Capitalization Of Intangible Assets And Analysts' Forecasts: Impact Mechanism And Institutional Background

With the development of science and technology, we have progressively moved into a knowledge-based, fast-changing and technology intensive economy in which investments in intangible assets such as human resources, information technology, research and development, and advertising have become essential in order to maintain the firm's competitive position and ensure its future viability. The source of economic value and wealth is no longer the production of material goods but the creation and manipulation of intangible assets. The emphases of companies'operation have already shifted from tangible assets to intangible assets. Considering the importance of intangible assets, disclosure and recognition of intangible assets in financial reports become the central concerns of investors, appraisal agency and information intermediaries (such as financial analysts). Much research has suggested that the information about intangible assets is associated with firms'earnings quality, future profits, and valuation. The disclosures of intangible assets are meaningful for investors to evaluate firms, estimate firm's profit and make investment decision. In other words, the amount of intangible assets presented in financial reports has value relevance. However, in most cases just small part of intangible assets can be reflected in the balance sheet due to the existence of very restrictive accounting criteria for the recognition of assets and their valuation. Firms with more unrecognized intangible assets have more information asymmetry. As a consequence, the information of intangible assets in financial statements is becoming less informative on the firm's current financial position and future prospects. Thus, investors are provided with biased estimates of firm's value and of its capability for the creation of wealth in the future. The relevance and usefulness of the information of intangible assets in financial statements declined. In this scenario, this dissertation investigates the association between capitalized intangible assets and earnings forecasts made by financial analysts who are the wiser and professional user of financial reports. I study the relationship between capitalized intangible assets and analysts'forecast from two aspects. First, from the microeconomic view, I examine whether firms that capitalize a higher proportion of their underlying intangible assets have higher analyst following, lower dispersion of analysts'earnings forecast and more accurate earnings forecast. Second, from the macroeconomic regulation view, I test the influence of accounting standard on the association between capitalized intangible assets and analysts'forecasts. Specifically, I examine whether adoption of the new intangible standards issued in 2006 enhanced the usefulness of the information of recognized intangible assets for financial analysts.The results of my research suggest that firms that capitalize a higher proportion of their underlying intangible assets have higher analyst following, lower dispersion of analysts'earnings forecasts and more accurate earnings forecasts relative to firms that capitalize a lower proportion; The associations between capitalization of intangible assets and analysts'forecasts are different among different type of intangible assets; The adoption of the new intangible assets standards adopted in 2007 strenghthen the association between intangible assets and analysts'forecast, thus the adoption of IFRS enhanced the usefulness of the information of recognized intangible assets for financial analysts.My research contributes new evidence to three research branches. First, for the research of intangible assets, most previous literature use the amount of intangible assets presented on balance sheet as the proxy of intangible assets, and they did not test the assoctiation between the proportions of capitaliszed intangibles and price, and thus did not answer the question that whether the extent of the disclosure of intangible assets on balance sheet will influence the decision of the users of financial statements. My research investigate the how capitalization of intangible assets will influence the most professional user of financial statesments, analysts'following, forecast error and dispersion and thus provide a direct answer for this question. Second, most current research about intangible assets focus on the total intangible assets, few research investigate the different influence of different types of intangible assets, so they did not open the black box of intangible research. My research find that different types of capitalized intangible assets have different influence on analysts'following, forecast error and forecast dispersion, thus address this blank of intangibles research. Third, capitalized intangible assets have strong institutional background, whether the adoption of the new standards of intangible assets improve the association between the capitalized intangible assets and the decision of the users of financial statements and whether the adoption of IFRS increase the usefulness of capitalized intangibles still remain blank. My research addresses to answer this important question.This dissertation not only contributes to the relative theory but also provides useful reference for managers of firms, financial analysts and the departments which issue accounting standards. For managers, with more accounting policy choices, when and how to present the intangible assets on their financial statements have big influence on investors and analysts, so managers can learn whether disclose and how much intangible assets should be disclosed have great impact on the capital costs of the firms. For analysts, usually they just focus on the information of traditional accounting items; they should put more effort on analyzing the information of firms'intangible assts because the capitalization of intangible assets will influence accuracy of their earnings'forecasts. For departments which issue accounting standards, how to make suitable standards to make firms reflect their intangible assets sufficiently and vedically is a very important task. Whether the adoption of international financial accounting standards of intangible assets improve the association between the capitalized intangible assets and the decision of the users of financial statements and whether the adoption of IFRS increase the usefulness of capitalized intangibles is an very important question but it can not be answered directly, this dissertation provide an empirical answer for this question.