11. kohlbeck warfield 2007.pdf

8/9/2019 11. Kohlbeck Warfield 2007.pdf

1/20

Accounting HorizonsVol. 21, No. 1March 2007pp. 23–41

Unrecorded Intangible Assets:Abnormal Earnings and Valuation

Mark Kohlbeck and Terry D. Warfield

SYNOPSIS: We use the unique banking industry setting to demonstrate the impact of

unrecorded intangible assets on abnormal earnings and equity valuation in the context

of the residual income valuation model. We show that the persistence of bank abnormal

earnings and, consequently, the pricing multiples on bank abnormal earnings, vary with

the level of unrecorded intangible assets. Our evidence suggests that unrecorded in-tangible assets are important in understanding the persistence and valuation of ab-

normal earnings in the banking industry. The analysis framework introduced in this

paper could also be used to examine the valuation impacts of intangible assets in other

industries.

Keywords: intangible assets; abnormal earnings; persistence; residual income model.

Data Availability: Data are available from the sources listed in the paper.

INTRODUCTION

Earnings persistence is an important property of financial information that investors

incorporate in assessing firm value. We examine whether unrecorded intangible as-sets are a source of earnings persistence and how such persistence is priced. We use

the residual income model (RIM) setting in the banking industry and provide evidence thatthe pricing of abnormal earnings1 is conditional on the level of unrecorded bank intangibleassets. We use the RIM to investigate the effect of unrecorded intangible assets because(1) the RIM (Ohlson 1995; Feltham and Ohlson 1995, 1996) currently commands significantpopularity, and (2) the model provides a link from unrecorded intangible assets to valuationthat can be empirically investigated.

The accounting for many intangible assets is biased due to the predominant use of historical cost accounting that does not reflect some assets or fair values. In general, the

Mark Kohlbeck is an Assistant Professor at Florida Atlantic University and Terry D.Warfield is an Associate Professor at the University of Wisconsin–Madison.

We appreciate comments received from David Guenther (associate editor), Robert Lipe (editor), two anonymousreferees, Lisa Bryant, Qiang Cheng, Steve Henning, Tom Linsmeier, Matthew Magilke, Mary Lea McAnally, JohnWild, and workshop participants at the University of Wisconsin and the American Accounting Association MidwestRegional Meeting. Financial support from the Wisconsin Alumni Research Foundation and the University of Wis-consin, School of Business is greatly appreciated. Professor Warfield also acknowledges support from thePricewaterhouseCoopers Foundation.

1 Abnormal earnings are the excess of earnings over a required rate of return that is based on book value.

Submitted: July 2005 Accepted: August 2006

Corresponding author: Terry D. WarfieldEmail: twarfield@bus wisc edu


2/20

24 Kohlbeck and Warfield

future benefits of intangible assets are considered uncertain, and as a result, the vast majorityof internally generated intangible assets are not recognized in the financial statements(AICPA 1970; FASB 2001).2 Consequently, economic rents, growth opportunities, and otherfactors associated with intangible assets are not fully captured in the accounting system.

And future earnings are likely to exceed the normal return on book value of equity becauseof these accounting biases (referred to as conservative accounting). That is, internally gen-erated (and unrecorded) intangible assets represent a major source of abnormal earnings.

In straightforward scenarios, unrecorded intangible assets should lead to abnormal earn-ings. However, prior research has not empirically investigated why the two are related orthe implications of unrecorded intangible assets for valuation estimates.3 Significant in-vestments in unrecorded intangible assets, if successful, should generate more persistentabnormal earnings. We document the impact of unrecorded intangible assets on the per-sistence of abnormal earnings and the resulting effects on the pricing of abnormal earningsfor a sample of 1,065 bank-year observations.

We focus on banks because they exhibit a high degree of homogeneity in their oper-

ations, which reduces cross-sectional variation in factors that might otherwise affect valu-ation estimates (Beaver et al. 1989; Beaver et al. 1997). Although most other RIM studiesexclude banks from their samples, banking represents a good context to study the role of unrecorded intangible assets in valuation. Due to a high proportion of financial assets andliabilities, banking firms are less subject to conservative accounting with respect to theiron-balance-sheet items. In addition, methods for estimating intangible assets are more de-veloped in the banking industry. Isolating the valuation role of intangible assets outside of the bank setting is more challenging because non-bank firms generally have higher levelsof tangible assets, which are subject to conservative accounting practices. In addition, non-bank companies have a broader array of intangible assets, many of which are less suscep-

tible to reliable measurement.The primary bank intangible assets arise from a single source—customer relationships

related to deposit, lending, and asset management operations. The largest of these intan-gibles, the core deposit intangible, quantifies a bank’s ability to obtain cash from depositorsat a relatively low cost. Three other bank intangibles have similar characteristics, reflectingadditional cash flows arising from existing customer relationships for mortgage servicing,credit cards, and trust operations.

While these intangible assets give rise to economic rents, they generally receive con-servative accounting treatment. However, unlike other contexts (e.g., research and devel-opment) for which estimates of unrecorded intangible assets can only be derived fromhistorical costs, existing bank disclosures permit the derivation of reasonable fair value

estimates of specific intangible assets. Previous research documents substantial value-relevant unrecorded intangible assets for most banks (Kohlbeck 2004), but it does notexplore the link between the unrecorded intangible assets and abnormal earningspersistence.

We first investigate the persistence of abnormal earnings conditional on the level of unrecorded intangible assets. We show higher persistence of abnormal earnings for banks

2 Capitalization of software costs, movie rights, and mortgage servicing rights are permitted in specific situations(Lev 2001).

3 Our study complements and extends Begley et al. (2006). While their study considers a theoretical approach tomodify the RIM for use with banks because of the existence of unrecorded intangible assets, we take a moredirect and focused approach. First, we consider a wider range of intangible assets and use actual measures of unrecorded intangible assets. Second, we focus on how unrecorded intangible assets influence valuation throughthe persistence of abnormal earnings and we provide insight into why intangible assets affect valuation


3/20

Unrecorded Intangible Assets: Abnormal Earnings and Valuation 25

with greater relative levels of unrecorded intangibles assets. Our second set of analysesconsiders the pricing implications of the differential persistence levels by estimating avaluation model for banks conditional on the magnitude of unrecorded intangible assets.The abnormal earnings of banks with higher levels of unrecorded intangible assets are more

persistent and receive higher pricing multiples. We also estimate a valuation model withbook value of equity and abnormal earnings adjusted for the impact of the unrecordedintangible assets in our sensitivity tests. We find that adjusted book value of equity isvaluation sufficient, consistent with the unrecorded intangible assets being the primarysource of bank abnormal earnings.4

Investors and financial analysts are increasingly interested in intangible assets. Ourfindings imply that intangible asset measures or factors that are indicative of intangibleassets should be considered when assessing value. That is, our research shows that unre-corded intangible assets are important in the determination of bank value through the per-sistence of abnormal earnings, which complements the growing area of intangible assetresearch. Although our evidence is based on banking firms and the RIM, it suggests the

need to consider intangible assets with other valuation models and/or other industries.The remainder of this paper is organized as follows. Background and motivation are

provided in the next section followed by the presentation of our analysis framework. Theresults are discussed in the fourth section, and concluding remarks follow.

