Intangible assets and the cross-section of stock returns

We examine whether intangible assets are priced in the cross-section of stock returns. We find that intangible asset intensity has more explanatory power than size, value, profitability, and investment. An intangibles-based long-short factor has a higher Sharpe ratio than these established factors. Adding the intangible factor to the Fama-French five-factor model improves the description of average returns and makes the investment factor redundant. The intangible factor is distinct from traditional growth strategies, provides a hedge to value and quality strategies, and expands investors’ opportunity sets. Intangible intensity as characteristic is more important than as risk factor, consistent with intangibles-based mispricing.