"The Linkage Between Intangibles And Profitability "

Abstract

The intangibles can be viewed as strategic assets, since their inclusion in the structure of the total assets allows economic entities to extract a "competiveness rent" and, thus, to enhance the outcomes of their activity. This paper seeks to provide some empirical evidences for the effects exercised by shocks emerged at the level of intangible-to-total assets ratio on profitability in the case of 562 large companies listed on Frankfurt Stock Exchange and London Stock Exchange. We found that, for the full sample, there is a relatively steady relationship between this ratio and various measures of profitability (Return on Assets -ROA, Return on Capital Employed -ROCE and Gross Margin). However, when the two markets as whole or different sectors are considered, there seem to be various significant structural differences and some scale effects in the transmission of the intangibles' impact on profitability. Moreover, we check the robustness of the results in view of two control variables: cash flow-to-operating revenue ratio appears to be the most robust, whereas the effects of solvability ratio are less stable and vary across markets and sectors.

Intangibles as innovative drivers for competitive businesses

“…This evidence does not correspond to the ones obtained by Omil et al (2011), who verified that high-profitable firms are strongly focused on managing their intangibles, which leads to a greater impact and increase on return on assets. In fact, for the estimation of this indicator of performance, intangibles appear to be irrelevant or negatively associated, which contradicts the positive impact found by Bedi (2019), , Nadeem et al (2016), Pucci et al (2015), Tudor et al (2014) and Pal and Soriya (2012).…”

“…The negative or null impact of other intangible assets on TURN is not the most accepted premise in the literature. In fact, these results are not consistent with the commonly positive effect of intangibles on performance, in particular on turnover (Fontana et al, 2018;Osinski et al, 2017;Shakina and Molodchik, 2014;Tudor et al, 2014;Tanfous, 2013;Omil et al, 2011;Heiens et al, 2007), although corroborating the findings of Pucci et al (2015) who found no positive impact of IC measured by intangible assets on turnover.…”

“…The selected dependent variables are TURN, ROA, ROE, ROS, and EPS, in line with literature review (Fontana et al, 2018;Osinski et al, 2017;Nadeem et al, 2016;Lome et al, 2016;Pucci et al, 2015;Nath et al, 2015;Li and Wang, 2014;Shidhar et al, 2014;Shakina and Molodchik, 2014;Wang et al, 2013;Sheikh et al, 2013;Amadieu and Viviani, 2010;Mashayekhi and Bazaz, 2008). Turnover is the indicator which is expected to be the most susceptible to significant effects of intangibles, as this measure directly represents the direct economic benefits obtained by firms (Hussinki et al, 2017;Li and Wang, 2014;Tudor et al 2014;Tanfous, 2013;Gan and Saleh, 2008). The assumption of accounting standards that intangibles are associated with future economic benefits will be supported if a positive and significant impact on these firms' turnover is verified.…”

“…In this scope, for a sample of 562 companies listed on Frankfurt Stock Exchange and London Stock Exchange, Tudor et al (2014) found that there is a positive and steady relationship between intangible assets and multiple performance indicators (ROA, ROCE, etc.). This relationship seems to suffer structural differences and scale effects when considering distinct sectors or the two markets as a whole.…”