Alpha Architect

Financial Literacy in the US…Doesn’t look great!

This paper aims to analyze financial literacy in the United States, utilizing the most recent data from the National Financial Capability Study (NFCS) collected in 2021 by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation. The paper focuses on the importance of financial literacy, particularly in the context of the economic conditions in the US, such as the COVID-19 pandemic, inflation, and changes in the financial system.

Peer-Reviewed Theory and Expected Stock Returns

The risk-based explanation provided by a peer-based review is a necessary ingredient for considering investment, but it is not a sufficient ingredient.

Do racial barriers prevent Black and Hispanic households from pursuing financial advice?

This article seeks to examine what research says about the interplay between risk tolerance, financial literacy, and trust and their collective impact on the pursuit of financial advice by Black and Hispanic households.

Organization Capital and the Cross-Section of Expected Returns

This paper focuses on "organization capital," representing intangible assets in a firm's key employees that is not captured by classic value measures such as book-to-market. The authors propose a structural model to analyze the impact of organizational capital on asset prices and argue that shareholders perceive firms with high levels of organizational capital to be riskier than those with more physical capital.

Technology Spillover Impacts Stock Returns

The timelier adoption of new technology and the higher likelihood of large-scale technology adoption make the risk associated with technological innovation more systematic, which in turn increases returns required by investors for technology spillover recipients.

The Research and Development Factor

The higher returns to high R&D stocks represent compensation for heightened systematic risk not captured in standard asset pricing models.

Intangible Value: Modernizing the Factor Portfolio

The “Intangible Value Factor” (IHML) can play an additive role in factor portfolios alongside the established market, size, value, quality, and momentum factors. This Six-Factor Model avoids the problematic “anti-innovation” bias of traditional factor portfolios and can be easily implemented using ETFs.

Intangible-Adjusted Profitability Factor

Not accounting for intangibles affects not just value metrics but other measures (such as profitability) that often scale by book value or total assets, both of which are affected by intangibles—and investors recognize at least some of their value.

Improving the Quality Factor by Incorporating Intangible Intensity

In this paper we explain the answer to the question of if intangibles can be used to improve the performance of the quality factor.

Research and Development, Expected Profitability, and Expected Returns

Regardless of the model used, an anomaly for all models is that the empirical evidence demonstrates that stocks with high research and development (R&D) expenses have delivered a premium.

Intangibles and the Value Factor

This figure shows the long, short and long-short leg performance of the intangible value factor in comparison to the traditional value factor. The performance is shown for each of the four regions: U.S., Europe, Japan and Asia Pacific between June 1983 and December 2021. The monthly returns are ex-post volatility scaled to 5% p.m

Automation and Asset Pricing Theory

In this article about asset pricing theory, we examine the research on the impact of technological advances that displace human labor in favor of machine capital to asset pricing.

Brand Values and Long-Term Stock Returns

An equal-weighted portfolio of Best Brands (BBs) in the U.S. earns an excess return of 25 to 35 bps per month during the period 2000-2020. This result is remarkably robust across various factor models and therefore is not driven by exposure to common (risk) factors. The excess returns of the BB portfolio are not due to firm characteristics, industry composition, or small-cap stocks. We provide evidence suggesting that expensing investments in brands (instead of capitalizing them) and the tendency to underestimate the effect of brand name on generating future earnings are two mechanisms contributing to the excess returns.

Employee Satisfaction and Stock Returns

“Employees are our greatest asset” is a phrase often heard from companies. However, due to accounting rules requiring that most expenditures related to employees be treated as costs and expensed as incurred, the value of employees is an intangible asset that does not appear on any balance sheet. That leaves the interesting question of whether employee satisfaction provides information on future returns.

Factor Investing: Are Internally Generated Intangibles Worthless?

As mind-bending as it sounds, although a company’s internally generated intangible investments generate future value, they are currently not accepted as assets under US GAAP. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value. In fact, Amitabh Dugar and Jacob Pozharny, authors of the December 2020 study “Equity Investing in the Age of Intangibles,” concluded that the relationship between financial variables and contemporaneous stock prices has weakened so much for high intangible intensity companies in both the U.S. and abroad that investors can no longer afford to ignore the changes in the economic environment created by intangibles.

Factor Investing: Is a Human Capital Factor on the Horizon?

Taken together, our results suggest that firms’ personnel expenditures reflect not just the cost of labor in the current period but also the investment in human capital contained within that cost, and that market participants fail to fully understand the opportunity and efficacy of human capital development embedded in the disclosure of the expense.

Does the Market Efficiently Price the Value of Brands?

Despite the fact that a company’s internally generated intangible investments create future value, under current U.S. generally accepted accounting principles, internally developed intangibles are not included in reported assets. While research and development is an important intangible asset, so too is branding. Omission of an increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value.

Value Investing and Intangibles

Recent research, including the 2020 studies “Explaining the Recent Failure of Value Investing” and “Intangible Capital and the Value Factor: Has Your Value Definition Just [...]

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