Blackwell Reference Online

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With advances in technology and the growth of knowledge‐based industries, many firms in today's economy find that the majority of their assets are not tangible like buildings and machinery, but more intangible like patents, brands, and unique organizational designs. For example, a firm whose market share depends on trendiness or consumer perceptions (such as Coca‐Cola, Nike, or Abercrombie and Fitch) may derive more of its value from its brand name or image than from its physical plant and equipment. A firm with negligible physical assets may have value that stems from its skilled workforce (like Accenture and Yahoo), or superior methods of production, assembly, or distribution (Dell Computers and Amazon). Similarly, many pharmaceutical and computer companies spend heavily on research and development to create new drugs or software, and some may even be currently operating at a loss. Nonetheless, the market value of such firms reflects investors beliefs in the future prospects of such to‐be‐developed technologies. The economics of intangible assets are quite different from the economics of tangible assets. The main difference involves the uncertainty associated with future benefits. In the case of expenditures on tangible assets, an equilibrium rate of return is expected to be earned or it is expected that the firm will recover the expenditures, at least by liquidating the assets. ... log in or subscribe to read full text