An Empirical Study on the Lead－Lag Relation between Price and Knowledge－Based Assets
Asian Tax Journal Vol. 6 No. 4 (2005), pp. 187-211
Abstract
This paper measures firms' knowledge－based assets and investigates the relation with stock prices. Since the knowledge－based assets have similar characteristics to the firm's competitiveness or future excess earnings, finance research measures the excess earnings by applying the dividend discounted model. This study uses various methods of measuring the knowledge－based assets, based on the residual income model alternative the dividend discounted model. This paper evaluates the relevance of the measurement methods by testing the lead－lag and simultaneous relations between stock price and knowledge－based assets. The empirical test shows the method of incorporating the industry averages into the measurement variables is the most appropriate among the various measurement methods. There exist lead－lag and simultaneous relations between stock price and knowledge－based assets, supporting that the stock market take the knowledge－based assets not recognized in the financial statement into the firm valuation process. The analysis also shows that the types of lead－lag relations and lead－lag periods depend on industry characteristics, indicating the incorporation of industry averages into the measurement process results better measurements of the knowledge－based assets.
Keywords
- knowledge－based assets
- excess earnings model
- price leading model
- firm valuation
- market value
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