INTRODUCTION
Problem Statement
The remarkable mergers and acquisitions (M&A) involving renowned Vietnamese brands often perplex financial analysts As reported by Kinhtedautu magazine in April 2014, foreign firms negotiated these acquisitions at surprising prices, exceeding the total value of the companies' tangible assets, exemplified by Phở 24.
Many businesses, such as those valued at $20 million or more than $60 million, raise questions about the original sources of a firm's intrinsic value These firms often struggle to accurately assess the benefits of intangible assets and may underestimate the importance of investing in these invisible resources Consequently, this can lead to inaccuracies in calculating operational efficiency and project payback periods For instance, a strong brand, as an intangible asset, can significantly enhance product sales and pricing power If analysts fail to evaluate the strength of a brand, they may encounter challenges when forecasting future revenue.
Proper evaluation of intangible assets is crucial due to the volatile nature of the economy, which significantly influences both management decisions and investor choices Companies must continuously adapt their operations and expansion strategies to maintain market share and revenue However, traditional financial statements often fail to capture the full extent of a company's efforts to innovate and grow, as highlighted by Baruch Lev and Paul Zarowin (1999), who noted a decline in the relevance of current reporting systems Investments in research and development or advertising are frequently recorded as expenses rather than assets, obscuring their true value Furthermore, as economic conditions evolve rapidly, firms must engage in innovative activities to retain customer interest and loyalty, making the strategic allocation of funds towards intangible assets essential for sustained competitiveness.
10 companies couldn’t appropriately assess value of intangible asset, they might be violated matching concept in accounting standard Each earned revenue need to suitable with expense creating it.
Valuating intangible assets is essential for key sectors such as financial reporting, commercial strategy, and development strategy When companies clearly present their financial position and future expectations, shareholders are more likely to remain loyal, potentially lowering the cost of equity Beyond financial implications, intangible assets like brand reputation and intellectual capital enhance customer loyalty and enable firms to achieve higher profit margins A well-known brand can command premium prices and negotiate better input costs with suppliers Furthermore, as noted by Mike Rocha, these assets play a significant role in strategic development.
(2014), manager of company could plan their investment strategy, how much for factory constructing and what proportion for marketing…
The demand for measuring the value of intangible assets is evident, and selecting the right method is crucial in this area of research As noted by Parble Fernandez (2013), we are still in the early stages of evaluating intangible assets Currently, there are three established methods for calculating the total value of these assets, but this research will introduce a new approach to enhance this evaluation process.
Research Objective
This research evaluates the impact of intangible assets on company performance across various industries, providing valuable insights for firms to strategically allocate resources among different asset types Utilizing a novel indirect approach with panel data analysis, the study aims to calculate the total value of intangible assets for selected companies in Vietnam.
This thesis also solves another objective related to development policies It rises a problem about supporting policies between small and medium enterprise (SME) and larger companies.
Research Questions
Base one research objectives above, this research will solve two questions:
Why should companies allocate their resources in both tangible and intangible assets?
Structure of Thesis
The study will encompass four key components: a literature review, a conceptual framework, an econometric model, and an empirical study The initial section will focus on the foundational research conducted by previous authors regarding intangible assets.
This article explores various approaches to evaluating intangible assets, analyzing the strengths and weaknesses of each method while emphasizing the advantages of T Yamaguchi's 2014 model It outlines improvements made to Yamaguchi's valuation method and visualizes the evaluation process through diagrams Additionally, the article discusses qualitative methods and specific econometric models utilized in the study, interpreting their application Finally, it examines the evaluation process of intangible assets in the Vietnamese stock market, providing specific calculations to illustrate their value across different businesses and industries, while also investigating the relationship between intangible assets and business performance.
LITERATURE REVIEW
What Are Intangible Assets
Intangible assets are defined differently due to varying perceptions, leading to diverse interpretations From an accounting perspective, a conservative approach results in a more stringent definition of these assets In contrast, investors and managers tend to adopt a broader assessment and definition of intangible assets, reflecting their wider implications in business strategy and value creation.
International Accounting Standard 38 (IAS 38) defines an intangible asset as an identifiable non-monetary asset that lacks physical substance Additionally, this standard emphasizes that a key characteristic of intangible assets is the expectation of future economic benefits.
According to OECD project (2011), with a different perspective, OECD defines
Intangible assets refer to non-physical assets that lack a tangible or financial form According to the OECD, there is a distinction between intangible assets and intellectual assets, with the latter being a subset of the former Intangible assets encompass various categories, including computerized information, highlighting their diverse nature and significance in the modern economy.
“innovative property”; “and economic competencies".