BACKGROUND AND MOTIVATION

Residual Income Model

We investigate the influence of unrecorded intangible assets on earnings persistenceand valuation in the residual income model (RIM) setting for two reasons. First, the RIM,as reintroduced by Ohlson (1995) and Feltham and Ohlson (1995, 1996), currently com-

mands significant popularity in academic and financial circles. Second, the model providesa link between unrecorded intangible assets (goodwill) and abnormal earnings. This link can be empirically investigated to improve our understanding of the influence of unrecordedintangible assets on abnormal earning as an alternative to including the unrecorded intan-gible assets as other value-relevant information in the RIM.

The RIM starts with the assumption that firm value equals the present value of expecteddividends. When combined with a ‘‘clean surplus accounting’’ assumption, the model pro-duces a valuation based on current book value of equity and expected abnormal earnings.5

The addition of the linear information dynamics assumption (Ohlson 1995) relates futureabnormal earnings to current abnormal earnings and permits Equation (1) to be stated in

current measures:

MV BV AE v . (1)t t t t

In Equation (1), MV is the market value of equity; BV is the book value of equity; and AE is abnormal earnings, all as of the current period. The parameter incorporates the per-sistence of abnormal earnings (as well as time value of money and the risk properties of

4 Valuation sufficiency means that when considering an accounting information item (e.g., book value), no otherinformation item (e.g., earnings) is necessary to determine price.

5 See Ohlson (1995) and Feltham and Ohlson (1995) for the complete derivation of the RIM model. The cleansurplus assumption implies that when some value-relevant items are excluded from current book value (forconservatism or other accounting reasons), the value implications of those items will be reflected in expectedabnormal earnings


4/20


abnormal earnings). Persistence measures the extent to which current year abnormal earn-ings are predictive of future abnormal earnings.

As indicated in Equation (1), an important insight of the RIM is that value is derivedfrom both the book value of equity and abnormal earnings elements. The relative valuation

weights attached to these elements depends on how well the book value component capturesall value-relevant information. For example, the book value element may be nearly orcompletely valuation-sufficient when a company has few growth opportunities or when allvalue-relevant assets are recorded. In this context, current period abnormal earnings havenothing to add, and equals 0. In contrast, the earnings element plays a more importantrole when book value excludes some value-relevant assets and/ or when recorded assetshave significant growth prospects that are not reflected in their historical costs. For thesecompanies, the extent to which current abnormal earnings are useful in predicting futureabnormal earnings—in other words, the persistence of abnormal earnings—is important inassessing value and can be significantly greater than 1.

Prior RIM research examines the determinants of abnormal earnings. Analytic studies,

such as Zhang (2000), conclude that economic rents and conservative accounting contributeto non-zero abnormal earnings. Empirically, Cheng (2005) finds that both the level andpersistence of differential abnormal return on equity increase with market share, firm size,firm-level barriers to entry, and firm-level conservative accounting factors (as captured byexpensing R&D). Similarly, Jansen (2002) decomposes residual income into economic andaccounting components and documents the association of these components with marketpower and accounting bias.6

In summary, intangible assets are associated with economic rents, and these assetsgenerally are unrecorded until realized. Intangible assets can represent the expected addi-tional cash inflows arising from a firm’s recorded investments that create or prolong com-

petitive advantages (one source of economic rents). Intangible assets can also representother internal projects (for example, R&D) that generate additional future cash inflows, butthe expenditures are expensed in the current period (conservative accounting). As indicatedin Cheng (2005), both economic rents and conservative accounting are associated withearnings persistence. We therefore consider the joint effects of a specific source of economicrents and conservative accounting by examining the effect of unrecorded bank intangibleassets on the persistence of abnormal earnings and how the market responds to differentpersistence levels.

In the next section, we develop the theoretical linkages between unrecorded intangibleassets and valuation in our bank setting.

Theoretical Linkages—Intangible Assets

RIM valuation theory suggests that abnormal earnings can arise due to either economicrents or conservative accounting (Ohlson 1995; Feltham and Ohlson 1995). In either case,future earnings are not recorded in the current period balance sheet. We refer to these asunrecorded intangible assets. Our context is similar to Feltham and Ohlson (1995) where

6 Prior RIM research also examines the underlying assumptions of the model by exploring the persistence inabnormal operating earnings, growth in operating assets as a component of book value, and conservatism inreporting operating assets (Feltham and Ohlson 1996; Liu and Ohlson 1999; Zhang 2000; Ahmed et al. 1998).The results from these studies generally support the RIM assumptions. Other studies comparing the accuracy of RIM value estimates to those from competing valuation models yield mixed results (Bernard 1995; Francis etal. 2000; Penman and Sougiannis 1998; Dechow et al. 1999; Begley et al. 2006). Efforts to improve the accuracyof RIM valuation estimates generally focus on the time-series properties of abnormal earnings (Myers 1999;Francis et al 2000)


5/20


abnormal earnings are related to operating activities and not financial activities. However,in a bank setting, the financial activities are the operating activities. We therefore focus onthe unrecorded bank intangible assets associated with the financial assets and liabilities assources of abnormal earnings.

We first consider whether the persistence of abnormal earnings varies with the level of unrecorded bank intangible assets. Prior empirical research of the determinants of abnormalearnings is generally consistent with this assumption (for examples, see Cheng 2005; Jansen2002). However, Cheng’s (2005) findings of barriers to entry and market share as sourcesof persistence are less applicable to a bank setting. The banking industry, with over 9,000commercial banks in 1998, and the largest bank holding just 6 percent of U.S. deposits, isgenerally competitive with low barriers to entry and no dominant members.

Customer relationships are a primary source of bank abnormal earnings. Banks investin customer relationships when managers believe the investment will provide future returnsby increasing revenue or decreasing costs. Banks offering superior service and productswill likely experience lower customer turnover, and managers will attempt to protect op-

erations and products that provide above average returns. In this context, Begley et al.(2006) consider lending and deposit activities as sources of positive net present value, buttheir focus is on theoretically developing and then validating a valuation model that is basedon the RIM. While we also use the RIM setting, our study investigates unrecorded intan-gible assets themselves and their association with persistence of abnormal earnings anddifferential valuation effects.

