The Missing Ingredient: How to improve value investing in the information age

Sammanfattning: This thesis aims to inform a value investing strategy in specific niches of European firms by adjusting the book-to-market (B/M) ratio for intangible assets. An increase in intangible assets' importance for corporate value creation coupled with a lack of amendments to their accounting treatment has led to debates on the value relevance and accuracy of accounting information, including the B/M ratio used to derive value premiums. Motivated by this observation, the thesis artificially capitalizes intangible investments such as R&D and SG&A expenses to create the intangible-adjusted B/M (iB/M) ratio and related premiums such as the High-Minus-Low (HML) factor. Focusing on European public firms beginning in 2005, this study offers unique insights into the impact of intangible adjustments in an IFRS environment. The results demonstrate the superior predictive power for returns of the iB/M ratio in Europe. These effects are especially pronounced in the niches of firms with no or low levels of goodwill and no or low acquisition activity. Ultimately, the thesis formulates a value investing strategy by employing extreme breakpoints, investing exclusively in the long side portfolio, and focusing on said niches. Our study further contributes to the ongoing academic discussion regarding the evolution of value investing in an era defined by intangible assets. By offering a nuanced understanding of how intangible assets influence firm valuations, this thesis paves the way for more informed investment decisions and empirical-backed standard setting in accounting.