Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Won W. Choi
DONGGUK UNIVERSITY
Sung S. Kwon
RUTGERS UNIVERSITYCAMDEN
Gerald J. Lobo
SYRACUSE UNIVERSITY
his study examines the relationship between the reported value of intangible assets, the associated amortization expense, and firms equity market values. It is
motivated by the accounting for intangible assets required by
Accounting Principles Board (APB) Opinion No. 17, under
which firms must capitalize the cost of intangible assets and
amortize that cost over a period not to exceed 40 years or
the economic life of the asset, whichever is shorter. These
accounting requirements have long been the subject of controversy. At the core of the controversy is whether the reported
value of intangible assets on the balance sheet reflects the
Address correspondence to Gerald J. Lobo, School of Management, Syracuse
University, 900 S. Crouse Avenue, Syracuse, NY 13244.
Journal of Business Research 49, 3545 (2000)
2000 Elsevier Science Inc. All rights reserved
655 Avenue of the Americas, New York, NY 10010
For example, Rabe and Reilly (1996), and Reilly (1996) reported that the
valuation of intangible assets has become an increasingly more integral and
more complex part of the current health care environment and the corporate
bankruptcy and reorganization environment, respectively.
36
J Busn Res
2000:49:3545
W. W. Choi et al.
Background
Under APB Opinion No. 17 (American Institute of Certified
Public Accountants, 1970), intangible assets are accounted
for in a manner similar to the accounting required for property,
plant, and equipment. An intangible asset is recorded at historical cost and amortized over the period that the firm expects
to benefit from its use. However, unlike fixed assets, the
uncertainty in the degree and timing of future benefits expected from intangible assets is considerably greater. Because
of the higher levels of uncertainty associated with future benefits to be derived from intangible assets, many practitioners
and academics have suggested that such expenditures should
be written off in the period in which they are incurred. This
suggestion is consistent with valuation models, which indicate
that the value of an asset will approach zero as the level of
uncertainty of its future economic benefits approaches infinity.3 Whether the higher level of uncertainty associated with
the benefits from intangible assets is significant enough to
cause the market to discount those benefits more than it
does for other asset benefit streams is a question that can be
empirically investigated.
The continuing controversy surrounding the accounting
for intangible assets has drawn the attention of academic researchers. Much of the research has focused on issues related
to goodwill accounting, which is the largest intangible asset
3
The notion that the value of an asset will approach zero as the level of
uncertainty of its future economic benefits nears infinity is consistent with
the FASBs definition of an asset as a probable future economic benefit
controlled by an entity as a result of a past transaction or an event under
Statement of Financial Accounting Concepts No. 3. In other words, if the
future realization of the economic benefits resulting from the use of the
intangible asset is not probable, then it should not be classified as an asset.
J Busn Res
2000:49:3545
37
McCarthy and Schneider (1995) reported that their research of the COMPUSTAT database identified 1,451 firms reporting goodwill in the aggregate
amount of $158 billion.
5
The book value and market value of recently acquired intangible assets are
likely to be closer to one another because the book value will more closely
reflect the price at which the asset was acquired. Consequently, there will
be little impact of accounting methods on the reported book value of the
asset. By restricting the experimental firms to those that have had intangible
assets for a longer period, we are able to focus on how closely the accounting
for these assets corresponds to the markets assessment of their value.
38
J Busn Res
2000:49:3545
Market Valuation of
Reported Income Statement Items
We use an analogous procedure to assess the markets valuation of amortization expense related to intangible assets reported in the income statement. Once again, we form three
portfolios. The first portfolio, labeled the experimental portfolio, comprises firms with significant amounts of amortization
expense that have been relatively stable over the past three
years. The second portfolio, labeled the adjusted portfolio,
These three variables allow us to control for size (by total assets), debt-toequity ratio (by book value of equity and total assets), and return-on-equity
(by earnings and book value of equity). Prior research has shown that these
variables are significant in explaining firms equity market values (e.g., Atiase,
1985; Lang, 1991).
W. W. Choi et al.
comprises the same firms as the experimental portfolio; however, the earnings are adjusted to remove the effect of deducting amortization expense related to intangible assets. This
results in the adjusted firms earnings always exceeding the
experimental firms earnings. The third portfolio contains
firms that do not report amortization expense. Firms in this
control portfolio are pairwise matched with the adjusted
firms based on total assets, book value of equity, earnings,
industry, and year.