Significant investments in customer relationships, superior service and products, andabove-average returns also are consistent with higher levels of unrecorded intangible assets.For example, bank managers cite economies of scale in customer relationships as the basisfor bank merger activity during the past decade. While economies of scale will likely

influence the level of bank intangibles and the effects of bank intangibles on the persistenceof abnormal earnings, the banking economics literature (e.g., Hughes et al. 2002) suggeststhat banks may experience diminishing returns to their investment in these unrecordedintangible assets.

The common attribute across bank intangible assets is therefore the maintenance of thecustomer relationship. By maintaining the customer relationship, the bank creates a lastingintangible asset that in turn increases the sustainability of future abnormal earnings. Thus,the first link we establish is that between the level of unrecorded intangible assets and thepersistence of abnormal earnings. Individually and collectively, the above factors suggestthat banks with higher levels of unrecorded intangible assets will exhibit greater persistenceof abnormal earnings.

If estimates of unrecorded bank intangible assets are associated with differing persist-ence levels, will investors price this difference? As indicated in Equation (1), persistenceis a determinant of the pricing coefficient on abnormal earnings. As a result, differences inabnormal earnings persistence levels should be manifested in pricing effects. We thereforeexpect that the abnormal earnings of firms with higher levels of unrecorded intangible assetswill exhibit higher pricing coefficients arising from higher persistence of abnormal earningsassociated with unrecorded intangible assets. That is, if abnormal earnings of firms withhigher levels of unrecorded bank intangible assets are more persistent, then firm valuationsshould reflect a premium because investors value persistent earnings. Thus, the second link we establish is the positive pricing effect associated with increased persistence of the ab-

normal earnings for companies with higher levels of unrecorded intangible assets.In the next section, we describe the framework for empirically documenting these

linkages in the context of the banking industry


6/20


ANALYSIS FRAMEWORK

We first discuss the empirical proxies for bank intangible assets. We then develop themeasurement of abnormal earnings persistence and related tests of the association betweenunrecorded intangible assets and abnormal earnings persistence. Finally, we present the

empirical models for investigating the effect of differing unrecorded intangible asset levelson the pricing of abnormal earnings.

Bank Intangible Assets

We examine the following bank intangible assets: core deposits, mortgage servicing,credit cards, and trust operations. The core deposit intangible reflects a bank’s favorabledeposit financing benefit and is based on deposits being a bank’s primary source of funding.The interest cost to banks in accepting core deposits is generally less than alternatives suchas certificates of deposits or debt financing. Lower interest costs combined with the stableand long-term nature of core deposit accounts creates an intangible asset that is realized

through future reduced financing costs. The value of mortgage servicing rights is the presentvalue of future servicing fee income after accounting for prepayment risk and related ex-penses incurred during the loan’s life. Similarly, credit card and trust operations intangibleassets represent the present value of future fees to be generated from existing customerbases. Each of these intangible assets represents expected net future cash flows derivedfrom existing customer relationships. Banks also can generate earnings by capitalizing onthese relationships to cross-sell other bank services.

These bank customer relationships therefore give rise to important intangible assets.However, the values of these customer relationships are generally not reflected in bank book values and represent unrecorded intangible assets. Previous research documents sub-

stantial unrecorded intangible assets in almost all banks (see Kohlbeck 2004). We usediscounted cash flow techniques that are based in part on methodologies used by valuationexperts to estimate these intangible assets (mortgage servicing rights, credit card intangible,core deposit intangible, and trust operations intangible.)

Our general approach is to determine future net income amounts (future economicrents) by estimating (1) the net income related to the intangibles asset’s value, (2) a decayrate to account for attrition of the existing asset or liability portfolio, and (3) the period of benefit. The projected net income is discounted to arrive at intangible asset estimates usingbank- and time-period-specific weighted average cost of capital.

The general form of our measurement process is as follows:

t M i,t,k E (CF ) (1 T )k,i,t,j IAEST . (2)k,i,t ( jt )(1 D ) jt 1 i,t,j

In Equation (2), IAEST is the estimate of the k th intangible asset type for bank i at time t ; M is an estimate of the period of benefit; E (CF ) is an estimate of future cash flows relatedto intangible asset k ; T is the marginal tax rate (assumed to be 40 percent); and D is thebank’s weighted average cost of capital. Additional discussion of estimation of each intan-gible asset measure is included in the appendix.

From the sum of each bank’s intangible asset estimates, we subtract the amount alreadyrecorded by the bank as identified intangible assets to arrive at the unrecorded portion:


7/20


4

UIA IAEST IA . (3)i,t k,i,t i,t k 1

In Equation (3), UIA is each bank’s estimated unrecorded intangible assets; IAEST is the

estimate of each type of intangible asset from Equation (2); and IA is the net book valueof each bank’s identified intangible assets included in the balance sheet.7

Persistence of Abnormal Earnings

As discussed earlier, the link from unrecorded intangible assets to bank value is man-ifest through abnormal earnings, and in particular, the persistence of abnormal earnings.Intuitively, persistence refers to the extent to which current year abnormal earnings arepredictive of future abnormal earnings. Consistent with prior RIM research, we measurepersistence based on the correlation between current and prior year abnormal earnings.8

We use the following regression of one-period-ahead abnormal earnings on current abnor-

mal earnings to estimate the persistence of abnormal earnings (the firm subscripts areomitted here and in subsequent equations):9

AE AE ε . (4)t 1 0 1 t t 1

In Equation (4), AE represents abnormal earnings and is defined as income available forcommon shareholders before extraordinary items less the time-specific risk-free return onbeginning of year book value of common equity.10 The estimated coefficient for abnormalearnings in Equation (4),

1, represents an overall estimate of its persistence. We examine

the impact of the level of unrecorded intangible assets on the persistence of abnormalearnings (our first link) by examining whether banks with higher levels of unrecorded

intangible assets exhibit higher abnormal earnings persistence.

Pricing of Abnormal Earnings

To provide evidence on the pricing effects of unrecorded intangible assets, we use thefollowing model based on Equation (1):11

7 If the recorded intangible asset exceeds the total of our estimate, then we set the unrecorded intangible asset tozero. This affects only seven observations, or less than 1 percent of the observations. We also separate theunrecorded intangible asset estimate into its three known components—unrecorded mortgage servicing rights,unrecorded credit card intangible, and unrecorded other identifiable intangible assets consisting of the coredeposit and trust operations intangible assets—and repeat our analyses. Our overall results appear to be drivenby the other identifiable intangible assets and to a lesser extent the credit card intangible. The increased rec-

ognition of mortgage servicing rights under existing accounting principles may be responsible for its weakerresults.

