Investment in intangibles

In the manufacturing sector, what can be the effect of investment in intangible assets such as R&D and vocational training? It can account for almost 30 per cent of labour productivity growth, reports a recent paper in www.ssrn.com titled Intangible Investment and the Swedish Manufacturing and Service Sector Paradox by Harald Edquist.

Studying the ratio of intangible investment to tangible investment in Sweden's manufacturing and services (1995–2006), the author notes that since the mid-1990s the ratio has almost doubled in manufacturing while it has stayed approximately the same in the service sector. “Thus, there is strong indication of a structural shift in manufacturing production with intangibles becoming increasingly important in manufacturing production.” For instance, in 2006, manufacturing accounted for 18 per cent of total investment in tangible assets, while it accounted for as much as 47 per cent of total investment in intangibles, one learns. “Business services accounted for 67 per cent of the total investment in tangible capital, while they accounted for 48 per cent of the investment in intangible capital.”

Considering that intangible investments often are knowledge-intensive services, the author underlines that investment in services has become increasingly important for productivity growth in manufacturing. Adds Edquist, therefore, that when intangible assets are capitalised it becomes evident that the interaction between productive manufacturing and the less productive service sector has increased.

Valuable insights about manufacturing.

Analyst interest

The number of analysts who participate on a firm's earnings conference call can be an early indicator of a firm's overall market visibility. Thus argue Michael J. Jung, M. H. Franco Wong, and X. Frank Zhang in Analyst Interest, Market Visibility, and Stock Returns ( www.ssrn.com ).

The paper opens by citing R. C. Merton's model (1987) about how a firm's market visibility (or investor recognition) affects its cost of capital, and thus, its market value.

The authors then refer to other studies, such as that visibility explains stock returns and other capital market consequences more than firm fundamentals (Lehavy and Sloan 2008); and that public firms not attaining a critical mass of visibility and market interest (proxied by analyst coverage, institutional ownership, and stock turnover) are more likely to go private (Mehran and Peristiani 2010). Building upon prior literature, the authors develop an early indicator of a firm's market visibility based on analyst interest (as opposed to analyst coverage), and demonstrate its practical implications for predicting future stock returns.

In particular, the authors find that changes in analyst interest are positively related to next quarter's change in trading volume turnover, suggesting that early analyst interest in a firm leads to greater future trading activities in the stock.

“Overall, we believe that our measure of analyst interest serves as an early indicator of market visibility and offers a one-step-ahead advantage in analysing stock market dynamics,” they aver.

Recommended study for analysts.

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