FRANCHISE VALUE, TOBIN’S Q, AND MARKUPS

We decompose the difference between a firm’s market and book values into two components: intangible assets that can be created by competing firms through SG&A/R&D expenditures, and the residual denoted as franchise value (FV). The estimated parameters in the model for creating intangible assets by capitalizing R&D/SG&A expenditures vary significantly across industries. Consistent with FV being a measure of economic rents and quasi-rents, ceteris paribus, higher FV firms face fewer product market threats, have higher markups, and their investments are less sensitive to their total Tobin’s Q. In contrast, firms with higher capitalized intangible assets, face higher product market threats.