8 This process is referred to as autoregressive with one lag (or AR1). Findings of prior empirical research (forexample, see Dechow et al. 1999; Bar-Yosef et al. 1995) are generally consistent with this assumption. We alsoanalyzed the abnormal earnings process for our data (untabulated) and find that an AR1 process is reasonable.

9 This equation and subsequent estimating equations are scaled by beginning of period book value of equity tocontrol for scale effects (Christie 1987; Brown et al. 1999). Note that a separate

1 is estimated for each bank.

10 We assume risk-neutrality consistent with Ohlson (1995) and use a risk-free rate to maximize sample size. Loand Lys (2000) suggest that in cross-sectional tests, a firm-specific discount rate should be used in the mea-surement of abnormal earnings. In sensitivity tests, we allow the discount rate to vary by firm by using a firm-specific discount rate that is calculated as the risk-free rate plus the firm’s beta (calculated using weekly returnsover the preceding year and the Capital Asset Pricing Model) times a fixed market premium. Although thealternative measurements increase the number of bank observations with negative abnormal earnings, by virtueof a higher minimum return, our findings are not significantly affected.

11 We measure the share price as of the end of the first quarter following the fiscal year-end to capture theinformation lag from releasing annual financial information after year-end.


8/20


MV BV AE . (5)t 0 1 t 2 t t

To test whether the pricing coefficient of abnormal earnings varies with the level of unrecorded intangible assets (due to variation of the persistence of abnormal earnings), we

estimate the model for different subgroups of the sample, based on level of unrecordedintangible assets.12 If abnormal earnings of high unrecorded intangible asset banks are morepersistent, then we should observe a higher estimated coefficient on abnormal earnings forgroups of banks with higher levels of unrecorded intangible assets. 13

EMPIRICAL RESULTS

Data

Financial data from 1992 to 1998 for publicly traded bank holding companies aregathered from annual financial reports, annual regulatory reports, and the Center for Re-search in Security Prices (CRSP) research tapes. We start with a sample of 347 bank holdingcompanies over six years (1,492 bank-years). We first exclude 190 bank-year observations

that lack one-period-ahead abnormal earnings that are necessary for our persistence anal-ysis. Second, prior research reports that coefficients differ between firms with positive andnegative earnings (Collins et al. 1999; Leibowitz 1999), and we anticipate that similardifferences will also exist with respect to abnormal earnings. Because negative abnormalearnings are less persistent than positive abnormal earnings, we exclude 237 bank-yearobservations with negative abnormal earnings. In order to provide a consistent samplebetween our tests, we perform both our persistence and pricing tests after both eliminations.The final sample consists of 1,065 bank-year observations.

Descriptive statistics for the sample are presented in Table 1. The pooled sample dataexhibit significant variation in bank size, operations, growth, profitability, and estimated

unrecorded intangible assets. The estimated unrecorded intangible assets are substantialaveraging 40.7 percent of book value of equity. Note that banks also have significant re-corded intangible assets (4.3 percent of book value of equity), primarily arising from depositrelationships, mortgage servicing, credit cards, and trust operations that were acquired inbusiness combinations.14

In Table 2, we report the means of the financial data reported in Table 1 for the bank-year observations partitioned into deciles according to the magnitude of total UIA dividedby prior year-end’s book value of equity. The data reveal that banks with the lowest levelsof UIA are smaller and have lower deposits to assets, abnormal earnings, and return onequity. Not surprisingly, given the conservative accounting treatment for UIA, the market-to-book ratios generally increase as we move from the lowest to highest UIA deciles. The

largest UIA decile has the highest asset growth and return on equity. UIA for banks in thehighest UIA decile comprise approximately 90 percent of book value of equity.

Figure 1 plots the average total estimated intangible assets ( IA) for each UIA decile asa bar, and the average UIA is displayed as a line. In addition, each bar is split according

12 In estimating Equation (5), we make a simplifying assumption that persistence level is constant across all banksexcept for the impact of unrecorded intangible assets. This assumption restricts the overall persistence level tobe equal for all banks within the subsample. This restriction may introduce noise that could bias against detectingthe role of persistence in the pricing of bank shares.

13 To formally test the association between unrecorded intangible assets and abnormal earnings persistence andvariation in valuation conditional on the level of unrecorded intangible assets, we use a regression model withinteraction terms. These models and results are discussed in the next section.

14 GAAP requires identifiable intangibles acquired in a business combination to be recorded at fair value. Similarintangibles that are internally developed cannot be recorded.


9/20


TABLE 1

Descriptive Statistics, 1992–1998

Variablea

(n

1,065) Mean Median

Standard

Deviation

25th

Percentile

75th

PercentileAssets ($ in millions) 16,844.6 3,050.6 40,864.9 1,138.4 11,981.1

Deposits / Assets (%) 77.0 79.0 10.4 70.6 85.1

Abnormal Earnings ($ inmillions)

51.3 7.1 159.6 2.1 33.4

Market-to-Book Value of Equity (%)

198.2 175.0 88.7 142.9 232.3

Adjusted Market-to-Book Value of Equity (%)

143.3 132.6 63.4 101.4 169.1

Asset Growth (%) 17.4 11.0 23.3 5.3 22.6

Return on Assets (%) 1.2 1.2 0.4 1.0 1.4

Return on Equity (%) 14.4 14.7 5.4 12.4 16.8Estimated Unrecorded

Intangible Assets/Equity (%)40.7 35.2 27.7 25.7 49.4

Recorded Intangible Assets /Equity (%)

4.3 1.7 7.5 0.3 4.7

Total Estimated IntangibleAssets/Equity (%)

44.9 39.0 29.2 28.7 53.4

a Variables are defined as follows (all amounts are as of year-end unless stated otherwise): Assets are totalassets; Deposits/Assets is the ratio of total deposits to total assets; Abnormal Earnings is the excess of earnings over a required rate of return; Market-to-Book Value of Equity is the ratio of market value of common equity to book value of common equity; Adjusted Market-to-Book Value of Equity is the ratio of market value of common equity to the sum of the book value of common and an estimate of unrecordedintangible assets; Asset Growth is percentage change in total assets during the year; Return on Assets isincome before extraordinary items divided by average assets; Return on Equity is income before extraordinaryitems divided by average common equity; Estimated Unrecorded Intangible Assets is the ratio of the differencebetween each bank’s total estimated intangible assets and its recorded intangible assets to book value of equity;Recorded Intangible Assets is the ratio of the sum of the net book values of each bank’s identified intangibleassets included in the balance sheet to book value of equity; and Total Estimated Intangible Assets is the ratioof the sum of the estimates of each bank’s intangible assets to book value of equity.