We compare earnings-to-market value (EM) ratios between
control and adjusted portfolios to examine whether the market
reflects reported amortization expense in its valuation. Ceteris
paribus, if amortization expense has no effect on market value,
them the EM ratios of the control and adjusted portfolios will
be equal. Alternatively, if the market value declines as a result
of the reported amortization expense, then the EM ratio of
the adjusted portfolio will be greater than that of the control
portfolio. This is so because the negative effect of the amortization expense is reflected in the market value of the adjusted
portfolio but not in its earnings. Based upon the above discussion, we test the following hypothesis (stated in its alternate
form):
HI1: The earnings-to-market value ratio of the adjusted
portfolio is greater than the earnings-to-market value
ratio of the control portfolio.
Our second income statement-related hypothesis examines
whether the effect of each dollar of amortization expense on
market value differs from the corresponding effect of other
income statement elements. We compare EM ratios between
experimental and control portfolios to test this hypothesis. If
the market value decrease per dollar of amortization expense
equals the market value decrease per dollar of other income
statement elements, then the experimental and control portfolios will have equal EM ratios. Alternatively, if the reduction
in market value per dollar of amortization expense is less than
it is for other income statement components, then the EM
ratio for the experimental portfolio will be lower than the EM
ratio for the control portfolio. Consistent with this reasoning,
we test the following hypothesis (stated in its alternate form):
HI2: The earnings-to-market value ratio of the experimental portfolio is less than the earnings-to-market value
ratio of the control portfolio.
J Busn Res
2000:49:3545
39
We used various ranges (from 5 to 30%) to control for these three variables.
The wider the range, the less the control, while the narrower the range, the
fewer the number of matched observations. Given this trade-off, we chose
15%, because it provided a sufficient number of observations for conducting
our tests. When more than one control firm satisfied these criteria, we ranked
the deviations of total assets, book value of equity, and earnings between
control and adjusted observations, summed the ranks for each firm, and
selected the firm with the lowest total rank.
9
The choice of 0.25% is derived from criterion (1) for selecting experimental observations for the balance sheet tests (intangible assets must comprise
at least 10% of total assets) and the maximum amortization period for intangible assets of 40 years specified in APB No. 17. This cutoff provides a comparable sample size for the income statement tests to that used for the balance
sheet tests.
40
J Busn Res
2000:49:3545
W. W. Choi et al.
3
2
5
1
1
2
1
1
3
3
2
2
3
1
3
2
5
40
1
1
1
3
1
1
2
3
2
4
18
3
2
1
6
1
2
1
1
1
2
1
9
2
1
2
6
1
1
3
Total
4
3
5
2
1
2
3
1
3
5
10
2
6
4
10
8
14
83
2
1
2
1
1
1
1
1
1
1
1
1
1
1
2
1
2
2
2
3
2
3
1
2
2
1
3
4
21
4
3
25
1
2
3
2
2
2
1
2
3
4
3
2
2
32
1
1
1
1
3
1
3
1
1
1
2
12
1
1
Total
4
3
3
2
2
5
7
6
8
4
6
10
6
5
5
14
10
100
One-digit SIC codes: 1; mining, oil and gas, and construction; 2; light manufacturingfood, textile, furniture, printing, and chemical; 3; heavy manufacturing
rubber, glass, metal, electric, and measuring instrument; 4; transportation, communication, and utilities; 5; wholesale and retail trading; 6; financebanking, brokers, insurance, real estate, and investment; 7; personal and business servicehotel, repair, motion
picture, and amusement.
Matching Experimental
with Control Observations
The same adjustments and matching criteria used for the
balance sheet portfolio are employed. These criteria result in
100 matched pairs of adjusted and control observations. Panel
B of Table 1 summarizes the sample distribution by year and
industry.
Empirical Results
We first present the results of the portfolio analyses. These
results are reported in Tables 2 through 5. We compare mean
(panel A) and median (panel B) values of BM ratios and EM
ratios for the experimental, adjusted, and control portfolios.