In this research, we will follow OECD’s definition to estimate aggregate value of intangible asset It means that we will use the word “intangible asset” instead of
“intellectual property” or “intellectual asset” This definition allows us not to have problem with matching concept and undervaluation of current financial reporting system.
Types Of Intangible Assets
Intangible assets can be categorized in various ways, with researchers often focusing on specific types such as brand names, customer lists, and corporate culture A notable contribution to this field is the work of Petros A Kostagiolas and Stefanos Asonitis (2009), who identified distinct categories of intangible assets.
Table 1: Category of Intangible Asset
This research focuses on the impact of total intangible assets on a company's income, despite the various types of intangible assets available Understanding the categorization of these assets is essential for selecting the appropriate valuation approach and interpreting the underlying factors contributing to industrial growth rates in subsequent sections.
Intangible Asset Valuation Approaches
According to the book Valuing Intangible Assets of Reilly, R F., and Schweis, R P.
In 1999, three primary approaches were established to evaluate intangible assets: the cost approach, the market approach, and the income approach Each method relies on distinct data sources and involves various procedures, resulting in a range of reasonable valuations for intangible assets Typically, researchers tend to utilize only one of these approaches due to constraints related to the availability of information and the costs associated with data collection.
According to Lev and Sougiannis (1996), the cost approach evaluates intangible assets by determining the total expenditure required to recreate or build a similar asset with the same function They analyze the value of R&D activities in relation to a company's earnings by calculating the value of intangible assets based on historical R&D expenditures While this method can accurately assess certain intangible assets, such as R&D and advertising expenses, it poses challenges in valuing others, including brand reputation, employee experience, and customer lists.
Determining the useful life of intangible assets poses a significant challenge, as it requires continuous evaluation to identify the appropriate lag period for research and development (R&D) expenses that impact operating earnings.
The market approach evaluates the value of intangible assets by referencing the market price of similar assets within the same market Kossovsky (2002) utilized this method to indirectly assess the value of intellectual assets by analyzing the difference between a firm's book value and its market equity value This approach offers an objective measurement of intangible asset value through market comparisons; however, it is important to note that a company's stock price reflects not only its intrinsic value but also shareholder perceptions regarding the firm's future prospects Additionally, stock prices can be influenced by temporary speculation, complicating accurate valuation Moreover, relying solely on comparable assets can be problematic, as it is often challenging to identify two truly similar intangible assets in practice.
The income approach assesses the value of intangible assets by measuring the significant difference in benefits between scenarios where the asset is present and where it is absent In essence, the value of an intangible asset is determined by subtracting the net present values of cash flows in both situations.
Interbrand employs an income approach to assess brand value, integrating various earnings with a new variable known as brand strength However, Paulo Fernandez highlighted several issues with Interbrand's valuation method in his paper, "Valuing Intangible Assets and Intellectual Property."
In 2013, Interbrand highlighted the significant advantages of intangible assets by comparing the EBITs of well-known brands with those of private label companies However, identifying private label companies poses a challenge, as these firms lack market power associated with brand recognition, making them difficult to pinpoint Additionally, alongside Paulo Fernandez, it was noted that the methods used to assess brand strength are inherently subjective and can be influenced by the appraisers' biases.
The panel data approach employs panel data analysis to assess unobservable firm effects, which Motohashi (2005) identifies as factors like management ability, employee motivation, and R&D expenditure While R&D expenses can be precisely measured, Motohashi includes them as an independent variable in his model His methodology utilizes components of the production function to evaluate the influence of labor, capital, and internet networks on a firm's value added However, in this framework, Motohashi only interprets the effects of internet networks, treating other intangible assets as part of the error term He also suggests using cross-sectional data along with fixed and random effects for estimation.
Ramirez and Hachiya (2006) introduced an alternative method for calculating the value of intangible assets by employing fixed effects Their approach utilized sales growth rate as the dependent variable, while considering production factors such as R&D expenses and sales and general administrative expenses as independent variables Although this method is linked to the market value of firms, it may exhibit biases similar to those found in market approaches, despite its foundation in production functions and the inclusion of production factors.
Sadowski and Ludewig (2003) utilized panel data to examine added value as the dependent variable, incorporating capital, labor, human capital, and social capital as explanatory variables Similarly, Tomohiro Yamaguchi (2014) employed panel data to assess intangible assets through firm-specific fixed effects, distinguishing his research by using both production and cost functions to evaluate a company's added value with and without considering intangible assets.
