Australian Journal of Basic and Applied Sciences, 6(12): 115-122, 2012

ISSN 1991-8178

The Relationship between Intangible Assets and the Market Value; Metals Industry of
Tehran Stock Exchange Case Study
1

Mehdi Behname, 2Mohammad Reza Pajoohi, 3Mohammad Ghahramanizady

Department of Economics of Ferdowsi University of Mashhad (FUM) Mashhad, Iran

2
Department of Accounting, Shiraz University Shiraz, Iran
3
Accounting Department, Islamic Azad University, Marvdasht Branch Marvdasht, Iran.
Abstract: In today's highly competitive economic, intangible assets are creating value for productive
companies, but challenges faces accounting standards about measuring and reporting these assets.
Present study aims to analyze the intangible assets and market value relationship in Metals industry of
Tehran Stock Exchange. Therefore, financial information of mentioned test case companies collected
from year 2001 to 2011. Pooled/Panel regression method and F-Limer, Hausman and Levin Lin Chu
tests used to analyze data. Test results showed that reported intangible assets have significant positive
relation with market value in Tehran Stock Exchange as in Metals industry of Tehran Stock Exchange.
It seems an increase in intangible assets leads to an increase in market value of company in this
industry. Also, result shows that there is positive and meaningful relation between abnormal earnings
and market value in Metals industry of Tehran Stock Exchange.
Key words: Intangible Assets, Firms Market Value, Value relevance, Felthman & Olhson model
INTRODUCTION
Characteristics of the today's world includes economic globalization, mass production and excess capacity
in most markets, time-based competition, mass volume of information and efficiency of communication,
knowledge, information and increasing power of customers. All of these indicates that integration and
complexity of global markets and dynamic nature of the environment which manufacturing and service firms
and institutions are dealing with it.
If organizations were able to define their human perfectly, information and organizational resources, design
suitable indices to measure them and finally align them with organizational goals and strategies, then they will
be able to take advantages of the amazing results in order to increase profits and interests of stakeholders. As
Kaplan and Norton (2004, 47) states: an organization that is able to align its human assets such as the
knowledge and skills of its employees with information assets such as human resource management information
system and organizational assets such as teamwork and organizational culture. It will be able to create a strong
competitive advantage that competitors cannot easily copy it.
Given the increasing importance of intangible assets in the new economy, (due to potential problems of
measurement), it can be discussed that all intangible assets (purchased or made by the firm) should be identified
and reported in financial statements (fair value) in order to maximize the value relevance of these forms. The
value relevance of a financial item is ability to verify or change in investors' expectations about firm value.
Therefore, if the stock is popular among investors, the market prices should indicate a summary of collective
expectations of investors about firm value. Therefore, the value relevance (and reliability) of financial
statements could be determined by examining the relationship between a firm's market value and its accounting
numbers. Note that valuation of stockholders equity is the main purpose of the financial statements, but U.S.
Securities and Exchange Commission and the Financial Accounting Standards Board focus is on the equity of
investors.
From the mid 1980's, there were some discussions to the reliable assessment and quantification the value of
intangible assets. With the advent of the dot-com scandal, these concerns were broader in the field of accounting
and accountants are looking for a way to explain the differences between the book value of a firm and its
market value.
Financial Accounting Standards Board states: The traditional financial reports cannot display stimulus of
value development for the New Economy. Traditionally, firms identify two types of assets: tangible assets and
intangible assets. Although tangible assets (such as land, equipment, housing, etc.) assessment method are well
developed, intangible assets are difficult to assess and are almost impossible to manage.
Some studies have concluded that in recent decades, the value relevance of accounting information reduced
due to increase of unreported intangible assets (Brown et al, 1999, Dumontier, P, & Raffournier, 2002).