to intangible asset type. Examination of the components of IA presented in Figure 1 revealsthat approximately 56 percent of IA comes from deposit intangibles.15 For the middle dec-iles, deposit intangibles make up an even higher proportion of IA. For example, in the fifth

decile, deposit intangibles comprise 70 percent of total IA, while the credit card and trustintangibles together account for less than 26 percent of total IA. The level of the mortgageservice rights is fairly constant across the UIA deciles with the exception of the extremetwo deciles where the levels of mortgage servicing rights are more than 50 percent greaterthan in the other deciles. Interestingly, banks with the lowest and highest UIA also reporta higher proportion of recorded intangible assets. Although the middle decile banks reportlower recorded intangible assets, the proportion of UIA attributed to deposit intangibles ishigher for these middle deciles (generally over 70 percent).

15 Morgan and Cates (1994), Berkovec et al. (1997), Ausubel (1991), and Nash and Sinkey (1997) provide de-

scriptive information about intangible assets of banks based on acquisition premium data. Our estimates of thefair values of intangible assets are generally consistent with their results and available SFAS No. 107 disclosures.


10/20

A c c o u n t i n gH or i z o n s ,M ar c h 2 0 0 7

TABLE 2Mean Statistics by Unrecorded Intangible Asset Decile, 1992

Variablea

(n 1,065)1

Lowest2 3 4 5 6

Assets ($ in millions) 12,762.8 5,433.6 4,591.1 10,623.7 14,325.0 24,213.2

Deposits / Assets (%) 68.5 75.1 78.2 77.1 79.9 78.5

Abnormal Earnings ($ inmillions)

14.2 13.0 12.7 31.6 44.7 66.1

Market-to-Book Value of Equity (%)

186.2 185.3 191.2 194.9 198.1 188.0

Adjusted Market-to-Book Value of Equity (%)

168.7 153.9 151.8 149.7 149.0 136.5

Asset Growth (%) 16.4 16.2 14.1 10.5 12.8 11.9

Return on Assets (%) 1.1 1.2 1.2 1.1 1.2 1.1

Return on Equity (%) 12.0 13.9 14.1 13.1 14.9 13.9

Estimated UnrecordedIntangible Assets/Equity (%)

10.8 20.6 25.8 30.3 33.2 38.3

Recorded Intangible Assets / Equity (%)

6.6 4.3 3.3 3.4 2.7 3.4

Total Estimated IntangibleAssets/Equity) (%)

16.8 25.0 29.2 33.8 35.9 41.7

a Refer to Table 1 for variable definitions.


11/20


FIGURE 1

Estimated Intangible Assets by Unrecorded Intangible Asset Decile

0

10

2030

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10

Unrecorded Intangible Asset Decile

$ / E q u i t y

Core Deposit Intangible Mortgage Servicing RightsCredit Card Intangible Trust Operations Intangible

Unrecorded Intangible Assets

Evidence on Linkages

The theory presented earlier indicates that future abnormal earnings are expected whenintangible assets are not recorded. We first examine the correlations between one-period-ahead abnormal earnings and unrecorded intangible assets. The overall correlation of 0.324(p-value 0.001) indicates future abnormal earnings are associated with UIA.16

To provide evidence that unrecorded intangible assets affect the persistence of abnormalearnings, we estimate Equation (4) over UIA quartiles. As reported in Table 3, we find thatthe persistence parameters,

1, for the third and fourth UIA quartiles are significantly greater

than those for the first and second UIA quartiles. These results support the first link in ouranalysis and suggest that unrecorded intangible assets should play a role in the valuation

of abnormal earnings.We also estimate a pooled regression that allows the persistence parameter to vary by

UIA level. This measure, DUIA, is developed by assigning each bank to one of ten portfoliosbased on the level of unrecorded intangible assets divided by prior year-end’s book valueof equity (1 lowest level, 10 highest level) and transforming the portfolio ranking torange between 0 and 1. We formally test the differential effect of unrecorded intangibleassets on bank valuation in the following equation:

16 We also estimate by-quartile and pooled regressions of one-period-ahead abnormal earnings on unrecordedintangibles assets and two variables based on prior research, the banking literature, and our descriptive statisticsthat may be related to abnormal earnings—size and growth. We confirm that unrecorded intangibles assets are

positively related to future abnormal earnings consistent with our expectation that UIA gives rise to futureprofitability.


12/20


TABLE 3

Persistence of Abnormal Earnings Conditional on Unrecorded Intangible Assets

Equation (4): AE t 1

0

1 AE

t ε

t 1

UIA Quartile n R2

Variablesa

Intercept( 103) AE

1 (Lowest UIA) 262 53.7% 1.662( 0.001)

0.585( 0.001)

2 268 48.2% 1.772( 0.001)

0.444( 0.001)

3 268 69.8% 1.246( 0.001)

0.784( 0.001)

4 (Highest UIA) 267 63.1% 3.234

(

0.001)

0.751

(

0.001)p-values for testing that the coefficient is zero are in parentheses.a AE is abnormal earnings. The intercept and AE are scaled by prior year-end’s book value of equity, and the

portfolios are based on UIA divided by prior year-end’s book value of equity.

AE AE AE * DUIA ε . (6)t 1 0 1 t 2 t t t 1

We find that the persistence parameter varies positively with UIA in this pooled regression(not tabulated). The persistence for the lowest decile (w2) equals 0.450 (p-value 0.001),and persistence increases with the level of UIA (2 0.332, p-value 0.001). The results

are robust when we control for size, growth, and year.We also obtain bank-specific estimates of persistence by estimating Equation (4) by

bank over the sample time period. We regress the persistence measures on the level of unrecorded intangible assets in the latter years of our sample and find that our bank-specificpersistence measures are positively related to unrecorded intangible asset level.

We then examine the effects of UIA, if any, on the pricing of bank shares. In Table 4,we report the estimation of Equation (5) by UIA quartile. While the pricing coefficient forbook value of equity is fairly consistent around 2.0, the pricing coefficient for abnormalearnings generally increases with UIA.

