Intangible Asset Valuation: The Impact of Scalability and Economic Dependence

Abstract

I examine two sources of heterogeneity in the valuation of intangible assets: scalability and economic dependence. Scalability positively impacts the value of a firm’s option to extend the use of existing intangible assets. Economic dependence negatively impacts the value of a firm’s option to adapt its intangible assets to a different use. I develop a novel approach to categorize firms based on these characteristics and find significant variation in scalability and economic dependence in the cross section of firms. Further, I find that valuation multiples are increasing in the scalability of intangible assets and decreasing in the economic dependence of intangible assets. These results highlight the importance of considering how the properties of a firm’s intangible assets impact the relation between market prices and accounting information and impact the distribution of a firm’s potential future cash flows.