Tables 2 and 4 present the analyses for portfolios with matched
observations that are within 15% in terms of the three
control variables (total assets, book value of equity, and earnings. To provide an indication of the sensitivity of our results
to the choice of the 15% matching criterion, we report
corresponding results for observations matched on a 10%
criterion in Tables 3 and 5. The portfolio results are followed
by regression analysis results in Table 6. These results serve
as a basis for comparison with prior research and for comparison with the results of the matched portfolio analysis.
J Busn Res
2000:49:3545
41
Table 2. Descriptive Statistics of Variables for Experimental, Adjusted and Control Samples for Tests of Balance Sheet Hypotheses
Panel A: Analysis of Mean Values
Mean Value
Variables
PIA
PAE
TA
BE
EBX
BM
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl pairs
AdjustedControl pairs
0.1578
0.0017
831
396
51.00
0.6295
705
269
52.26
0.4522
695
275
52.07
0.6195
0.0000
0.0000
0.2399
0.3774
0.1406
0.2875
0.4909
0.0000
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl pairs
AdjustedControl pairs
0.1832
0.0000
319
184
17.16
0.5571
225
122
17.16
0.3965
230
114
16.23
0.5589
0.0000
0.0000
0.3816
0.7966
0.1398
0.3013
0.4653
0.0000
42
J Busn Res
2000:49:3545
W. W. Choi et al.
Table 3. Descriptive Statistics of Variables for Experimental, Adjusted and Control Samples for the Tests of Balance Sheet Hypotheses
Panel A: Analysis of Mean Values
Mean Value
Variables
PIA
PAE
TA
BE
EBX
BM
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl pairs
AdjustedControl pairs
0.1478
0.0018
640
310
39.43
0.6947
543
214
40.62
0.5031
542
216
40.24
0.6610
0.0000
0.0000
0.0420
0.3176
0.9399
0.9212
0.9139
0.0046
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl Pairs
AdjustedControl Pairs
0.1373
0.0000
289
153
16.06
0.5894
247
86
16.06
0.4456
248
81
15.96
0.6224
0.0000
0.0000
0.0510
0.6893
0.8123
0.8838
0.8694
0.0059
Table 4. Descriptive Statistics of Variables for Experimental, Adjusted and Control Samples for Tests of Income Statement Hypotheses
Panel A: Analysis of Mean Values
Mean Value
Variables
PIA
PAE
TA
BE
EBX
EM
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl pairs
AdjustedControl pairs
0.0641
0.0066
1547
609
73.48
0.0733
1467
529
80.59
0.0806
1462
530
79.08
0.0870
0.0000
0.0000
0.0008
0.0364
0.2680
0.5213
0.3227
0.8019
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl pairs
AdjustedControl Pairs
0.0562
0.0043
446
212
25.13
0.0713
399
175
28.66
0.0762
397
172
26.42
0.0776
0.0000
0.0000
0.0000
0.0032
0.4159
0.6695
0.3194
0.8377
J Busn Res
2000:49:3545
43
Table 5. Descriptive Statistics of Variables for Experimental, Adjusted and Control Samples for the Tests of Income Statement Hypotheses
Panel A: Analysis of Mean Values
Mean Value
Variables
PIA
PAE
TA
BE
EBX
EM
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl pairs
AdjustedControl pairs
0.0928
0.0067
2253
911
117.55
0.0723
2119
776
126.52
0.0783
2165
805
126.45
0.0984
0.0007
0.0000
0.0998
0.0145
0.5464
0.4218
0.9686
0.9559
Experimental
Portfolio
Adjusted
Portfolio
Control
Portfolio
ExperimentalControl Pairs
AdjustedControl Pairs
0.0597
0.0049
554
303
35.29
0.0744
522
184
38.11
0.0801
487
176
37.45
0.0776
0.0002
0.0000
0.0001
0.0214
0.5130
0.6368
0.8489
0.2070
(1)
3IAit 4LIABit et
where MV market value of common equity measured at
the fiscal year end, ABPI book value of total assets minus
property, plant, and equipment and intangible assets, PPE
book value of property, plant, and equipment, IA book
value of intangible assets, and LIAB book value of sum of
liabilities plus book value of preferred stock.