Analogous to the persistence tests, we also assess the pricing effects using the DUIAinteraction. By interacting the ranking variable with abnormal earnings and book valuevariables in Equation (5), we formally test the differential effect of unrecorded intangibleassets on bank valuation:

MV BV AE DUIA DUIA * BV t 0 1 t 2 t 3 t 4 t t

DUIA * AE . (7)5 t t t

We find that the pricing of abnormal earnings varies positively with UIA in this pooledregression (untabulated), with the relative UIA effect captured by an interaction variable of abnormal earnings and UIA level (

5 8.595, p-value 0.001). This pricing analysis

indicates that the incremental pricing effects are not due to the extent of UIA because thedifferential persistence effect remains significant after including DUIA to capture the levelof UIA effect Further the main abnormal earnings effect (

2) is not significant suggesting


13/20


TABLE 4

Market Pricing

Equation (5): MV t

0

1 BV

t

2 AE

t

t

UIA Quartile n R2Intercept

( 103)

Variablesa

BV AE

1 (Lowest UIA) 262 82.9% 13.719(0.014)

1.940( 0.001)

4.271(0.001)

2 268 89.3% 16.013( 0.001)

2.049( 0.001)

2.031(0.039)

3 268 88.1% 20.500( 0.001)

2.054( 0.001)

4.549( 0.001)

4 (Highest UIA) 267 82.5% 7.011(0.205)

1.962( 0.001)

11.147( 0.001)

p-values for testing that the coefficient is zero are in parentheses.a Variables are defined as follows: MV is market value of equity at the end of the first quarter following the

fiscal year-end; BV is the book value of equity; and AE is abnormal earnings. The intercept and all variablesare scaled by prior-year-end’s book value of equity, and the quartile portfolios are based on UIA divided byprior-year-end’s book value of equity.

that book value is relatively more valuation sufficient for banks with lower levels of un-recorded intangible assets where the sources of abnormal earnings are limited.

Our valuation analyses indicate that UIA are associated with bank price through thepersistence of abnormal earnings. However, our results are not strictly monotonic acrossUIA quartiles, and the persistence levels do not map directly to the pricing of abnormalearnings. Separate analyses indicate that the monotonic increase and mapping improve whenwe use finer UIA partitions and allow for nonlinearity.

Overall, the second link in the framework is supported—the pricing of abnormal earn-ings increases as unrecorded intangible assets increase. That is, the valuations reflect thegreater persistence of the abnormal earnings of firms with greater levels of unrecordedintangible assets.17

Alternative Valuation Approaches

Our primary results provide evidence that the persistence and pricing coefficients forabnormal earnings increase with the magnitude of unrecorded intangible assets. We consider

two alternative specifications of the valuation model to address other related implementationpossibilities. First, we adjust book values and abnormal earnings for unrecorded intan-gible assets to correct for the conservative accounting. Second, we model unrecorded in-tangible assets as other value-relevant information. As discussed below, our earlier findingsare corroborated by the results from these alternative specifications.

We extend our pricing analysis by estimating Equation (8) using book values andabnormal earnings adjusted for the impact of unrecorded intangible assets:

17 We estimate the pooled regressions of Equations (4) and (5) by year, using fixed time effects, using fixed firmand time effects, and without eliminating the negative abnormal earnings observations. We also include bank size (total assets) and growth (year-to-year change in assets) as additional potentially value-relevant informationin Equation (5). Results are consistent with those reported. Given the promulgation of new accounting standardsfor investments and mortgage servicing rights (SFAS No. 115 in 1993, and SFAS No. 122 in 1995 [FASB1995]), we also re-examine the tests for different subperiods of the data. The primary inferences are robust tothe inclusion of interaction terms to measure the effects of SFAS No 122 and SFAS No 115


14/20


TABLE 5Adjusted Residual Income Model

A AEquation (8): MV BV AE t 0 1 t 2 t t

Variablesa,b

(n 628)

Equation (5)

Coefficient t-statistic

Equation (8)

Coefficient t-statistic

Intercept ( 103) 16.87*** 3.9 6.57 1.4

BV / BV A 1.94*** 24.9 1.59*** 26.7

AE / AE A 9.68*** 7.7 0.07 0.2

Adjusted R2 83.9% 81.7%

*** Significant at the 0.01 level.a Variables are defined as follows: MV is market value of equity at the end of the first quarter following the

fiscal year-end; BV is the book value of equity; BV A is the book value of equity plus the estimate of unrecorded intangible assets; AE is abnormal earnings; and AE A is abnormal earnings adjusted for estimates of unrecorded intangible assets. The intercept and all variables are scaled by prior year-end’s book value of equity.

b Mean statistics for the explanatory variables scaled by prior-year-end’s book value of equity are as follows:

Unadjusted Adjusted

BV / BV A 1.211 1.718

AE / AE A 0.058 0.152

A A MV BV AE . (8)t 0 1 t 2 t t

In Equation (8), BV A is the book value of equity plus the estimate of unrecorded intangibleassets ( BV UIA); AE A is abnormal earnings adjusted for estimates of unrecorded intangi-

ble assets (earnings plus the change in unrecorded intangible assets during the year less therequired rate of return based on adjusted book value of equity); and MV is as previouslydefined. The change in UIA represents the income statement impact from incorporating theestimated unrecorded intangible asset value in the balance sheet, and this impact capturesthe creation of new intangible assets, changes in value estimates, and the wasting of prior-year amounts. To the extent our measure of unrecorded intangible asset captures the pricingof unrecorded intangible assets by investors, we expect that the influence of adjusted ab-normal earnings in the estimation of Equation (8) will be less than unadjusted abnormalearnings in Equation (5). This test can, therefore, provide corroborating evidence on thepricing effects of unrecorded intangible assets.

Table 2 demonstrates an association between unrecorded intangible assets and market-to-book ratios. Not surprisingly, the reported and adjusted market-to-book ratios are similarfor banks in the lowest decile of UIA (1.86 versus 1.68). But for banks with the highestlevels of unrecorded intangible assets, the adjusted ratio of 1.19 is quite smaller than thereported ratio of 2.27. In Table 5, we report the results of pooled regressions based on book values and abnormal earnings adjusted for estimated unrecorded intangible assets.18 Onlybook value exhibits a significant association with price after we adjust book value andabnormal earnings for the impact of UIA. That is, book value becomes valuation sufficientwhen primary sources of abnormal earnings (UIA) are included in book value.

