Two Studies on the Management and Economic Impact of Intangible Assets

Abstract

This thesis conducts two studies on the management and economic impact of intangible assets. The first study investigates US firms’ myopic investment behaviour in technological and organisational intangibles under capital market pressure to meet earnings consensus targets. The study documents a systematic difference between the interim and fourth quarters in managing earnings towards meeting analysts’ quarterly forecasts. Managers engage in income-increasing accruals manipulation during the interim quarters when the discretion to delay expense recognition is allowed by integral accounting and audit scrutiny is absent. Managers engage in real activities management during the final quarter through reductions in R&D and SG&A expenditure, aggressive sales discounts and overproduction, given the high cost in adjusting real operations. The myopic investment behaviour of cutting R&D and SG&A spending for short-term financial benefits may be harmful to the long-term development of valuable intangibles within a firm. The second study investigates the financial impact of patents, being the output of the R&D process, on firm performance in China. It examines whether China’s unrivaled growth in patent generation is truly driven by strengthened innovativeness or whether it is a result of a spurious counting exercise directed at fulfilling centrally-imposed targets and gaining policy concessions. Using a unique patent dataset from China’s State Intellectual Property Office, the study finds that Chinese patents have positive impact on firms’ revenue and profit particularly in efficiency-driven and customer-focused industries. Patents in general exhibit a constant return to scale and appear as a complementary input to physical assets but a substitute to labour. The government’s vigorous post-2006 policy of enhancing innovation through patent generation has modest positive impact on state owned firms, but negligible impact on non-state owned firms.