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Market Valuation of Intangible Asset: Evidence on SG&A Expenditure

In this paper, we investigate the stock market valuation of the intangible asset created by selling, general, and administrative (SG&A) expenditure. Although GAAP requires immediate expensing of SG&A, prior studies show that current SG&A generates future economic benefits, suggesting tha...

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Bibliographic Details
Published in:The Accounting review 2019-11, Vol.94 (6), p.61-90
Main Authors: Banker, Rajiv D., Huang, Rong, Natarajan, Ram, Zhao, Sha
Format: Article
Language:English
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Summary:In this paper, we investigate the stock market valuation of the intangible asset created by selling, general, and administrative (SG&A) expenditure. Although GAAP requires immediate expensing of SG&A, prior studies show that current SG&A generates future economic benefits, suggesting that it creates an intangible asset. We find that the contemporaneous stock market seems to recognize some of the intangible asset value implicit in SG&A. Positive subsequent returns can be earned in firms with a high SG&A intangible asset value. These excess returns are more likely due to investor mispricing than to risk compensation. Furthermore, we find that both analysts' long-term growth forecast revisions and one-year-ahead forecast errors are positively associated with the future value created by current SG&A, indicating that analysts partially incorporate the intangible SG&A asset value into their forecasts. Overall, the evidence suggests that the capital market only partially recognizes the intangible asset value created by SG&A expenditure.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-52468