Corresponding Author: Mohammad Ghahramanizady, Accounting Department, Islamic Azad University, Marvdasht
Branch Marvdasht, Iran.
Tel: +98 9177111599 E-mail: [email protected]

115

Aust. J. Basic & Appl. Sci., 6(12): 115-122, 2012

This study examines the intangible assets and the firms market value relations in Tehran Stock Exchange
market. It investigates the relationship between the intangible assets reported in the firm's balance sheet and
their market value to answering following question:
Do the intangible assets have value relevance? In the other words, is there any significant relationship
between the intangible assets reported by the firms and the market value of their stocks? or Do investors
consider the value relevance for intangible assets? This means that whether they pay attention to intangible
assets in this market for firm's valuation or not.
MATERIALS AND METHODS
Theoretical Principles:
Value Relevance:
Given that the decision making of the players of the capital market, particularly active investors in the stock
market is carried out in an uncertain environment, they need information. On the other hand, the public default
is that the accountant should be able to provide information relating to the stock valuation (Brennan, 1991,
p.61). The importance of such a claim caused that many scholars test it over the past four decades and introduce
a new branch of market-based research in accounting entitled Value Relevance Studies.
The common aspect of the presented definitions of value relevance or relevance in terms of valuation in
accounting literature is the existence of a statistically significant relationship between accounting data and
market value of owners' equity (Beaver, 2002, p.459). On the other hand, given that this test first done by
researchers such as Miller & Modigliani (1966) and Horrigan (1996), the term of "value relevance" was used by
(Amir et al, 1993, p.230) for the first time.
According to Barth et al (2001), the main objective of researches in the field of value relevance is to
increase the awareness level of the users of financial statements in terms of qualitative features of relevance
and reliability of reflected accounting information in the market value of the owner's equity. The above
qualitative features are two main criteria of Financial Accounting Standards Board to make best choice among
various options. The value relevance test suggests an approach to make operating the previous definitions of
qualitative features. The reason for the recent attitude is that the accounting items considered as relevant from
the perspective of valuation in the case where they containing relevant information for the valuation of firm with
sufficient reliability to reflect in its stock price (Barth et al, 2001, 80).
Feltham and Olson Model
Feltham and Olson (1995) proposed a model for the relationship between a firm's market value and
accounting information of its operating and financial activities. They declared that the book value of financial
activities is equal to its market value, but the book value and the market value of operating activities are not the
same. It seems that the market value is equal to the net value of the expected divided dividend. According to
clean surplus accounting, the market value defined as the net book value plus the present value of expected
abnormal earnings (which is equal to accounting profit minus weighted average cost of capital).
A linear model determines the change of a bunch of information including book value and abnormal
earnings of operating activities. The parameters of the model indicate the presence of abnormal earnings, growth
and accounting conservatism. The model is simple enough to use the variables related to the market value,
accounting data and other information.
Three types of analysis are possible using this model. The first analysis deals with the value related to the
predictability of accounting data. The second analysis exactly examines the dependence of firms value to
simultaneous realize of accounting data. The third analysis examines the approximate relationships by
comparing the market value, earning and the book value and investigates how earnings related with the book
value at the beginning of the period.
Clean Surplus Accounting
The clean surplus accounting method presents the elements of a model that predicts the market prices as a
function of expected returns and the variations of the book value.
The clean accounting surplus does not consider the relationship with shareholders (including distribution of
dividends, buy back stock or stock options, etc.) in the calculation of the returns of an institution. The current
accounting system necessitates the financial statements of the underlined balance sheet calculation as well as
profit and loss account (earnings and book value). In addition, its format requires that the book value be equal to
earnings minus distributed dividends (net of investment related to capital).
The main basis of the clean surplus accounting theory is estimating the value of a firms stock (Unlike the
discounted dividend methods or procedures related to cash flow). The other use of this theory is to replace
CAPM to calculate the cost of capital.
The Olson theory of clean surplus accounting provides a framework according to the measurement view.
MV (Market Value) of a firm (and thus the efficiency of its securities) can be calculated through some
components of the BS (Balance Sheet) IS (Interest/Loss Statement). This theory considers the ideal conditions.