Calculate α and β in production Production Function
Equity of firm Equity of firm withour Intangible Asset Subtract
Book Value of Equity Tangible Asset
Conceptual Framework
T Yamaguchi's 2014 study offers a practical approach to evaluating intangible assets by utilizing panel data and indirect methods to address limitations found in previous research His methodology involves calculating a firm's equity using production and cost functions, excluding the effects of intangible assets The value of intangible assets is then determined by subtracting the total value of tangible assets from the enterprise's overall value This indirect approach relies on realizable data, avoiding speculative assumptions about future economic value Finally, regression analysis is employed to assess the relationship between enterprise value—measured by revenue or stock price—and various asset types, enabling a clearer evaluation of the significance of intangible assets in businesses.
ECONOMETRIC MODEL
This research utilizes Tomohiro Yamaguchi’s methodology for assessing the value of intangible assets It subsequently analyzes the impact of these intangible assets on a firm's added value and equity, contrasting their effects with those of tangible assets.
The formula of growth of company is based on Cobb and Douglas production function (1928):
� �� = � � � �� �� � � �� (1) Where: � �� is added value of firm i in year t,
� �� stands for capital of firm i in year t,
� �� is labor of firm i in year t.
The parameter in equation 1 reflects the impact of total factor productivity (TFP), which encompasses various elements such as the advantages of internet usage, buyer and seller power, intellectual capital, and employee motivation Collectively, these factors represent the influence of intangible assets on a company's growth rate However, a company's value growth is not solely dependent on its total assets; it also varies over time (Hulten, 2000) Consequently, the effects of intangible assets include firm-specific influences and the growth rate of industry h at time t.
Where: λ ℎ presents growth rate λ of industry h
� ℎ (�) is dummy variable of firm i in industry h.
To estimate the function, we take the logarithmic form of equation 2 T Yamaguchi (2014) simplified the equation by replacing β with 1-α, assuming constant economies of scale for the researched companies However, in this study, α and β will be estimated separately to analyze the aggregate market, with the assumption that we can identify the type of economies of scale present.
The added value of the i th firm is derived from its financial statements, beginning with operating profit This value encompasses depreciation, personnel expenses, and operating profit itself Furthermore, it is essential to adjust the firm's added value for inflation, as it will be represented in deflator form.
With p t is deflator in year t.
The primary focus of this research is the valuation of intangible assets, which prevents us from regressing Equation 3 without the value of the variable in question To address this, we will first estimate Equation 3 to derive the two parameters, α and β By utilizing the difference form of the variables in the equation, we can ensure that the expectation of the variable is zero, thereby allowing us to extract the fixed effects.
Where d(…) is difference form of variables.
Because firm’s added value includes cost of production factors, we couldn’t compute value of company by discount just firm’s added value flow Instead, we will use company’s profit.
= Operating Profit – Interest Rate – Tax (6)
= � � � �� – (Depreciation Cost + Personnel Expense + Interest + Tax)
(7) We also have the firm’s total cost C excluding cost of goods sold:
So that, firm’s profit is available to compute via formula:
The cost of a company is analyzed through the duality approach, a key concept in microeconomics that examines the relationship between production and cost functions This approach, debated by economists such as Samuelson, Shephard, and Uzawa, emphasizes the optimal combination of production factors to minimize costs Consequently, the cost function is estimated based on the production function, ensuring efficient resource allocation in manufacturing.
Where � �� is nominal cost of capital of firm i in year t
� � � is nominal wage of firm i in year t
We will calculate cost function through equation 10 After that, firm’s added value
� �� and α, β will be obtained from estimating equation 5.
The next step involves estimating the equity nominal value, Eit, which reflects the impact of intangible assets This will be calculated based on the net present value of two key flows: the firm's added value flow and the total cost flow.
� � is cost of equity of firm i in year t
However, � �� includes value of intangible assets To compute value of intangible assets, we will subtract value of tangible asset from � �� Nominal value of equity ���� without intangible assets
� �� will be obtained by below formula:
� ���� is nominal cost of capital without intangible assets.
� ���� is nominal wage of labor without intangible assets.
�� �� and � ���� are able to be identified by:
From equations 12 and 13, we could calculate value of intangible assets � �� by the ���� difference between � �� and � �� ���� (16)
Based on Equation 16, we can assess the proportion of intangible assets relative to a firm's total assets This analysis will allow us to compare the impact of intangible assets versus tangible assets on the firm's market value and overall performance.
Where: � �� is value of firm’s tangible assets,
� � � is firm’s stock price or firm’s added value.
EMPIRICAL RESEARCH
Data Sources
This research will be conducted for Vietnam listed companies in different industries These are 214 chosen companies and data are collected from 2008 to 2012.
We chose this time range to lower effect of economic recession from previous period.
