Mark Hirschey

Advertising, R&D Expenditures and the Market Value of the Firm

This article attempts to determine whether investors recognize the long-term, or asset-like, characteristics of advertising and R&D expenditures. In previous studies, it has been conventional to employ Tobins q ratio, defined as the market value of the firm normalized by the replacement cost of tangible assets, as a measure of capitalized market value. However, the q ratio can be viewed as a market cum accounting-based measure that is subject to measurement error to the extent that flaws persist in accounting replacement cost data. The q data will also be biased if firms capitalize nonproductive assets so as to smooth or hide monopoly profits. To provide an unbiased framework for analysis, our study considers the effects of advertising and R&D on the market value of common equity without any accounting-based adjustments. Therefore, this article focuses on the market value implications of advertising and R&D in a manner that minimizes the potential for accounting error or bias.

Union Rent Seeking, Intangible Capital, and Market Value of the Firm

This study considers the effect of unions on intangible capital investment and profitability within t he context of market value rather than a more traditional accounting-based appro ach. Theory is provided suggesting unions are able to affect profitability by sh aring in the economic returns to firm-specific intangible capital. Insupport of this hypothesis, we find unionization reduces the returns to R&D and produces a corresponding limiting influence on R&D investment at the firm level. Copyright 1986 by MIT Press.

Information and contagion effects of bank loan-loss reserve announcements

Abstract Consistent with an information-signaling perspective, negative and statistically significant announcement effects are associated with bank loan-loss reserve (LLR) announcements over the 1985–1990 period. Announcement effects differ between money-center and regional banks and also according to the nature of contemporaneous earnings and dividend disclosures. Moreover Information transfer or ‘contagion’ effects are present in that LLR announcements by regional banks decrease the value of both money-center banks and nonannouncing regional banks. These statistically significant contagion effects suggest a link between the asset quality characteristics of money-center and regional bank loan portfolios.

Goodwill, profitability, and the market value of the firm

Abstract Despite the importance of goodwill to the survival of many businesses, and to the easy working of most, the concept has been the focus of little theoretical and empirical research in accounting or financial economics. This paper identifies a number of firm-specific characteristics with a consistent influence on goodwill, and a consistently positive influence of accounting goodwill numbers on both profitability and the market value of the firm in the nonmanufacturing firm. As such, current accounting goodwill measures offer a useful perspective on the firms intangible capital.

Valuation effects of patent quality: A comparison for Japanese and U.S. firms

Abstract For both Japanese and U.S. firms, measures of patent quality based upon the number of scientific citations have robust market-value influences. These results suggest that investors regard scientific measures of the quality of inventive output as useful indicators of the economic value tied to patenting activity. The possibility of country-specific influences on the effectiveness of patenting activity is also suggested. These findings are of practical relevance because they suggest that scientific measures of patent quality have the potential to offer managers useful guidance concerning the quantity and quality of inventive output and the effectiveness of patent investments.

Information content of accounting goodwill numbers

Abstract Information effects narrowly tied to goodwill write-off announcements are typically negative and material, on the order of 2–3% of the company’s stock price. In the one-year pre-announcement period, negative information effects on the order of −40% are also noted. Post-announcement period information effects of roughly −11% suggest that much, but perhaps not all, of the negative information (valuation) effects tied to goodwill write-off announcements are realized by the end of the announcement period. Negative stock-price effects tied to goodwill write-off decisions indicate that accounting goodwill numbers capture a significant aspect of the intangible dimension of firm value, and suggest that accounting theory and practice is adept at identifying when such intangible assets are impaired.

Market value and patents: A Bayesian approach

Abstract This paper finds a large, positive and statistically significant effect op patent statistics on firm market values. Furthermore, these effects are robust to a variety of alternate specifications of our underlying model. We conclude that patent data provide economically meaningful information on the scope and relative effectiveness of a firms R&D program.

Investor Underreaction to Goodwill Write-Offs

Current accounting rules end regular amortization of goodwill and mandate annual tests for goodwill impairment and loss recognition, when appropriate. These rules make consideration of goodwill write-offs important and timely. In the study reported here, we found that the effects of goodwill write-off announcements were typically negative and material—on the order of −2.94 percent to −3.52 percent of the companys stock price. What makes goodwill write-off announcements especially noteworthy for investors is that additional effects of roughly −11.02 percent were realized by the end of a one-year post-announcement period. These results suggest that investors initially underreact to goodwill write-off announcements and that they need to be aware of the potential for further losses in the post-announcement period. Until recently, goodwill accounting was based on the premise that goodwill and other intangible items were wasting assets with a finite life. The values assigned to intangible assets were amortized over an arbitrary period of time not to exceed 40 years. Financial Accounting Standards Boards Statement No. 142, Goodwill and Other Intangible Assets, does away with the presumption that acquired goodwill and other acquired intangible assets have finite lives, however, and eliminates mandatory amortization. Acquired intangible assets that have finite lives will continue to be amortized over their useful lives but without the constraint of any arbitrary ceiling. Under FASB Statement No. 142 accounting standards, goodwill is to be tested for impairment, at least annually, by using a two-step process. The process begins with an estimation of the fair value of a reporting unit and is a screen for potential impairment. The second step measures the amount of impairment, if any. If the carrying amount of acquired goodwill or acquired intangible assets exceeds fair value estimates, an impairment loss must be recognized against net income in an amount equal to that excess. FASB Statement No. 142 improves financial reporting by helping users of financial statements understand corporate investments in goodwill and other intangible assets and the subsequent performance of those assets. Adoption of FASB Statement No. 142 is relevant for investors because this statement promises to make goodwill write-offs routine corporate events that are based on a quantitative approach. This article provides evidence about investor reactions to company announcements of goodwill write-offs. Investor reactions to such write-offs offer evidence about how investors process potentially important information about a companys profit-making potential. Stock price effects associated with goodwill write-offs offer evidence about the extent to which accounting goodwill numbers capture the economic value of intangible factors with assetlike characteristics. We found statistically significant negative abnormal returns tied to goodwill write-off announcements. Two-day announcement effects for our sample of 80 U.S.-listed companies announcing goodwill write-offs in the 1992–96 period were typically negative and material, on the order of −2.94 percent to −3.52 percent of the companys stock price. Importantly for investors, average one-year post-announcement period effects of roughly −11.02 percent suggest that a significant portion of the negative valuation effects tied to goodwill write-off announcements are realized after the announcement period. The evidence presented here suggests that investors must be wary of negative valuation effects tied to goodwill write-off decisions and the potential for continued underperformance in the post-announcement period.

Bank debt, insider trading, and the return to corporate selloffs

Abstract Recent theoretical models suggest that banks carry out an evaluation and monitoring function for borrowers that entails the collection of private information from borrowers. In this paper, we present empirical evidence that the benefits of this evaluation and monitoring are reflected in the share price reaction to announcements of corporate selloff decisions. We also find a consistency in the pattern of selloff returns with respect to bank debt and insider trading. This implies that decisions of both quasi-insiders (banks) and traditionally recognized insiders (management) convey important information to financial market participants about the valuation of a major managerial announcement.

Firm size and R&D effectiveness : A value-based test

Abstract R&D activity has similar effects on the market value of small and large-scale firms. Using this criterion, size alone does not emerge as a prime determinant of R&D effectiveness.