Intangible to asset growth and the cross-section of returns

Abstract

Intangible assets are despite their increasing importance often omitted in factor investing approaches. I propose an extension to the asset growth factor (Cooper, Gulen, and Schill 2008) by building the intangible-to-asset growth factor based on quarterly fundamental data. Intangible assets are estimated based on a perpetual inventory method to flows of selling, general, and administrative expenses (Eisfeldt and Papanikolaou 2014). I show that long, and long-short portfolios build according to the intangible-to-asset growth factor underperform the market benchmark. Only the long-short strategy exhibits some diversification potential for a portfolio due to its low volatility.