Aust. J. Basic & Appl. Sci., 6(12): 115-122, 2012

Market value of firm = NBV of firms net assets + expected PV of future abnormal earnings (goodwill)
The market value of the firm is equal to the net book value (NBV) of the firms net assets plus the expected
present value (PV) of future abnormal earnings (goodwill).
Where:
1 - The actual earnings calculated based on the clean surplus that identifies all income and expenditures in
the interest and loss account. This means that the identified interest or loss recognized at the interest and loss
account considering the fair value.
2- The difference between actual operating earnings and expected operating earnings (which defined as
abnormal operating earnings) that called goodwill.
3- The expected operating earnings are equal to the equity value of the firm at the beginning of period
multiplied by the firm's cost of capital (similar to the accretion discount rate of the firm).
4- Net book value of the firm plus estimated goodwill is equal to the firm's market value. It means that the
firms market value can be calculated using the book value and accounting procedures.
The main advantage of this method is the relatively fast calculation of the firm's market value. The
valuation method that used in discounted dividend and cash flow model can use. Feltham and Olson model can
used for estimating the value of firms stock and to compare with the actual market value of the stock. Frankel
and Lee's study shows that the estimated value of the stock to real value of stock can be a good indicator for
predicting stock returns in 2-3 future years.
Literature Review:
Eckstein (2004) has investigated the accounting standards related to the intangible assets in U.S., England
and International Accounting Standards Committee in an article entitled the measurement and identification of
intangible assets. She declared that an advance in financial reporting is very dependent on progress in the
identification and reporting intangible assets.
Recent research conducted in the U.S. indicated that reported earnings of U.S. firms relationship have
almost no value relevance. Therefore, Goodwin and Ahmed (2006) suggested that the lack of identification of
intangible assets by these firms is the main reason for loss of value relevance of earnings in U.S. firms. They
calculated the value relevance of earning of Australian firms to prove their reason. In Australian firms,
identification of intangible assets had not prohibited. Using several models, their results showed that there is an
insignificant effect of decrease in the value relevance of earnings in an average firm. However, the firms that
invest the intangible assets have growing stronger value relevance. They calculated the difference between the
value relevance of firms that invest intangible assets with those firms that do not invest intangible assets. They
concluded that this difference has been growing in the late 1990s.
Oliviera et al (2010) have studied the value relevance of identified intangible assets according to
international standards that had adopted recently by Portugal. They concluded that the reported goodwill and
other intangible assets that significantly related to stock price of the firm. However, the value relevance of
intangible assets has reduced after the adoption of international standards.
Boulerne et al (2011) conducted a study entitled "Do the International Standards of Financial Reporting
provide better information about intangible assets in Europe? . They compared the results of international
standards of financial reporting / international accounting standards and local GAAP in the firms engaged in the
European exchanges markets. Their results showed that intangible assets that had reported under International
Standards of Financial Reporting have more information to explain stock prices and returns than intangible
assets that had reported under local generalized accepted principles. In addition, the intangible assets that
reported on the balance sheet contain more information for shareholders in France and Italy than unreported
intangible assets or those intangible assets that reported in the goodwill account. Generally, their study showed a
slight difference between local standards and International Standards of Financial Reporting.
Research Hypotheses:
In the present study, a main hypothesis proposed as follows to achieve the research objectives based on
research questions. The hypotheses examined for all firms:
Main hypothesis: There is a significant positive relationship between intangible assets and the market value
of firms listed on the Tehran Stock Exchange.
Hypotheses Model:
Following model chose for the study by developing the model of Fetlman and Olson (1995).
MVEt = 1 + 2 (NOA INT)t + 3GWt + 4 IDt + 5NFAt + 6AOEt +
According to this model, the variables of this study divided into three groups including independent
dependent and control variables to test the hypotheses.

