Relevance of intangible assets to evaluate financial health

Abstract

Purpose The purpose of this paper is to examine the relevance of asset composition of a firm (tangible versus intangible properties), when evaluating its financial health. The paper argues that relevance of any asset is a function of how effectively it is used. Design/methodology/approach The paper uses two distinctive samples: a sample of traditional firms holding primarily traditional physical assets and a sample of technology service firms holding primarily intangible assets and examines the ability of intangible assets to surrogate as financial health signals. Findings The results show that when evaluating firms with significant intangible assets, using information about intangible assets to improve financial health evaluation. However, fundamental financial variables continue to be important in signaling financial health, regardless of asset composition. Practical implications The results highlight the importance of both objectively‐measured and reported fundamental financial information and subjectively measured intangible asset values. The results would help managers and markets in using greater caution when evaluating firms with intangible assets. Originality/value Unlike prior studies, this paper uses both fundamental financial variables and surrogates for intangible asset values in the model. The paper contributes by highlight the importance and limitations of intangible asset values.