The Usefulness of Acquired Intangible Asset Fair Values in Predicting Future Payoffs
56 Pages Posted: 6 Nov 2018 Last revised: 19 Jun 2023
Date Written: June 19, 2023
Abstract
Proponents of recognizing intangible assets argue intangibles are a key source of value and profitability, while opponents note the considerable inherent measurement uncertainty. Using a broad sample of business combinations from 2003 to 2014, we find that the recorded values of acquired intangibles are a significant predictor of future operating income and cash flows at one-, three-, five-, and seven-year horizons, using both in- and out-of-sample tests. Further, the predictive ability of intangibles dominates that of acquired tangibles, with goodwill being more important, but identifiable intangibles contributing as well. In cross-sectional tests we find the predictive ability of intangibles weakens in settings where the measurement reliability of intangibles is lower. We find customer-related intangibles, and trademarks to a lesser degree, drive the predictive ability of identifiable intangibles. These results are informative to policy makers considering whether hard-to-value intangibles can be measured with sufficient reliability to be useful in predicting payoffs.
Keywords: intangible assets; mergers; acquisitions; goodwill
JEL Classification: M41; G34
Suggested Citation: Suggested Citation