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The Traditional Accounting System is of Little Help in Monitoring and Accounting for Intangibles, and in Providing Useful Information to Investors.
Despite Widespread Disbeliefs, Accounting Data Can be Adjusted, to Better Reflect Value, and Intangibles Can Be Valued.
Source: Testimony before the Committee on Financial Services, U.S. House of Representatives, February 27, 2002.
4
Alan Greenspan
From one perspective, the ever-increasing proportion of our GDP that represents conceptual as distinct from physical value added may actually have lessened cyclical volatility. In particular, the fact that concepts cannot be held as inventories means a greater share of GDP is not subject to a type of dynamics that amplifies cyclical swings. But an economy in which concepts form an important share of valuation has its own vulnerabilities.
As the recent events surrounding Enron have highlighted, a firm is inherently fragile if its value added emanates more from conceptual as distinct from physical assets. A physical asset, whether an office building or an automotive assembly plant, has the capability of producing goods even if the reputation of the managers of such facilities falls under a cloud. The rapidity of Enron's decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation. The physical assets of such a firm comprise a small proportion of its asset base. Trust and reputation can vanish overnight. A factory cannot.
I. What They Say
Source: Leonard Nakamura, " A Trillion Dollars a Year in Intangibles Investment and the New Economy," 2001.
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Leonard Nakamura
I argue that U.S. private gross investment in intangibles is at least $1 trillion. Most of this investment goes uncounted. This is not surprising, in that it is new: the rate of investment in intangibles, and its economic value, accelerated significantly beginning around 1980.
An intangibles investment rate of $1 trillion suggests that U.S. businesses are investing nearly as much in intangibles as they are in plant and equipment.
If we are investing $1 trillion a year in intangibles…then the long-run equilibrium value of intangibles is $6 trillion.
Source: "Managing an Alliance Portfolio," MckInsey Quarterly, 2002 Number 3. 10
A MAJOR PROBLEM: MONITORING ALLIANCES
“Most large companies now have at least 30 alliances, and many have more than 100. Yet despite the ubiquity of alliances—and the considerable assets and revenues they often involve—very few companies systematically track their performance. Doing so is not a straightforward task… Our experience suggests that fewer than one in four has adequate performance metrics… Few Senior management teams know whether the alliance portfolio as a whole really supports corporate strategy.”
Mismeasurement and Biased Reporting of Intangibles - Continued
Manipulation with In-Process R&D.
Manipulation with R&D Expenditures (and Other Intangibles?).
Reporting Opaqueness: No Information on Employee Training, Brand Enhancement, Software and Technology Acquisitions, R&D Breakdowns, Innovation Revenues, etc., etc.
The Myth of Enron, Global Crossing and Winstar Being Intangibles-Intensive.
N 2981 1431 3803 4311 1354 3400 3223 Panel E: Mean (first row) and standard deviation (second row) of the “optimal” book value and earnings adjustments Chem. Fab. Mach. Elec. Trans. Scient. Bus.
BT*/ A – B0/ A 0.1246 0.0189 0.0729 0.1329 0.0408 0.0954 0.0892
0.1692 0.0323 0.0847 0.1574 0.0493 0.0868 0.1444
ET*/ A – E0/ A 0.0111 0.0002 0.0031 0.0082 0.0026 0.0058 0.0052 0.0334 0.0083 0.0232 0.0296 0.0107 0.0332 0.0345
P is market value of common equity, A is total assets, Dy is a dummy variables that equals one for year y, BT (ET) is pro-forma
book value (earnings) assuming T years useful R&D life (hence T = 0 implies the reported book-value and earnings), and DNE is a
dummy variable that equals one when pre-R&D earnings are negative. Panel B reports the percentage change in R2 (relative to the
benchmark T = 0 regression) from using earnings and book value that have been adjusted to reflect R&D capitalization and
amortization over the subsequent T years. The test statistics in Panel C are calculated as (N.5 mean[r02 – rT
2]) / std[r02 – rT
2], where
N is the number of observations, r0 is the residual from the benchmark regressions, and rT is the residual from the adjusted earnings
and book value regression. The test statistics have a limiting standard normal distribution. T* denotes the value of T that maximizes
the percentage change in R2 (identified in panel B using bold font).
Cumulative abnormal return (CAR) is measured as the cumulative sum of the portfolio monthly abnormal returns. Portfolio monthly abnormal return for each of the 36 months is calculated as the average abnormal return for the corresponding month across all firm-year observations that “belong” to the portfolio. Monthly abnormal return is calculated as the difference between the firm’s return and the contemporaneous return on a SIZE and B/M matched portfolio (SIZE and B/M are updated every twelve months).