Market pricing of intangible investment

Characterize how U.S. equity markets price corporate intangible investment—specifically research and development (R&D) expenditures and the investment component of selling, general and administrative (SG&A) expenses—and ascertain whether this intangible investment can function as an independent predictive factor for stock returns that is not substitutable by the Fama–French profitability (RMW) or value (HML) factors.

Background

The authors emphasize that while prior evidence suggests intangibles influence the predictive power of profitability and value, the mechanism by which markets price intangible investment itself and its independence from established factors remains unsettled.

To address this, they develop and test an intangible intensity factor that is orthogonal to Fama–French factors to directly evaluate market pricing of intangible investments and its incremental role in explaining stock returns.

References

Although the effect of intangible investment on the predictive power of profitability (Jagannathan et al., 2023; Rajgopal et al., 2024) or MTB ratio (Arnott et al., 2021; Lev and Srivastava, 2022) may somehow suggest that intangible investment contributes to stock returns, it remains unclear how the market prices intangible investment itself and whether intangible investment can be an independent factor in predicting stock returns that profitability and MTB ratio cannot substitute for.

— The Role of Intangible Investment in Predicting Stock Returns: Six Decades of Evidence  (2505.16336 - Li, 22 May 2025) in Section 1. Introduction