Exploring the Relationship between Intangible-Intensiveness and Earnings Persistence in North American Publicly Listed Companies

Abstract The shift towards an intellectually driven economy commenced in the 1980s and it has stimulated companies to put greater emphasis on intellectual capital investments. Concurrently, accounting research literature has acknowledged the declining trend in the quality of earnings. Despite both intellectual capital and the quality of earnings being widely studied topics, only a few prior studies have examined the relation between these two subjects. The purpose of this study is to examine whether there is a relationship between the intangible-intensiveness of a company and its earnings persistence, which is one of the commonly applied earnings quality metrics in the prior earnings quality literature. Additionally, this thesis pursues to explore whether intangible-intensity and abnormal returns of a company are associated. The data of the study, obtained from the Compustat North America and the CRSP databases, consists of all publicly listed companies in North America during the years 1962–2017. The final sample includes 148,882 firm-year observations from 14,920 different companies. Against the initially stated hypothesis derived from prior earnings quality literature, the results of this study suggest intangible-intensity to be positively associated with earnings persistence. Additional research findings reveal that the positive relationship between intangible-intensity and earnings persistence is the result of the higher persistence of losses that the intangible-intensive companies are subject to. In addition, the second hypothesis regarding the negative association between intangible-intensity and abnormal results was discredited by the empirical findings. According to the results, intangible-intensive companies’ earnings are less associated with abnormal results. The conjecture for this phenomenon is the common effect of inferior earnings compared to less intangible-intensive companies and the promising outlook regarding the future earnings of intangible-intensive companies perceived by the markets. This paper is the first of its kind examining the relationship between cost-based measured level of intellectual capital and the earnings persistence of a company. The empirical findings also contribute to the earnings persistence literature by acknowledging the considerable influence of intangible-intensity in increasing the persistence of negative earnings. The results of this study serve as a stimulus for executing further studies regarding the relationship between intellectual capital and earnings quality or earnings quality measures