The firm's operating profit multiplying deflator represents its added value, which can be calculated using Equation 4 Various studies have employed different proxies for measuring firm added value within the Cobb-Douglas model For instance, Hsing and Yu (1996) used value added, while Lev and Radhakrishnan (2003) opted for revenue as a proxy Additionally, Yamaguchi (2014) utilized earnings before tax, depreciation, and amortization to represent output in his research on intangible assets In this study, EBIT will be used as the output measure since it reflects added value after accounting for raw input costs Data for calculating Equation 4 will be sourced from the VEC database, including accounts TS131, TS132, TS161, TS162 (depreciation); TN11 (personal expense); and KQKD8, KQKD12 (operating profit).
Capital K and Labor L will be sourced from the VEC database, with net plant, property, and equipment (PP&E) representing capital K, as defined by B Lev and S Radhakrishnan (2003) Construction in process is excluded from this definition, as it cannot currently generate profit Labor L is represented by the number of employees within the firm, following the methodology of T Yamaguchi (2014) This research will further analyze labor by calculating total labor expenses, which more accurately reflects the impact of labor on a firm's added value when using the Cobb-Douglas function in its logarithmic form This approach effectively interprets the relationship between labor and capital factors concerning EBIT Moreover, K and L will be utilized in evaluating equity values, making total labor expenses a more relevant measure than merely counting employees Data for K and L will be gathered from specific accounts in the VEC database, including TS11 and TS12 for capital K, and LD11, LD13, TN11, and TN12 for labor L.
The nominal cost of capital (R) is calculated using the Capital Asset Pricing Model (CAPM), which begins with determining the firm’s rate of return (r), also known as the cost of equity This return reflects the expectations of common shareholders regarding the firm's operational performance Unlike R, which represents a weighted average of capital flows from equity, debt, and liabilities, r focuses solely on equity returns Calculating r poses challenges due to the unpredictability of future cash flows, which can vary significantly in amount and timing To address this uncertainty, various methods can be employed, including the CAPM, the dividend discount model, and the bond yield plus risk premium approach For this research, we will utilize the Capital Asset Pricing Model.
According to the Capital Asset Pricing Model (CAPM) developed by William Sharpe in 1964, the expected rate of return for a firm is determined by the relationship between the risk-free rate and the market risk premium, expressed as beta multiplied by the difference between the market return and the risk-free rate (beta*(rm-rf)).
� = � � + ���� ∗ (� � − � � ) With: � is firm’s cost of capital,
The risk-free rate is derived from assets with minimal default risk, typically represented by Treasury bonds or government debt instruments When calculating a firm's rate of return, it is essential to select the appropriate type of bond Generally, the risk-free rate should match the duration of the firm's stock However, considering the accounting assumption of a firm's ongoing concern, which implies an infinite duration for its stock, a long-term Treasury bond, specifically a ten-year bond, is used as the proxy for the risk-free asset.
To accurately assess risk premium, it is essential to consider various factors, including inflation, business cycles, and credit risk The Fama-French three-factor model (Fama & French, 1992) attempts to capture these multiple risks However, a historical equity risk premium approach is a reliable method for estimating risk premium, utilizing long-term data on average market returns and risk-free rates This approach requires a comprehensive data collection period that encompasses both economic expansions and recessions In their 2003 study, Dimson, Marsh, and Staunton employed this method to compute risk premiums for 16 countries, including the United States, from 1900 to 2002 Their findings provide clear insights into equity risk premiums in relation to Treasury Bonds, enhancing readers' understanding of the nature of risk premiums.
This research utilizes the historical equity risk premium approach to calculate equity's risk premium, while acknowledging its limitations Key constraints include the fluctuating nature of stock indices, the unstable risk aversion among investors, and the limited historical data coverage Despite these challenges, this method has demonstrated its validity over time and remains widely used by researchers Additionally, the IFS database will provide the necessary deflator data for the study period.
First estimation: Calculate α and β
To determine α and β, we will utilize equation 5, which requires the data to be transformed into its derivative form The challenge lies in processing time series data from a large number of companies across three industry categories, particularly using their tax ID numbers To address this, both SPSS and Excel will be employed for data analysis Initially, relevant data will be collected and categorized into various industries Subsequently, the derivative for each firm will be calculated, and dummy variables will be created for the industries, resulting in 49 dummy variables for the 50 industries With the derivative forms of K, L, Q, and the dummy variable D established, we can proceed with equation 5.