Aust. J. Basic & Appl. Sci., 6(12): 115-122, 2012

Variables:
Independent Variable:
In this study, the independent variable is the annual identifiable intangible assets of the firms that extracted
from annual audited financial statements.
Identifiable intangible assets are the sum of reported intangible assets according to accounting standards of
the firm (net of amortization and goodwill).
Dependent Variable:
The dependent variable is the market value of the firm that calculated by multiplying the price of each share
on the last day of the fiscal year and the number of shares in the same year.
Control Variables:
Some of observable features of the firm will considered as control variables to control other effective
factors contributing the market value of the firm. Therefore, operating assets, operating liabilities, financial
assets, financial liabilities, the inflation rate, normal and abnormal operating earnings used as control
variables.
Table 1: Measurement Method of the Variables
Variable
Description

NOA

Net Operating Assets

NFA

Net Financial Assets

AOE

Abnormal Operating Earnings

Definition/Measurement
= Operating Assets-Operating Liabilities
Operating Assets=Current Assets-Cash Flows-Short-term Investments+(land,
property and equipment- relevant accumulated depreciation)+long term
Investments with special value method+ possible income taxes benefits
Operating liabilities = total debt + preferred stock - financial liabilities
Financial liabilities=long-term debt+ current portion of long-term +preferred
stock
=Financial Assets-Financial Liabilities
Financial Assets=Total Assets-Operating Assets
= OEt-(R*NOAt-1)
OEt=Operating earnings of the year t; the reported net profit after subtracting
the taxes of parent firm+ interest expense after taxes-interest earnings after
taxes
r= weighted average cost of capital (discount rate)
NOAt-1=the Net Operating Assets for the year, t-1

Statistical Population:
The statistical population of firms listed on the Tehran Stock Exchange selected as the successor of
statistical population of the present study.
Sampling Method and Sample Size
In this study, sampling does not carry out; but the statistical population of the study, namely the firms listed
on the Tehran Stock Exchange are limited based on the following criteria:
Given the study period (from early 2001 to late 2011) and considering the required information for a year
before the examined year, the firm must be listed on the Tehran Stock Exchange before 2000 and the required
information must be available.
In order to increase comparability and integration of the selected firms, the financial year should be to the
end of March of each year. The firm should not altered activity or financial year change during the study period
(2001 to 2001).
The selected firms must be manufacturer firm to achieve similarity in terms of items and their classification
in the financial statements. The selected firms should not be banks and financial institutions (investment firms,
financial intermediation, holding and leasing firms).
After acquiring the sample size requirements, the sampling size reached to 128 samples. The data related to
the years 2001 to 2011 collected for these firms.
Data Collection Method:
In this study, the desk study used to collect data and information. For the desk study, theoretical principles
of the research collected from specialized Latin and Persian books and journals. Based on the definitions of
variables and the measurement methods, the required data for this study include some accounting items
extracted from the audited financial statements of the firms. Accordingly, the required data for the research
collected through data collection, documents, and sample firms by referring to the financial statements,
explanatory notes, weekly reports, Stock Journal, Library and the website of Tehran Stock Exchange as well as
using the comprehensive statistic software of TadbirPardaz, Rahavard Novin and Sahra companies.

Aust. J. Basic & Appl. Sci., 6(12): 115-122, 2012

Methods for Data Analysis and Hypothesis Testing:

Several statistical methods were used which will be described in more detail. In this study, following data
collection, the descriptive statistics of the variables are calculated. These statistics include the mean, median,
standard deviation and other required information. The most important statistical tests of this study include the
Limer F -test, Houseman test and Levin, Lin and Chu test. The significance of the models and assumptions of
regression including independence and normality of errors, the normality of the dependent variable and linearity
had studied through these tests. The collected data initially was stored in a database. Then, data was transferred
EXCEL and EVIEWS 6 for analyzing the data and their results.
Results:
Reliability of Variables:
The reliability of variables presented in Table 2. The Levin, Lin and Chu test used to determine the
reliability of variables. The results of test indicate that the independent, dependent and control variables were in
reliable level during the research period, because the P-Value is less than 5% for the test.
Table 2: The Reliability Test of Variables
The test/Variables
The Market Value of the Firm
Identifiable Intangible Assets
Net Operating Assets expect the Intangible Assets
Net Financial Assets
Abnormal Operating Earnings

