Investing in intangible assets has a tangible effect on a company's performance, according to a recent unpublished study. The study suggests that investments in research and development (R&D) and in advertising, although they generally reduce short-term profits, can significantly boost a company's long-term valuation.A total of 3,500 companies tracked between 1964 and 1998 enjoyed a 4.3% rise in their mean market-to-book ratio with each 1% increase in R&D spending. And a 1% increase in advertising spending produced a 1.8% rise in the market-to-book ratio. Market-to-book ratio takes a company's combined tangible and intangible value (market value) and compares it with tangibles alone (book value). Examples of intangible assets are R&D and technological know-how, patents, brand names, product quality and intellectual capital. Although intangibles generally are not recorded on the balance sheet, they are assets nevertheless: They have the potential to generate future economic benefits to the organization.Surprisingly, results did not vary by industry sector — even in high-technology companies that spend heavily on R&D and advertising. “Extra dollars invested by either high- or low-tech companies produce the same bang for the buck,” explains S.P. Kothari, one of the study's authors.