18 The sample size of 628 reflects the loss of observations that lack necessary lagged data to adjust book value of equity and abnormal earnings. Similar results are obtained when we separately estimate the equation for eachUIA quartile


15/20


Information items, such as unrecorded intangible assets, are sometimes modeled as‘‘other information’’ that is useful in explaining price. In this case, rather than being viewedas a determinant of the persistence of abnormal earnings, the unrecorded intangible assetinformation is supplemental to book value of equity and abnormal earnings. We modify

Equation (7) to include UIA as an independent variable to investigate this possibility. Theresults for this model (not tabulated) corroborate our earlier findings with respect to thepersistence of abnormal earnings increasing in UIA (the estimated coefficient for abnormalearnings interacted with the UIA portfolio ranking is 8.213, p-value 0.001). AlthoughUIA is also significant when modeled as ‘‘other information’’ (estimated coefficient of 0.347, p-value 0.010), including UIA does not significantly increase the explanatorypower of the valuation model compared to a pooled estimation of Equation (7).

CONCLUDING COMMENTS

We examine the implications of unrecorded intangible assets for the persistence andvaluation of abnormal earnings in the banking industry. We focus on the banking industry

because it represents a context in which both economic rents and accounting conservatismexist and because banks exhibit a high degree of homogeneity in their operations, whichreduces cross-sectional variation in factors that might otherwise affect our estimated valu-ation effects. In the bank setting, we can isolate the role of intangible assets in valuation.This is because banks generally have a high proportion of financial assets; banking firmsare therefore less subject to conservative accounting with respect to their on-balance-sheetassets. Existing bank disclosures also permit the derivation of reasonable estimates of spe-cific intangible assets. These intangible assets reflect how existing customer relationshipsrelated to core deposits, mortgage servicing, credit cards, and trust operations can increasethe bank’s future cash flows and its value.

We document that unrecorded intangible assets are related to the persistence and pricingof abnormal earnings. First, we provide evidence of greater persistence of abnormal earn-ings for banks with larger unrecorded intangible assets. Second, we find that the pricingmultiples for abnormal earnings increase from lower to higher levels of unrecorded intan-gible assets.

Our tests are motivated in part by limited prior research on the influence of unrecordedintangible assets on the persistence and valuation of abnormal earnings in the residualincome model. In addition, the adequacy of the current historical cost accounting modelhas been challenged as it relates to the accounting for intangible assets (Lev 2001). Ourtests provide evidence on the merits of developing estimates of intangible assets whenimplementing the RIM.

These findings are also important because they identify information that can lead toimproved understanding of the role of intangible assets in equity valuation. Investors andfinancial analysts are increasingly interested in intangible assets. This interest appears con-sistent with our evidence that unrecorded intangible assets are influential in the determi-nation of firm value in industries such as banking where relevant and reliable measures of unrecorded intangible assets are available. Additional research is needed to examine otherindustries where factors might be associated with the existence of intangible assets (forexample, R&D intensity).


16/20


APPENDIX

Measuring Intangible AssetsThis appendix provides a brief discussion of the each of the intangible assets considered

in this paper (see Kohlbeck [2004] for further discussion).

Mortgage Servicing Rights

The value of mortgage servicing rights is the present value of future servicing feeincome after accounting for prepayment risk and related expenses incurred during the loan’slife. It is calculated as follows:

( R R )i,t,j1 i,t,j L SR (1 Exp ) (1 T ) i,t i,t t M i,t 2 MSR (A1)i,t ( jt )(1 D ) jt 1 i,t,j

where MSR is the mortgage servicing rights for bank i at time t ; L is the outstanding balanceof mortgage loans serviced for others; R is the estimated percentage of the portfolio balanceremaining in year j of the loan portfolio’s life of M years, where R is determined using thePublic Securities Association (PSA) prepayment rates to account for prepayments and de-faults; SR is the service revenue rate assumed to be 37.5 basis points, the rate typicallycharged for mortgage-backed securities insured by government agencies and corporations; Exp is the bank’s overall expense ratio calculated as the ratio of total salary and occupancyexpense to operating revenue; T is the marginal tax rate assumed to be 40 percent; and Dis the bank’s weighted average cost of capital.19

Credit Card IntangibleEllsworth (1991) developed a model to value credit card premiums based on discounted

cash flows and the existing customer base. We estimate fee income levels using the FederalReserve Functional Cost Analysis (FCA) survey data and base the expenses on the bank’soverall expense ratio.20 The estimated income is then discounted over an arbitrary five-yearperiod as follows:

t 5 CCL (CCRev )(1 Exp )(1 T )i,t t i,t CC (A2)i,t ( jt )(1 D ) jt 1 i,t,j

where CC is the credit card intangible; CCL is the outstanding balance of credit card loans;CCRev is noninterest revenue (exchange and consumer fees) per dollar of outstanding creditcard loans for a given year and is obtained from the FCA; and Exp, T , and D are aspreviously defined.

19 The weighted average cost of capital is a linear combination of the bank’s alternative funding rate and risk-adjusted return on equity using the bank’s leverage ratio as the weighting factor. The zero-coupon Treasuryinstrument yield curve is used to proxy the alternative funding rate because of its availability and similarity tothe retail certificate of deposit yield curve (Miller 1995). The return on equity is derived using the Capital AssetPricing Model and daily return data from the Center for Research in Security Prices research tapes over thepreceding year.

20 The Functional Cost Analysis is an annual survey of approximately 100 banks conducted by the Federal Reserve

Banks where member banks choose to participate (FRB 1991–1996). The summarized data are commonly usedin bank valuations and intangible asset estimation when bank-specific data are unavailable (Miller 1995).


17/20


Core Deposit Intangible

The core deposit intangible quantifies a bank’s favorable deposit financing benefit andis based on deposits being a bank’s primary source of funding. The cost to banks in ac-cepting core deposits is generally less than alternatives such as certificates of deposits or

debt financing. Lower costs combined with the stable and long-term nature of core depositaccounts creates an intangible asset that is realized through future reduced financing costs.We quantify the intangible asset’s value by estimating after-tax earnings rates for each coredeposit type, applying the rates to estimated remaining deposits, and then discounting thecash flows. The following formula is adapted from Miller (1995):

( RR RR )i,t,j1 i,t,jCD ( INT I MTN )(1 T ) N t M i,t,k i,t i,t,k t,k i,t 2CDI (A3) i,t ( jt )(1 D )k 1 jt 1 i,t,j

where CDI is the core deposit intangible for bank i at time t ; CD (core deposits) are totaldeposits of type k of N total types where demand, savings, and money market accounts aredeposit types; RR is the deposit retention rate for year j in the average deposit life of M years;21 INT is the average interest rate of the bank’s interest earning assets times thepercentage of investable deposits; I is the average interest rate paid on deposits of type k ; MTN is the operating costs associated with the each type of core deposits for a given yearand is obtained from the FCA; and T and D are as previously defined.