The statics of Levin, Lin & Cho

-27.38
-18.39
-6.72
-9.42
-14.01

The probability of Levin, Lin & Cho statics

0.0000
0.0000
0.0000
0.0000
0.0000

Descriptive Statistics of Variables at Level of Entire Firms:

Descriptive statistics for study variables presented in Table 3.
Table 3: Descriptive statistics of variables at the level of entire firms
Variations
coefficient
1.8
1.61

Criteria/Variables

Number

Mean

Median

Max

Min

St. Deviation

The Market Value of the Firm

Identifiable Intangible Assets
Net Operating Assets expect
the Intangible Assets
Net Financial Assets
Abnormal Operating Earnings

110
110

397374.7
10240.17

229275
4210

6690255
64472

38912
100

716411.3
16490.3

110

198509.5

140117

1305771

-17576

218575.7

1.1

110
110

26583.18
-255.04

-23558
3659

141478
948738

-287400
-1190775

84286.68
176767

3.17
693.1

Discussion:
The main hypothesis: there is significant relationship between the intangible assets and the market value of
listed firms in Tehran Stock Exchange.
The model of fixed effects used for testing the hypothesis. The results presented in Table 4 that shows that
influence of identifiable intangible assets on the market value of entire firm is equal to +2.97, which is
significant given the T-statistics possibility (0.0021). The other results suggest that the effect of net operating
assets, expect intangible assets on the market value of firms is significant and negative at the entire firms level.
In contrary, the effect of abnormal operating earnings on the market value of firms is significant and positive.
The results of F-statistics also show the model was significant in general. According to Durbin-Watson
statistics, the model does not suffer the autocorrelation problem. Moreover, the results of the adjusted
determination coefficient show that during the whole period of study, about 77% of the changes in the market
value of the entire firms are affected by identifiable intangible assets and control variables, particularly net
operating assets except intangible assets and abnormal operating earnings.
Given the insignificance of the effect of identifiable intangible assets on the market value of the entire
firms, the main hypothesis of the study confirmed.
Table 4: The impact of identifiable intangible assets on the market value of entire firms
Statistics/Variables
Regression Coefficients
t-statistics
Constant Value
-10517.14
-0.19
Identifiable Intangible Assets
2.97
3.04
Net Operating Assets expect the 2.1
10.31
Intangible Assets
Net Financial Assets
1.49
2.72
Net Abnormal Operating Earnings
1.11
4.68
Determination Coefficient
Adjusted
Determination The probability
Coefficient
statistics
0.8
0.77
0.0000

