Reassessing the Mispricing of Intangible Information: Do Investors Recognize the Diminishing Effect on Future Earnings?

Abstract

This paper revisits and provides an explanation for the negative relationship between intangible information and future stock returns, as identified in an influential study by Daniel and Titman. Our empirical analysis reveals that while intangible information has a positive relationship with future earnings, this association weakens in a diminishing fashion overtime. As a result, due to this diminishing effect, intangible information has negative implications for firms’ future profitability growth. Our findings suggest that investors’ mispricing of intangible information stems from their misunderstanding of this diminishing impact of intangible information on future earnings. Once we control for the diminishing effect, the negative relationship between intangible information and future abnormal returns no longer holds.