Market Reactions to Tangible and Intangible Information
Source: Daniel & Titman (2006) · The Journal of Finance · DOI: 10.1111/j.1540-6261.2006.00884.x
TL;DR
The value premium is driven by intangible information, not book value per se. Decomposing a stock's past return into a part explained by fundamental ("tangible") accounting growth and an orthogonal "intangible" part, only the intangible return reverses: stocks that rose for reasons not tied to fundamentals subsequently underperform. Book-to-market predicts returns because it proxies for accumulated intangible return.
What anomaly it documents
Predictor: the intangible return — the component of a firm's past (e.g., 5-year) stock return that is orthogonal to its fundamental/accounting performance over the same window.
Direction:negative — high intangible return (price rose without matching fundamental growth) predicts low future returns; negative intangible return predicts high future returns.
Reframing of value: the book-to-market ratio works because firms with high past intangible returns mechanically become low-B/M (growth), and vice versa. Strip out the intangible return and B/M loses its predictive power — so value is fundamentally about overreaction to non-fundamental information.
OSAP predictors: IntanEP and related intangible-return signals.
How to construct it
Decompose past return: regress the multi-year stock return on contemporaneous measures of fundamental growth (book equity growth, earnings, etc.). The fitted value is the tangible return; the residual is the intangible return.
Universe: US common stocks (1968–2003 in the paper).
Portfolio formation: annually; sort on the estimated intangible-return component.
Long / short: long low (negative) intangible return, short high (positive) intangible return.
Weighting / rebalancing: value-weighted, annual.
Evidence and replication
Period
Notes
Source
IS (1968–2003)
intangible return reverses strongly; tangible return does not
this paper
IS (B/M decomposition)
B/M's predictive power loads entirely on the intangible component
this paper
OOS (post-2006)
persists; overlaps with value & reversal
post-publication
OSAP replication (IntanEP)
clear
Chen & Zimmermann 2022
The central result: the future reversal is concentrated in the intangible component of past returns. Past price moves justified by fundamentals do not reverse; price moves not justified by fundamentals do.
This unifies the value premium and long-horizon reversal under a single overreaction mechanism and clarifies why book-to-market works.
Why it might work
Overreaction to intangible information (the thesis): investors overreact to soft, non-fundamental information (narratives, sentiment, hype) that isn't reflected in accounting numbers; prices later correct. A behavioral, mispricing explanation.
Connection to value: it recasts value not as compensation for distress risk but as the correction of past overreaction — strong support for the behavioral side of the value debate.
Connection to issuance: firms with high intangible returns tend to issue shares into the overvaluation (links to the net-share-issuance anomaly).
Limitations and risks
Decomposition dependence: results hinge on how the tangible/intangible split is estimated; different fundamental-growth controls change the residual.
Overlap: entangled with value, long-term reversal, and share issuance — limited standalone incremental return.
Implementation: requires multi-year fundamental data and a regression step, adding estimation noise and turnover.
No free full text: paywalled; see DOI.
Key references
Daniel, K. & Titman, S. (2006) — Market Reactions to Tangible and Intangible Information — Journal of Finance — DOI: 10.1111/j.1540-6261.2006.00884.x
Lakonishok, J., Shleifer, A. & Vishny, R. (1994) — Contrarian Investment, Extrapolation, and Risk — Journal of Finance
Fama, E. & French, K. (1992) — The Cross-Section of Expected Stock Returns — Journal of Finance
Pontiff, J. & Woodgate, A. (2008) — Share Issuance and Cross-Sectional Returns — Journal of Finance
Chen, A. & Zimmermann, T. (2022) — Open Source Cross-Sectional Asset Pricing — Critical Finance Review