Each of the above variables is scaled by the beginning-ofyear book value of total assets to reduce potential problems
10
44
J Busn Res
2000:49:3545
W. W. Choi et al.
Estimate
White t
Prob |t|
0
1
2
3
4
1.5629
3.9520
4.5911
3.3326
2.7492
8.6924
12.5049
11.7155
4.2168
9.4544
0.0001
0.0001
0.0001
0.0001
0.0001
Adjusted R2
F-value
N
0.5131
270.25
1024
Estimate
White t
Prob |t|
c0
c1
c2
c3
c4
0.0729
1.3053
0.9098
0.8651
0.7176
2.5806
7.4767
2.7507
0.9048
8.5458
0.0100
0.0001
0.0060
0.6342
0.0001
Adjusted R2
F-value
N
0.2438
58.63
755
Variable definitions: RET, annual stock return; EBDA, earnings before extraordinary
items plus depreciation and amortization expenses; DEPR, depreciation expenses of
property, plant, and equipment; AMOR, amortization expenses of intangible assets;
MRET, equally weighted market return adjusted for dividends payout (EBDA, DEPR,
and AMOR are deflated by beginning market value of comon equity.)
We estimate the
following regression model to estimate the relation between
reported amortization expense and market value [Eq. (2)]:
(2)
3AMORit 4MRETt et
where RET annual stock return over the fiscal year, EBDA
earnings before extraordinary items plus depreciation and
amortization expense, DEPR depreciation expense on property, plant, and equipment, AMOR amortization expense
on intangible assets, and MRET equally weighted market
return adjusted for dividend payout.
EBDA, DEPR, and AMOR are deflated by beginning of year
market value of common equity. Model 2 is estimated using
755 firm-year observations with available data over the period
of study.
The results of estimating model 2 are reported in panel B
of Table 6. They indicate that the income statement variables,
EBDA is significantly positively related to firm return and
DEPR is significantly negatively related to firm return. These
results are consistent with theoretical predictions. The market
positively values EBDA and negatively values DEPR. The re-
References
American Institute of Certified Public Accountants, Accounting Principle Board. 1970. APB Opinion No.17Intangible Assets. New
York, NY: AICPA.
Amir, A., Harris, T. S., and Venuti, E. K.: A Comparison of the
J Busn Res
2000:49:3545
45
Value-Relevance of US versus Non-US GAAP Accounting Measures Using Form 20-F Reconciliations. Journal of Accounting Research 31 (1993): 230264.
Atiase, R. K.: Predisclosure Information, Firm Capitalization, and
Security Price Behavior around Earnings Announcements. Journal
of Accounting Research (1985): 2135.
Chauvin, K. W., and Hirschey, M.: Goodwill, Profitability, and the
Market Value of the Firm. Journal of Accounting and Public Policy
13 (1994): 159180.
Egginton, D.: Towards Some Principles for Intangible Asset Accounting. Accounting and Business Research 20 (1990): 193205.
Epstein, L. G., and Turnbull, S. M.: Capital Asset Prices and the
Temporal Resolution of Uncertainty. Journal of Finance 35 (June
1980): 627643.
Hodgson, A., Okunev, J., and Willett, R.: Accounting for Intangibles:
A Theoretical Perspective. Accounting and Business Research 23
(1993): 138150.
Jennings, R., Robinson, J., Thompson II, R. B., and Duvall, L.: The
Relation between Accounting Goodwill Numbers and Equity Values. Journal of Business Finance and Accounting 23 (1996): 513
533.
Johnson, J. D., and Tearney, M. G.: GoodwillAn Eternal Controversy. The CPA Journal 53 (April 1993): 5862.
Lang, M.: Time-Varying Stock Price Response to Earnings Induced
by Uncertainty about the Time Series Process of Earnings. Journal
of Accounting Research 29 (Autumn 1991): 229257.
McCarthy, M. G., and Schneider, D. K.: Market Perception of Goodwill: Some Empirical Evidence. Accounting and Business Research
26 (1995): 6981.
Rabe, J. G., and Reilly, R. F.: Valuing Health Care Intangible Assets.
National Public Accountant 41 (March 1996): 1443.
Reilly, R. F.: The Valuation of Intangible Assets. National Public
Accountant 41 (July 1996): 2640.
Robichek, A. A., and Myers, S. C.: Valuation of the Firm: Effects of
Uncertainty in a Market Context. Journal of Finance 21 (June
1966): 215227.
Rubinstein, M. E.: A Mean-Variance Synthesis of Corporate Financial
Theory. Journal of Finance 28 (March 1973): 167181.