- 1Traditional book-to-market ratios understate the true value of modern companies
- 2R&D and SGA spending create intangible assets that accounting rules ignore
- 3Adjusting book value for intangibles dramatically improves the value factor
- 4"Reports of value's death may be greatly exaggerated" — the factor isn't broken, the measurement is
- 5This paper is the basis for our intangible-adjusted value methodology
#The Paper at a Glance
Title: Reports of value's death may be greatly exaggerated
Authors: Robert D. Arnott, Campbell R. Harvey, Vitali Kalesnik, and Juhani T. Linnainmaa
Published: Financial Analysts Journal, 2021
DOI: 10.1080/0015198X.2020.1842704
The value factor had a terrible decade from 2010-2020, leading many investors and researchers to declare "value is dead." Arnott and colleagues argued the problem isn't value investing itself—it's how we measure value in an economy dominated by intangible assets.
#The Problem: Accounting Rules Are Stuck in 1975
How Book Value Works Under Current Rules
When a company builds a factory, accounting rules say: capitalize the asset (put it on the balance sheet as an asset that depreciates over time).
When a company spends on R&D, accounting rules say: expense it immediately (reduce current earnings, don't add to the balance sheet).
This creates a massive distortion:
| Company Type | Major Spending | Accounting Treatment | Effect on Book Value |
|---|---|---|---|
| Old Economy (factories) | Capital expenditure | Capitalized as asset | Book value increases |
| New Economy (tech/pharma) | R&D and SGA | Expensed immediately | Book value stays low |
A pharmaceutical company spending $10 billion on drug development gets zero book value for that investment. A manufacturer spending $10 billion on equipment gets it all on the balance sheet.
What This Means for Value Investing
Traditional value investing uses price-to-book ratios: low P/B = cheap = buy.
But if book values systematically undercount intangible-heavy companies, then: - Tech companies look perpetually "expensive" (low book value → high P/B) - Manufacturing companies look perpetually "cheap" (high book value → low P/B) - The value factor becomes a bet on old economy vs. new economy, not truly cheap vs. expensive
#The Solution: Adjust for Intangibles
Arnott et al. proposed capitalizing R&D and SGA spending as intangible assets:
R&D Capitalization
Instead of expensing R&D immediately: 1. Treat R&D as an investment in knowledge capital 2. Capitalize it on the balance sheet 3. Amortize over a typical useful life (3-5 years for most industries)
SGA Capitalization
A portion of selling, general, and administrative expenses represents investment in organizational capital: 1. Customer relationships, brand building, training 2. Capitalize a fraction (typically 30%) of SGA 3. Amortize over a useful life
The Impact on Book Values
| Company | Traditional Book Value | Intangible-Adjusted Book Value | Change |
|---|---|---|---|
| Tech Company (high R&D) | $20B | $55B | +175% |
| Pharma Company (high R&D) | $15B | $40B | +167% |
| Manufacturer (low R&D) | $30B | $33B | +10% |
| Retailer (moderate SGA) | $10B | $16B | +60% |
The adjustment disproportionately affects R&D-intensive companies, making them look less "expensive" and more fairly valued.
#Results: Value Lives
| Value Factor | Annual Return (1963-2020) | Return (2010-2020) |
|---|---|---|
| Traditional HML | 3.5% | -3.2% (negative!) |
| Intangible-Adjusted HML | 4.8% | +1.9% |
The intangible-adjusted value factor: - Outperforms traditional value across the full sample by 1.3% per year - Didn't "die" in the 2010s — it earned positive returns while traditional value lost money - Is less correlated with size — no longer a proxy for buying old economy
Why Traditional Value Struggled
Much of value's poor 2010-2020 performance came from: 1. Underweighting R&D-heavy tech companies (which soared) 2. Overweighting old-economy companies with inflated book values 3. Effectively betting against innovation
The intangible adjustment fixes all three problems.
#Supporting Research
Other researchers independently reached similar conclusions:
- Peters & Taylor (2017): Developed a method for capitalizing R&D and SGA; showed intangible capital improves the investment-q relation
- Eisfeldt & Papanikolaou (2013): Showed organization capital predicts returns
- Berkin, Dugar & Pozharny (2024): Confirmed intangible-adjusted book values improve value factor performance in recent data
#How This Applies to Our Rankings
This paper is the intellectual foundation for our value factor (15% weight). Informed by Arnott et al.'s insight that traditional book-to-market is broken, our production implementation uses enterprise value-based metrics that naturally account for capital structure and avoid the intangible asset distortions they documented:
- 1EBIT/TEV (35% weight) — Operating earnings yield relative to total enterprise value
- 2EBITDA/TEV (25%) — Cash earnings yield, less affected by depreciation policies
- 3FCF/TEV (25%) — Free cash flow yield, the purest measure of cash generation relative to price
- 4Earnings Yield (15%) — Net income relative to market cap
By using enterprise value denominators (which include debt and subtract cash), we get a cleaner picture of what you're actually paying for a company's earnings power — addressing the same core problem Arnott et al. identified with raw book-to-market ratios.
#Academic Source
Arnott, R. D., Harvey, C. R., Kalesnik, V., & Linnainmaa, J. T. (2021). "Reports of value's death may be greatly exaggerated." Financial Analysts Journal, 77(1), 44-67.
Last updated: February 1, 2026