This paper examines the extent to which management makes accounting choices to record intangible assets based on their insights into the underlying economics of their firm. It exploits a setting in which management has accounting discretion to record a wide range of intangible assets. The results suggest that management's choice to record intangible assets is associated with the strength of the technology affecting the firms operations, the length of the technology cycle time, and propertyrights-related factors that affect the firm's ability to appropriate the investment benefits. These effects are more important than other contracting and signaling factors consistent with the underlying economics operating as a first-order effect as envisaged by GAAP. The results also indicate that the intangible assets management has a voluntary (unregulated) choice to record—identifiable intangible assets—are more highly correlated with underlying economic factors than the regulated classes, purchased goodwill and R&D assets. This result suggests that limiting managements' choices to record intangible assets tends to reduce, rather than improve, the quality of the balance sheet and investors' information set.

The objective of this study is to provide evidence on how technological innovation conditions underlying the firm's investments drive earnings growth and, hence, market value of equity. Technologies develop and flourish or die out through the combined investment decisions of those firms doing the inventing, and those firms that adopt those inventions, and thereby help to spread (or diffuse) the innovations into wider use. Hence, technology is important for the investment decisions of all firms, regardless of whether they patent. We focus on three aggregate measures of technological innovation conditions: the success rate of past technological investments, technology complexity, and the technology development period. We use the interactions between each of these three conditions with earnings to capture the combined effect on market value of a firm's technological innovation environment. Our sample comprises 12,594 U.S. firm years for the period 1990–2000 including firms actively producing new technologies and firms that adopt technologies for their processes and products. Our primary and additional tests suggest that the interactions capture value-relevant information not reflected in commonly used variables including industry, research and development, sales, general, and administration expenses, risk, and growth. We also triangulate our results by providing evidence that aggregate technological innovation conditions predict future earnings and are, hence, instrumental in the earnings-generation process. This paper extends the valuation literature by (1) developing a generalizable framework that explains how technological innovation conditions link to future earnings and therefore map into the market value of equity; (2) developing aggregate measures of technological innovation conditions that are relevant for estimating future earnings and value for all firms; and (3) providing detailed empirical evidence on the relation between these aggregate measures and the market value of equity and earnings for all firms not just those that patent.