The probability of t-statistics

0.8469
0.0021
0.0076

of

F-

0.0000
0.0000
The Durbin-Watson Statistics
1.78

Aust. J. Basic & Appl. Sci., 6(12): 115-122, 2012

Conclusion:
In accordance with Lu and Sogianis (1996), Niels Joachim and Henry (2000), Won Choi et al (2000),
Eckstein (2004), Goodwin & Ahmed (2006), Dehmash et al (2009) and Lydia Oliviera et al (2010) results, the
present study could not find any relationship between the market value of firms and their reported intangible
assets. Although the intangible assets and the market value of listed firms in the stock market have a significant
and positive relationship at the confidence level of 90%, but the relationship confirmed at the confidence level
of 95% between entire firms and industries. Perhaps, the most important reason for this is not proving the
efficacy of the Tehran Stock Exchange even low efficiency level.
In addition, this could be due to differences in accounting standards which led to recognizing and therefore
not reporting important part of the investment in the intangible assets (Boulern and others, 2011; Zeqal and
Malvel, 2011).
Suggestions:
According to the main hypothesis, the intangible assets have a direct relationship with the market value of
all firms listed in Tehran Stock Exchange. Therefore, this study recommend to stock investors that pay attention
to the amount of reported intangible assets of firms at the time of investment.
Given the value relevance of intangible assets, this study suggest that managers and accountants of the
firms listed in the Tehran Stock Exchange pay attention to the amount of reported intangible assets of their own
firm for preparing financial statements to prevent decrease of the market value of their own firm.
Given the possible abuse of managers from intangible assets to lure investors, the auditors also
recommended that have necessary accuracy in auditing intangible assets.
Suggestions for Future Studies:
It seems that it is essential to conduct research in the following areas:
1 The relationship between various kinds of reported intangible assets and the market value of the firm
2 - The relationship between intangible assets and the market value of firms in other industries
3 - The relationship between intangible assets and the market value of OTC firms
4 - The relationship between intangible assets and the market value of firms in different time intervals,
especially case studies
5 - The relationship between intangible assets and the market value of firms in the shorter periods and
closer to the present
The relationship between intangible assets and performance measurement criteria
Research Limitations:
Some of the major obstacles in the way of conducting this study were as follows:
1 Information unavailability for some firms that caused removal of them from sample
2 Un-identification of the generated goodwill by the business unit accounting to accounting standards
(Accounting Standard No. 17, Revised in 2007) which lead to elimination of goodwill from the model and in
general lead to not identifying a value relevance factor from the financial statements of the firm.
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Appendices
Table 1: Measurement Method of the Variables
Variable
Description
NOA
Net Operating Assets

NFA

Net Financial Assets

AOE

Abnormal
Earnings

Operating

Definition/Measurement
= Operating Assets-Operating Liabilities
Operating Assets=Current Assets-Cash Flows-Short-term Investments+(land, property
and equipment- relevant accumulated depreciation)+long term Investments with
special value method+ possible income taxes benefits
Operating liabilities = total debt + preferred stock - financial liabilities
Financial liabilities=long-term debt+ current portion of long-term +preferred stock
=Financial Assets-Financial Liabilities
Financial Assets=Total Assets-Operating Assets
= OEt-(R*NOAt-1)
OEt=Operating earnings of the year t; the reported net profit after subtracting the taxes
of parent firm+ interest expense after taxes-interest earnings after taxes
r= weighted average cost of capital (discount rate)
NOAt-1=the Net Operating Assets for the year, t-1

Table 2: The Reliability Test of Variables

The test/Variables
The Market Value of the Firm
Identifiable Intangible Assets
Net Operating Assets expect the Intangible Assets
Net Financial Assets
Abnormal Operating Earnings

The statics of Levin, Lin & Cho

-27.38
-18.39
-6.72
-9.42
-14.01

The probability of Levin, Lin & Cho statics

0.0000
0.0000
0.0000
0.0000
0.0000

Aust. J. Basic & Appl. Sci., 6(12): 115-122, 2012

Table 3: Descriptive statistics of variables at the level of entire firms

Criteria/Variables

Number

Mean

Median

Max

Min

St. Deviation

The Market Value of the Firm

Identifiable Intangible Assets
Net Operating Assets expect
the Intangible Assets
Net Financial Assets
Abnormal Operating Earnings

140
140

646280.8
65451.91

199604
1060056

7532800
1134509

24121
209

1214551
182262.1

Variations
coefficient
1.87
2.78

140

549649.5

154429

5352043

11532

1006077

1.83

140
140

60155.19
12620.97

-31742.5
2172

2992170
1356242

-1465280
-5417481

766948.2
50550.8

12.74
14732

Table 4: The impact of identifiable intangible assets on the market value of entire firms
Statistics/Variables
Regression Coefficients
t-statistics
Constant Value
Identifiable Intangible Assets
Net Operating Assets expect
Intangible Assets
Net Financial Assets
Net Abnormal Operating Earnings
Determination Coefficient
0.69

the

0.83
1.2
-0.58

12.69
1.66
-3.78

0.08
2.62
Adjusted
Coefficient
0.66

0.46
18.48
probability
statistics
0.0000

Determination

The probability of tstatistics

0.0000
0.0982
0.0002

of

F-

0.6461
0.0000
Durbin-Watson Statistics
1.81