Are Intangible Asset Valuations in Financial Reports Useful? Historical Evidence from the Illinois Blue Sky Law

Under current accounting standards, internally generated intangible assets are excluded from balance sheets, and acquired intangibles are reported only in aggregate. Scholars argue that this treatment limits investors’ ability to assess firm value, yet standard setters remain uncertain whether and how such assets should be recognized. We contribute to this debate by examining a historical setting: Illinois’s 1919 “blue sky law,” which required firms issuing securities to disclose itemized valuations of all intangible assets—without distinguishing between acquired and internally generated ones. Although our dataset spans several intangible categories, we focus on patents—the only type with measurable long-term value—to assess whether reported valuations were informative. The data also allow us to distinguish among valuation methods, including historical R&D costs, purchase prices, appraised values, and nominal valuations. We find that reported patent values are generally uncorrelated with independent measures of long-term patent importance. In contrast, the valuation method chosen by the firm is informative: certain methods are systematically associated with more valuable patents. To understand why reported valuations convey limited information, we use digit-testing tools from forensic accounting to distinguish manipulation from inherent valuation uncertainty. The evidence points to substantial uncertainty rather than misreporting. We find no evidence that the current differential treatment of acquired intangibles and internally generated intangibles is conceptually justified. Our findings indicate that firms should be given flexibility to value their intangible assets, including internally generated ones, using the method of their choice, but should disclose the method they use.