The impact of intangible intensity on the amount and quality of accruals, the tone of narrative disclosures, and the stock of capital assets
Date
2023-07
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Abstract
My dissertation consists of three studies about the impact of intangible intensity on the amount and quality of accruals, the tone of narrative disclosures, and the stock of capital assets. In my first study, presented in Chapter 2, I examine whether the amounts of accruals, their composition (components such as working capital, long-term, conditionally conservative, nonarticulating, and financial accruals), and their properties (alleviating timing difference between the occurrence of economic events and cash flows, as well as accruals’ ability to predict cash flows and earnings) differ for knowledge versus physical firms. I find that, as a percentage of assets and revenues, the absolute value of accruals is larger for knowledge firms than for physical firms. This pattern indicates that accounting for knowledge firms requires at least as much judgment and estimates as for physical firms. Meanwhile, accruals’ timing mitigating role is more prone to estimation errors for knowledge firms. Despite higher errors, knowledge firms’ accruals are as predictive of future earnings and cash flows as for physical firms, at least by the time knowledge firms become large and mature. This study contributes to the ongoing debate on the changing usefulness of accrual accounting vis-à-vis cash accounting, as the composition of listed firms shifts toward knowledge firms. I show that accrual accounting remains prevalent and useful despite this shift. In my second study, presented in Chapter 3, I estimate investment and maintenance portions of research and development (R&D) and MainSG&A (SG&A minus R&D), and their amortization rates, on an industry-year–specific basis. My modified book value, inclusive of capitalized intangibles, exhibits greater association with future returns, investments, and bankruptcies, relative to as-reported and mechanically estimated book values. I provide a better estimate of book values of assets and equity for consumers of financial statements. In my third study, presented in Chapter 4, I develop a model that uses the level of uncertainty in the narrative disclosures of the loss-reporting firms to predict their future earnings. I find that the level of uncertainty in narrative disclosures contains incremental information about the future performance of the loss-reporting firms. This information is economically significant as a size-adjusted hedged portfolio based on this information provides abnormal returns. In additional analysis, I find that the level of uncertainty in the narrative disclosures is more informative for young firms and those that report special items and research and development expenditures.
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Keywords
intangibles, book value, financial statement analysis, valuation
Citation
Iqbal, A. (2023). The impact of intangible intensity on the amount and quality of accruals, the tone of narrative disclosures, and the stock of capital assets (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.