Intangible Capital Aspects of Advertising and R & D Expenditures

Twenty years have passed since economists first emphasized the aspects of advertising. According to this view, . . consumers tend to forget brands and continuous advertising is needed to maintain a given rate of sales. Thus, advertising expenditures can be viewed as a capital good that depreciates over time and needs maintenance and repair 22, p. 197. More recently, Weiss 25, among others, has suggested that research and development, R&D, costs might also be capitalized as such expenditures . . yield benefits mainly in the future 25, p. 421. Unfortunately, most analyses of the intangible capital issue have been limited to advertising largely because no comprehensive data on R&D were available until quite recently. However, important recent theoretical contributions on the topic and improvements in data availability now make it possible more completely to consider the intangible capital aspects of both advertising and R&D expenditures. Here the intangible capital issue is investigated through use of a market valuation model. In this approach, significant future (intangible capital) effects of advertising and R&D are suggested to the extent that current expenditures have significant effects on the market value of the firm. Given positive market value influences, individual coefficient estimates can be used to estimate both the total stock of intangible capital as well as average annual depreciation rates for advertising and R&D. While these depreciation rate estimates are interfirm averages and undoubtedly err in individual instances, they can be quite useful in indicating the general magnitude of corporate profit and tax misstatement due to current reporting and tax policies. In section I below, various articles closely related to this study are reviewed. Section II develops a valuation model embodying intangible capital considerations. The data are discussed in section III, and estimation results are presented in section IV. And finally, conclusions and implications for public policy are discussed in section V.