As part of the series of the „Finance Research Seminar“, VGSF welcomes Robert Korajczyk from Kellogg School of Management to present his research paper.
An Intangibles-Adjusted Profitability Factor
We adjust the Fama and French (2015) profitability factor to reflect investment in intangible assets. Our intangible investment-adjusted profitability factor has significant alpha relative to many extant multi-factor asset pricing models, including the Fama-French five factor model. The improvement is consistent with the prediction of the dividend discount model for equity valuation: accounting for investment in intangible assets helps improve forecasts of the cross section of future operating cash flows, especially at longer horizons. The Fama-French five-factor model prices the cross section of asset returns better than many asset pricing models when we replace its profitability factor with our adjusted profitability factor. A number of anomalies in the literature (e.g., momentum and operating leverage) have insignificant alphas in this intangibles investment-adjusted model.
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