Abstract

The new business practices and information structures associated with information technology (IT) account for a significant fraction of the market value of modern firms. We use a new IT data series along with Hall’s Quantity Revelation Theorem to measure the amount of IT-related intangible capital (ITIC) in US firms. We find that the prices of ITIC have fluctuated due to dot-com boom and bust valuations. However, with the exception of a brief slowdown in 2001, ITIC quantities have been steadily increasing through 2005. In the average firm in 2005, IT-related intangible capital was about one quarter of the value of physical capital. We also estimate that IT-related intangible capital depreciates at a rate of about 6-8% a year, which is closer to the estimated depreciation rate for physical capital than for R&D capital. Implications for managers and policy makers are discussed.

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The Price and Quantity of IT-Related Intangible Capital

The new business practices and information structures associated with information technology (IT) account for a significant fraction of the market value of modern firms. We use a new IT data series along with Hall’s Quantity Revelation Theorem to measure the amount of IT-related intangible capital (ITIC) in US firms. We find that the prices of ITIC have fluctuated due to dot-com boom and bust valuations. However, with the exception of a brief slowdown in 2001, ITIC quantities have been steadily increasing through 2005. In the average firm in 2005, IT-related intangible capital was about one quarter of the value of physical capital. We also estimate that IT-related intangible capital depreciates at a rate of about 6-8% a year, which is closer to the estimated depreciation rate for physical capital than for R&D capital. Implications for managers and policy makers are discussed.