How do intangible assets affect company valuation?

Intangible assets influence company valuation by shifting how investors and acquirers perceive future earnings potential, risk, and competitive position. Unlike physical assets, intangibles such as brand equity, proprietary software, patents, organizational capital, and customer relationships frequently generate returns through market share, pricing power, or innovation capacity rather than immediate cash flows. Baruch Lev of New York University Stern has argued that the growing gap between market and book values reflects unrecognized intangible investment, making traditional balance-sheet metrics less informative for many modern firms.

Valuation mechanics and methods
Valuers incorporate intangibles through forward-looking models that emphasize future cash flow attribution and probability of persistence. Discounted cash flow approaches allocate projected earnings to intangible-driven advantages, while relief-from-royalty and excess earnings methods attempt to price specific assets such as brands or patented technologies. Ocean Tomo in its Intangible Asset Market Value Study reported that intangible assets accounted for a growing share of S&P 500 market value, illustrating the practical importance of capturing these assets in valuation. Accounting frameworks complicate this process: the International Accounting Standards Board under IAS 38 allows capitalization of development costs when strict criteria are met, whereas the Financial Accounting Standards Board generally requires research and development to be expensed, producing systematic differences between book and economic values.

Causes of intangible-driven valuation shifts
Structural changes in advanced economies have amplified intangible importance. Jonathan Haskel of Imperial College Business School and Stian Westlake of the London School of Economics document that investments in knowledge, design, and software have risen faster than investments in tangible capital, because digitization, global supply chains, and services replace traditional manufacturing as value drivers. Market concentration in sectors where network effects and intellectual property dominate also elevates the valuation premium that investors attach to intangibles.

Consequences for corporate strategy and stakeholders
When intangibles dominate value, companies face pressure to demonstrate sustainable advantages and to manage reputational, human capital, and innovation risks. Mergers and acquisitions often price strategic intangibles at a premium, raising integration and goodwill impairment risks for acquirers. For smaller companies and entrepreneurs, intangible strength can enable rapid market entry but also increases exposure to litigation over intellectual property. For workers and communities, the intangible economy can concentrate high-value jobs in technology clusters, reinforcing regional disparities and cultural shifts in labor demand.

Human, cultural, environmental, and territorial nuances
Valuing intangibles requires attention to cultural and territorial context because brand meaning, regulatory protection for IP, and talent availability vary across jurisdictions. A brand that commands premium pricing in one country may have little recognition elsewhere, and environmental intangibles such as green technology patents can carry both regulatory incentives and community expectations. Investors and policymakers must therefore combine quantitative valuation techniques with qualitative assessment of local institutions, cultural resonance, and environmental impacts to estimate sustainable value accurately.

Overall, ignoring intangibles leads to mispriced risk and misallocated capital. Robust valuation blends rigorous financial modeling with domain knowledge about legal frameworks, cultural relevance, and technological trajectories to reflect the true economic contribution of intangible assets.