Trust Operations Intangible

The trust operations intangible asset value is derived from the present value of the

expected future income on trust assets currently under management. The current trust in-come earned by a bank proxies for expected trust income because it is based on the existinglevel of assets under management and fee rates are normally constant as a percentage of assets managed. Because the duration of the income benefit is unknown, we assume a five-year life. The estimation model is as follows:

t 5 TRev (1 Exp )(1 T )i,t i,t TRUST (A4)i,t ( jt )(1 D ) jt 1 i,t,j

where TRUST is the trust operations intangible; TRev is annual amount of each bank’s

revenue disclosed as trust-related activities; and Exp, T , and D are as previously defined.

REFERENCESAhmed, A., R. Morton, and T. Schaefer. 1998. Accounting conservatism and the valuation of ac-

counting numbers: Evidence on the Feltham-Ohlson 1996 model. Working paper, Syracuse

University, Florida State University, and University of Notre Dame.

21 In estimating remaining core deposits, we use a constant deposit decay pattern and vary the average deposit life( M ) to induce cross-sectional variation. We start with a six-year life based on industry surveys and prior researchand perform an annual factor analysis to produce a model that combines bank characteristics into one variable

that is interpreted as a bank’s relative position with respect to customer retention. The factor score is used toadjust the six-year average deposit life either up or down to arrive at bank-specific deposit lives.


18/20


American Institute of Certified Public Accountants (AICPA). 1970. Intangible Assets. Accounting

Principles Board Opinion No. 17. New York, NY: AICPA.

Ausubel, L. 1991. The failure of competition in the credit card market. The American Economic

Review 81: 50–81.

Bar-Yosef, S., J. Callen, and J. Livnat. 1995. Modeling dividends, earnings, and the book value of

equity: An empirical investigation of the Ohlson valuation dynamics. Review of AccountingStudies 1: 207–224.

Beaver, W., C. Eger, S. Ryan, and M. Wolfson. 1989. Financial reporting, supplemental disclosures,

and bank share prices. Journal of Accounting Research 27: 157–178.

———, M. McAnally, and C. Stinson. 1997. The information content of earnings and prices: A

simultaneous equations approach. Journal of Accounting and Economics 23: 53–81.

Begley, J., S. Chamberlain, and Y. Li. 2006. Modeling goodwill for banks: A residual income approach

with empirical tests. Contemporary Accounting Research 23: 31–68.

Berkovec, J., J. Mingo, and X. Zhang. 1997. Premiums in private versus public bank branch sales.

Working paper, Federal Reserve Board, Washington, D.C.

Bernard, V. 1995. The Feltham-Ohlson framework: Implications for empiricists. Contemporary Ac-

counting Research 11: 733–747.Brown, S., K. Lo, and T. Lys. 1999. Use of R-squared in accounting research: Measuring changes in

value relevance over the last four decades. Journal of Accounting and Economics 28: 83–115.

Cheng, Q. 2005. What determines residual income? The Accounting Review 80 (January): 85–112.

Christie, A. 1987. On cross-sectional analysis in accounting research. Journal of Accounting and

Economics 9: 231–258.

Collins, D., M. Pincus, and H. Xie. 1999. Equity valuation and negative earnings: The role of book

value of equity. The Accounting Review 74 (January): 29–61.

Dechow, P., A. Hutton, and R. Sloan. 1999. An empirical assessment of the residual income valuation

model. Journal of Accounting & Economics 26: 1–34.

Ellsworth, R. 1991. Establishing the value for amortization of credit card customer accounts. The

Journal of Bank Accounting and Finance 5: 27–31.

Federal Reserve Board of Governors (FRB). 1991–1996. Functional Cost Analysis for Commercial

Banks. Washington, D.C.: FRB.

Feltham, G., and J. Ohlson. 1995. Valuation and clean surplus accounting for operating and financial

activities. Contemporary Accounting Review 11 (Spring): 689–731.

———, and ———. 1996. Uncertainty resolution and the theory of depreciation measurement. Jour-

nal of Accounting Research 34 (Autumn): 209–234.

Financial Accounting Standards Board. 1995. Accounting for Mortgage Servicing Rights. Statement

of Financial Accounting Standard No. 122. Norwalk, CT: FASB.

———. 2001. Goodwill and Other Intangible Assets. Statement of Financial Accounting Standard

No. 142. Norwalk, CT: FASB.

Francis, J., P. Olsson, and D. Oswald. 2000. Comparing the accuracy and explainability of dividend,

free cash flow, and abnormal earnings equity value estimates. Journal of Accounting Research38: 45–70.

Hughes, J., W. Lang, L. Mester, C. Moon, and M. Pagano. 2002. Do bankers sacrifice value to build

empires? Managerial incentives, industry consolidation, and financial performance. Working

paper, Rutgers University.

Jansen, I. 2002. Economic and accounting determination of residual income. Working paper, George-

town University, Washington, D.C.

Kohlbeck, M. 2004. Investor valuation and measuring bank intangible assets. Journal of Accounting,

Auditing, and Finance 19 (Winter): 29–60.

Leibowitz, M. 1999. Market-to-book ratios and positive and negative returns on equity. Journal of

Financial Statement Analysis Winter: 21–30.

Lev, B. 2001. Intangibles: Management, Measurement, and Reporting. New York, NY: Brookings

Institution Press.


19/20


Liu, J., and J. Ohlson. 1999. The Feltham-Ohlson 1995 model: Empirical implementations. Working

paper, University of California, Los Angeles, and New York University.

Lo, K., and T. Lys. 2000. The Ohlson model: Contribution to valuation theory, limitations, and em-

pirical applications. Journal of Accounting, Auditing and Finance 15: 337–367.

Miller, W. 1995. Commercial Bank Valuation. New York, NY: John Wiley & Sons.

Morgan, B., and D. Cates. 1994. Intangibles assets: A primer for banks. Bank Accounting and Finance7: 14–23.

Myers, J. 1999. Implementing residual income valuation with linear information dynamics. The Ac-

counting Review 74: 1–28.

Nash, R., and J. Sinkey, Jr. 1997. On competition, risk, and hidden assets in the market for bank

credit cards. Journal of Banking and Finance 21: 89–112.

Ohlson, J. 1995. Earnings, book values, and dividends in equity valuation. Contemporary Accounting

Research 11: 661–687.

Penman, S., and T. Sougiannis. 1998. A comparison of dividend, cash flow, and earnings approaches

to equity valuation. Contemporary Accounting Research 14: 343–384.

Zhang, X. 2000. Conservative accounting and equity valuation. Journal of Accounting & Economics

29: 125–149.


20/20

11. kohlbeck warfield 2007.pdf

Documents