Intangible Investments and the Cross-Section of Stock Returns

Abstract

In this paper, we examine whether reporting intangible investments as an expense affects firms' stock returns. We propose a comprehensive measure of intangible investments including both of firms' R&D and SG&A expenditures. Each of these two components is important in predicting stock returns in the future. The equal- and value-weighted average return spreads are all between 1.42% and 1.58% at the monthly level between the intangible-investment-sorted quintiles. They are highly significant at the 1% level. After controlling for one component, the return spread sorted on another component is still large and significant. These findings suggest that both of the intangible investment components are important and they include independent information in predicting stock returns.