Critical Finance Review > Vol 11 > Issue 2

An Intangible-Adjusted Book-to-Market Ratio Still Predicts Stock Returns

Hyuna Park, Koppelman School of Business, Brooklyn College, The City University of New York, USA,
Suggested Citation
Hyuna Park (2022), "An Intangible-Adjusted Book-to-Market Ratio Still Predicts Stock Returns", Critical Finance Review: Vol. 11: No. 2, pp 265-297.

Publication Date: 03 May 2022
© 2022 Hyuna Park
Research and development (R&D)GoodwillPrice-to-book ratioValue index fund


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In this article:
1. Introduction 
2. How to Adjust Book Value Using Unrecorded Intangibles 
3. Fama–MacBeth Regressions 
4. Portfolio-Level Tests 
5. Comparing iB/M with Other Alternatives 
6. Conclusions 
Appendix A. How Do Value Index Funds Define Value Stocks? 
Appendix B. A Numerical Example Showing Why We Need to Adjust B/M with Intangibles 
Appendix C. A Numerical Example That Illustrates the Procedures of Estimating Knowledge Capital and Organization Capital 


The book-to-market ratio has been widely used to explain the cross-sectional variation in stock returns, but the explanatory power is weaker in recent decades than in the 1970s. I argue that the deterioration is related to the growth of intangible assets unrecorded on balance sheets. An intangible-adjusted ratio, capitalizing prior expenditures to develop intangible assets internally and excluding goodwill, outperforms the original ratio significantly. The average annual return on the intangible-adjusted high-minus-low (iHML) portfolio is 5.9% from July 1976 to December 2017 and 6.2% from July 1997 to December 2017, vs. 3.9 and 3.6% for an equivalent HML portfolio.