replacement cost in
the opposite way from price inflation.
Rapid inflation makes the book value of assets less than
their value at current prices,
whereas rapid economic depreciation and technical
progress cause the book value of assets to exceed their
value in quality-adjusted prices.
In this sense, book value may actually exceed
replacement cost for certain types of capital goods that
have experienced rapid depreciation...
Bond & Cummins: The Stock Market and
Investment in the New Economy: Some Tangible
Facts and Intangible Fictions

29.  Non-residential buildings, δ= 4.7%
 Construction, δ= 5.6%
 2.3%-4.4%
 Machinery, δ= 9.5%
 10.4-%-14.9%
 Ship/vehicle/transportation equipment, δ=14.7%
 Tool appliance equipment, δ= 8.8%
 15.4%-22.7%
 Other tangible assets, δ= 8.8%
 10.3%-14.9%
EU-KLEMS depreciation rates