In this research, we apply a panel data fixed-effect model to regression analysis after conducting Hausman’s test, which compares the efficiency of fixed-effect and random-effect models The results indicate that the fixed-effect model is more suitable for our firm-level cross-section data To assess the impact of industry growth rates on firm performance, we incorporate an industrial dummy variable and utilize the Panel Least Squares Method with Fixed Effects Our analysis explores the relationship among added value, capital, labor, and industrial growth rates, employing both fixed and random-effects models The Hausman test results, presented in Table 4, suggest that the random-effects model provides a better explanation of the relationships among labor, capital, and firm performance We ensure the integrity of our results by testing for heteroskedasticity using the Wald test and addressing any identified issues, as shown in Appendix 4 Additionally, we assess multicollinearity using the VIF index, confirming that our regression does not exhibit multicollinearity problems Notably, the regression results from the random-effects model indicate a sum of α (0.63) and β (0.24) that is less than 1, revealing that Vietnam's listed companies experience decreasing returns to scale, meaning that increasing labor and capital investments leads to lower operating profit turnover.
Table 3: Result of equation 5 using fixed-effects and random-effects model α β R 2
(1) Fixed effect model without 0.62 0.24 industrial dummy variables (11.63) (3.93) 0.46
(2) Random effect model without 0.63 0.24 industrial dummy variables (14.30) (4.78) 0.46
(3) Random effect model with 0.63 0.24 industrial dummy variables (14.03) (4.64) 0.46
Table 5: Testing for heteroskedasticity using Wald test
Modified Wald test for groupwise heteroskedasticity in fixed effect regressio model
H0: sigma(i)^2 = sigma^2 for all i chi2 (214) = 3.4e+37
Table 6: Testing for multicollinearity using VIF index
Table 7: Effect of Industry on Firm’s Output
Despite the sum of α and β being less than one, the dummy variable analysis reveals that many industries in Vietnam exhibit positive growth rates This trend is a promising indicator for the Vietnamese economy, suggesting that the progress of listed companies is driven not only by tangible assets but also by intellectual contributions T Yamaguchi (2014) posits that the primary source of sustained, high growth will stem from intangible assets Table 9 illustrates the growth rates of various Vietnamese industries, and we will analyze several sectors that have demonstrated remarkable growth in recent periods to uncover the underlying factors contributing to their success.
The five high-growth industries—consumption, industrial machinery, chemicals, banking, and steel—experienced significant development between 2008 and 2012, driven by various factors Understanding these factors is essential for grasping the business environment of firms within these sectors By identifying the forces behind industrial growth, we can better interpret the scope of intangible assets related to a company's operations.
Vietnam's consumption market is rapidly developing, outpacing its neighboring countries and maintaining a high growth rate in recent years According to the Global Retail Development Index (GRDI), Vietnam's retail market ranking has fluctuated, moving from 23rd in 2011 to 32nd in 2012, and then to 28th in 2014, indicating significant potential for future growth in this sector Several factors have influenced the past progress of the consumption industry in Vietnam.
Vietnam's population growth rate is a key driver of the country's retail market development As the population continues to expand annually, the demand for retail products correspondingly increases, creating significant opportunities for retailers in Vietnam.
As of 2011, Vietnam's population reached approximately 87.84 million, reflecting a growth rate of 1.04% from the previous year, according to the Vietnam General Statistics Office (GSO) The citizen population accounted for about 26.88 million, or 30.6% of the total By 2012, Vietnam's population was projected to approach 90 million, highlighting the significant expansion and potential of this market.
- Spending on consumption: Average income per capita in 2002-2007 periods was about 7.3% per year and lead to 10.3% per year in the next period from
From 2008 to 2012, increased earnings enhanced customers' purchasing power, positively impacting the consumption industry's revenue During this period, the proportion of consumption relative to total personal income remained stable at approximately 14.8%, ultimately generating $89.7 billion by the end of 2012.
Vietnam's economic development plays a crucial role in the growth of its retail market, with the country's GDP growing at an annual rate of 6-7% From 2000 to 2011, Vietnam's GDP surged from $31 billion to $140 billion Despite global economic challenges, Vietnam's growth forecast remains resilient at approximately 5%.
Urbanization is a key driver of economic growth, significantly increasing demand in the retail sector As urban areas expand, they not only offer larger market sizes but also attract consumers who are more receptive to new products compared to those in rural areas This trend presents a substantial opportunity for the development of Vietnam's retail market, with the World Bank reporting an urbanization rate of approximately 3.4% per year in the country.
Vietnam's young population structure significantly contributes to its labor force, fostering economic growth and sustained demand As reported by the General Statistics Office (GSO), the labor force in Vietnam reached approximately 46.48 million in 2013 and is projected to continue growing in the coming years.
Travel significantly boosts Vietnam's retail market, particularly in the food, beverages, and clothing sectors Despite a low-growth economy, the country welcomes approximately 6 million international visitors annually, alongside catering to around 30 million domestic travelers In 2010, the travel industry generated a total profit of about 130 trillion Vietnamese dong.
