- 1Traditional "Book Value" ignores R&D and organizational capital, making tech stocks look artificially expensive
- 2Peters & Taylor developed a "Total q" metric that capitalizes intangibles
- 3Intangible-heavy value portfolios outperform traditional value portfolios
- 4Returns to intangible capital are just as strong as returns to physical capital
- 5This explains why Buffett bought Apple—it was a value stock, if you measured it correctly
#The Paper at a Glance
Title: Intangible capital and the investment-q relation
Authors: Ryan H. Peters and Lucian A. Taylor
Published: Journal of Financial Economics, 2017
DOI: 10.1016/j.jfineco.2016.03.011
By 2015, tangible assets (factories, land, inventory) made up less than 20% of the S&P 500's market value. Yet value investors were still using Price-to-Book ratios that only measured tangible assets.
Peters and Taylor fixed this broken metric. They created a new measure of "Total Capital" that treats R&D and SG&A as investments, not expenses.
#The Two Types of Intangible Capital
- 1Knowledge Capital: Created by R&D spending. Think pharmaceutical patents or software code.
- 2Organization Capital: Created by SG&A spending. Think brand value, distribution networks, and human capital.
When you add these back to the balance sheet, "expensive" tech companies often become "cheap" value stocks.
The Replacement Cost Logic
Tobin's q theory says a company should be worth the replacement cost of its assets. - If it costs $10B to build a factory, and the stock is trading at $5B, it's a bargain. - If it costs $10B to recreate Google's search algorithm and brand, and the stock is trading at $5B, it's also a bargain.
The authors showed that Total q (Market Value / (Physical + Intangible Capital)) predicts investment behavior and returns far better than traditional metrics.
#Improving the Value Factor
Traditional value strategies (HML) performed poorly in the 2010s because they systematically shorted technology.
An Intangible Value strategy (buying stocks with high Intangible Book-to-Market ratios) performed significantly better. It captured the value premium without being underweight the modern economy.
#How This Applies to Our Rankings
This research is foundational to our Value factor. We calculate Intangible-Adjusted Book Value for every company.
We capitalize R&D expenses (amortized over 5 years) and a portion of SG&A (amortized over various periods based on industry). This gives us a "Total Book Value."
This is why our Value rankings often include companies like Alphabet or Pfizer that traditional value screens miss. We recognize that their R&D spending is an asset, not a cost.
See our modern value rankings →
#Academic Source
Peters, R. H., & Taylor, L. A. (2017). "Intangible capital and the investment-q relation." Journal of Financial Economics, 123(2), 251-272.
Last updated: February 9, 2026