Vietnam's retail market is experiencing increased openness due to its engagement with the WTO, leading to significant changes in foreign investment regulations Since January 1, 2009, foreign companies have been allowed to establish wholly-owned firms in the retail sector Additionally, from November 1, 2010, these companies gained the ability to introduce new brands and franchises in Vietnam This heightened competition is driving domestic retailers to enhance their technology, boost productivity, improve management systems, and adopt more effective business strategies, including a greater emphasis on advertising and after-sales services.
The development of Vietnam's banking system, marked by an increase in payment facilities, is crucial for attracting foreign retailers As reported by the State Bank of Vietnam, the country had approximately 11,000 ATMs and over 24 million banking cards by the end of 2010 This shift has led to a significant decline in cash payments, which dropped from 31.6% in 1991 to just 15% in 2010, indicating a continuing trend toward digital transactions.
A robust distribution channel is a crucial intangible asset for success in the consumption industry, enabling firms to significantly boost revenue and enhance their chances of success when introducing new products.
Estimate Cost Function
According to Samuelson (1947), firms prioritize achieving maximum profit, which is influenced by production and costs To maximize profit, companies can either increase revenue or reduce total costs Utilizing the Cobb-Douglas formula, firms can determine the optimal output based on the combination of labor and capital This combination, aimed at maximizing profit, is a crucial objective for any company The profit function of a firm can be described as follows:
We take first derivative to find out maximizing profit point.
Firm will come to maximum profit when (19) and (20) equal zero We will change these two equation a little bit and have two equations as below:
We multiplied K in both side of equation 21 and L in both side of equation 22, then
�� �� � � � � = �� (24) From equation 23 and equation 24, factor labor L could be expressed via factor capital K:
The marginal products of capital and labor are derived from equations 21 and 22, leading to the cost minimization condition where the ratio of marginal product of capital (MPK) to marginal product of labor (MPL) equals the ratio of the cost of labor to the cost of capital This relationship can be expressed as: MPK/MPL = cost of labor/cost of capital.
Base on equation 2 and substitute L for K as equation 25, formula of target output will become:
Take power 1/(� + �) for both side of equation 28, we have:
It comes to number of labor (number two input), we will replace equation 29 to equation 25:
Up to now, we could measure cost of company base on cost function as below:
With B in equation 30 is expressed as:
Equation 30 is similar to equation 10 Data for calculating cost function includes�, �, � �� , � �� , � �� and � ℎ �, � and � �� are regression results of equation 5 � �� could be collected from VEC database and � �� will be computed using CAPM model It is another input we need to compute for equation 30, � ℎ � ℎ is presented in equation
31 and data we need to finish this computation is [� � � ∑ ℎ λ ℎ � ℎ (�)�] formula of equation 2 to do this calculation.
Equation 30 show total cost of company with effect of both intangible asset and tangible asset To determine value of intangible asset, value of intangible asset need to be subtracted from total firm’s equity We will calculate equity with and without intangible asset to compute intangible asset value in the next steps.
Compute Firm’s Equity Value
The equity value of a firm represents the total value it can generate throughout its lifetime, calculated as the present value of its future operating profit flow While the calculation method is straightforward, challenges may arise in accurately estimating these future profits.
� � identifying appropriate forecasting operating profit On the other hand, determining appropriate discount rate is also another problem.
In 2014, T Yamaguchi's research on discounted cash flow assumed an infinite growth rate, simplifying calculations despite challenges posed by changing economic conditions However, applying this method to Vietnamese listed companies reveals issues, particularly regarding the unrealistic expectation of sustained high growth rates While companies may experience temporary sales success, external factors such as competition, substitute products, and shifting macroeconomic policies continuously influence business cycles Additionally, each product has its own life cycle, and although some firms can extend their growth through effective management and mergers and acquisitions, such instances are rare Many industries are currently in an expansion phase, but this upward trend is unlikely to last Therefore, the assumption of long-term growth is weak To address this, I propose that companies will maintain their current growth rate for the next five years, aligning with the Vietnamese government's five-year economic plans, after which they will stabilize, secure market share, and generate consistent annual profits Consequently, our equity valuation formula will require slight adjustments.
With n is the number of year that company still remains it growth speed.
The weighted average cost of capital (WACC) is commonly utilized to discount a company's cash flow In this study, we adopt WACC as other researchers have, assuming that variations in the cost of equity and cost of liability are minimal and do not significantly affect WACC This critical assumption simplifies the model, maintaining its effectiveness.
Compute Firm’s Equity Value with Non Intangible Asset
The total value of a firm's equity reflects its future profit potential, which is influenced not only by physical assets like PP&E and labor force size but also by intellectual properties and intangible assets In the early stages of a business, the company’s smaller scale allows for manageable growth and effective oversight by owners, who can swiftly address daily operations As the company expands, it must explore new markets, develop additional brands, and hire more staff, leading to increased management complexities Effective management encompasses financial and marketing strategies, where each decision can significantly impact profitability Thus, alongside establishing a strong brand and company culture, hiring exceptional leaders such as a CEO or CFO becomes essential as they represent valuable intangible assets Furthermore, the growth percentage of smaller companies differs from that of larger firms, indicating that equity value assessments must consider non-intangible assets This approach essentially seeks to determine a company's value based solely on labor and capital inputs, allowing for a clearer understanding of its equity value.
13 In the left-hand side of equation 13, added value of firm’s equity is computed using Cobb-Douglas model with just two components, L and K We also use WACC as discount rate to discount future added value flow In formula of added value of firm’s equity with non-intangible asset, company’s growth rate will not exist Cobb-Douglas function indicates optimal output with each combination of K and L In the rest of equation 13, total firm’s expense with non-intangible asset will be calculated by
The total firm's expenses are calculated using a consistent formula, which distinguishes between the nominal costs of capital and labor In scenarios involving non-intangible assets, adjustments are made to the cost of capital and labor compared to their standard conditions.
Evaluating Firm’s Intangible Asset
To determine the value of a firm's intangible assets, we can use the formula derived from Equation 16, which states that the value of intangible assets equals the total asset equity value minus the equity value without intangible assets After performing the calculations, we obtain the firm's intangible asset value Figure 5 illustrates the proportion of intangible assets relative to total assets across various industries.
Examine Relationships among Firm’s Revenue, I ntangible Asset and
In examining the relationship between intangible assets and a firm's value, Yamaguchi (2014) reveals that intangible assets significantly influence firm revenue, more so than the book value of equity His research employed regression analysis, initially comparing firm revenue to book equity, before incorporating additional variables such as industry growth rate and intangible assets The findings indicate that while industrial growth rate does positively affect firm value, its impact is less pronounced than that of intangible assets Ultimately, the performance of Japanese firms is more closely tied to their asset structure, including strong brand recognition, effective control systems, and diversified distribution networks, rather than merely industry trends.
46 intangible asset) could reach higher development than peer companies in the same industry.
Figure 4: Change of total factor of production (TFP)
Figure 5: Ratio of Intangible asset on Total asset
This study investigates the impact of intangible assets on the added value of firms listed in Vietnam, focusing on the distinct effects of tangible versus intangible assets We will utilize the value of tangible assets rather than the book value of equity for our analysis To estimate the relationship, a non-linear model is theoretically employed, as firms make simultaneous decisions to optimize revenue and minimize costs However, as noted by Samuelson (1947), practical application of non-linear estimation is complex, prompting the use of a linear approach with logarithmic transformation of variables The estimation process will begin with a comprehensive set of variables, followed by a reduction in variable count to assess the influence of each factor on the firm's added value.
This study analyzes data from 214 companies across various industries to assess the factors influencing earnings before interest and taxes (EBIT) in 2012 While the dataset is limited to observations from that single year, which may include the effects of the business cycle and lacks seasonal adjustments, expanding the data range in future research could address these limitations.
Table 8: Estimation with all variables
REVENUE Coefficient Std Error t-Statistic Prob.
Table 9: Effect of intangible asset and industry development on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob.
Table 10: Effect of intangible asset on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob.
Research indicates that intangible assets significantly enhance a firm's added value, while tangible assets yield ambiguous effects A positive correlation exists between a company's focus on intangible assets and its profitability; specifically, a 1% increase in intangible asset investment correlates with a 0.04% rise in profit This impact is likely underestimated, as the benefits of increased intangible assets extend beyond a single year For instance, when a consumer firm expands its distribution network into new markets, it tends to attract younger, well-educated consumers who are more open to new products, as opposed to older customers who typically require more information before making a purchase According to Rogers (1983), about 2.5% of customers are innovators who are quick to try new products As these early adopters share their experiences, brand recognition grows, leading to increased interest from older consumers Consequently, expanding a distribution network not only boosts immediate revenue but also promises substantial long-term financial returns, a trend that applies similarly to investments in various intangible assets.
The growth rate of industries significantly affects the EBIT of firms, differing from findings in Yamaguchi's study The development resources for Vietnam's listed companies are influenced by unstable factors, particularly the profitability of various industries The attractiveness of each industry fluctuates with the economic cycle; during recovery, sectors like financials and transportation thrive early on, while technology and capital goods gain momentum in the middle stage, and basic industries and energy peak later Conversely, some industries, such as utilities, perform better during the middle of a recession, and financials excel at the trough Consequently, the growth rate of Vietnam's listed companies remains unstable and unpredictable.
In analyzing the market value of a company, we explore the relationship between independent variables and stock price, as illustrated in Table 11 The findings reveal that tangible assets hold a significant positive coefficient, while intangible assets and industry growth rate do not play a meaningful role in influencing stock prices.
Table 11: Association among intangible asset, tangible asset, industrial growth rate and stock price.
Stock Price Coefficient Std Error t-Statistic Prob.
Table 12: Association between tangible asset and stock price
Stock Price Coefficient Std Error t-Statistic Prob.
Stock prices are influenced by various factors, including a company's performance, financial position, and cash flow, as well as broader policies The Vietnamese stock market, being relatively small, is often easily swayed by large financial entities, leading many investors to prioritize short-term gains This focus on immediate profits can result in trading decisions that overlook critical aspects of a company's core value, such as administrative expenses and brand value, which are essential yet often neglected in investment analyses.
Tables 8 and 11 illustrate the differing impacts of intangible assets on a company's performance and stock price The analysis indicates that intangible assets represent a significant contributor to a firm's future profitability Therefore, in addition to enhancing production capabilities, companies should prioritize the accumulation of intangible assets to foster sustainable long-term growth.
4.8 Firm’s Intangible Asset and Policy Implications
Intangible assets hold significant value in a company's operations, closely linked to its potential for future growth Understanding why these assets exert such a strong influence requires a long-term analysis of specific cases A key concept to consider is "market power," which is often associated with monopolistic markets In a perfectly competitive market, businesses have minimal market share and do not significantly impact economic decisions, resulting in little market power However, when firms emerge that can control prices, they become price makers, highlighting the importance of market power in competitive dynamics.
Market power, as defined by Lawrence (May 2012), refers to a company's ability to generate excess profits through the disparity between price and marginal cost This power stems from product differentiation, which Bain (1956) identified as a key factor in creating barriers to entry Without product differentiation, goods become indistinguishable in the market, leading consumers to prioritize the lowest price, ultimately driving the market toward equilibrium and eradicating excess profits Lawrence highlights that product differentiation is rooted in three main elements and resembles the process of creating intangible assets, with various origins contributing to this differentiation.
A resources-owned monopoly refers to exclusive inputs such as proprietary government trade rights, like taxi service licenses, or exclusive patents Companies must possess significant social capital, financial strength, and brand reputation to secure these exclusive resources, ensuring that suppliers engage solely with them Additionally, proprietary trade rights from the government are integral to a firm’s social capital Patents, whether derived from research and development or acquisitions, are vital intangible assets that demonstrate a company's commitment to long-term innovation and leadership Overall, these intangible assets contribute to a firm’s structural capital, underscoring its competitive advantage in the market.
- Economic of scale: This is the origin of "natural monopoly" To participate in the industry, enterprises have accumulated an amount of capital needed and thereby create barriers to entry.
Entering the beverage industry requires significant investment, as businesses face substantial sunk costs that cannot be recouped if they choose to exit These costs include research and development, market research, advertising, and brand building, making it a capital-intensive sector For instance, while creating a product similar to Coca-Cola or Pepsi may seem straightforward, the formidable brand loyalty and extensive advertising strategies of these companies create a significant barrier to entry for new competitors According to game theory, potential entrants must be prepared to allocate considerable financial resources to establish their brand and compete effectively against established giants like Coca-Cola and Pepsi.
Lawrence's 1956 study highlights the strong connection between a firm's intangible assets and its market power To achieve profits exceeding the norm, businesses must focus on developing strategies that enhance their intangible assets.
Market power significantly influences a company's business operations, sparking varied opinions among economists regarding its effects on the economy While some view market power as beneficial, others highlight its potential drawbacks, leading to a complex debate about its overall impact on the marketplace.
Market power can have significant negative implications, particularly in monopolistic markets where competition is eliminated Unlike perfect competition, which optimizes prices and economic benefits, monopolies, such as Microsoft's dominance in the web browser market, allow companies to exert pricing power and make output decisions that hinder competition Microsoft's integration of Internet Explorer (IE) into its Windows operating system led to a staggering 95% market share in 2004, demonstrating the substantial barriers to entry for other firms Despite efforts from competitors, IE maintained an 85% share two years later, highlighting the overwhelming influence of monopolistic practices Antitrust laws have been implemented to curb such market power, as evidenced by Microsoft's legal challenges and fines totaling nearly $2.2 billion, which aimed to foster competition and innovation By 2013, these efforts had resulted in a significant decline in IE's market share to 24%, while competitors like Firefox and Chrome gained ground, illustrating the positive impact of antitrust interventions on market dynamics.