CRIEFF Discussion Paper Number 0806
Why
is it so Hard to Value Intangibles? Evidence from Investments in
High-Technology Start-Ups
Gavin C. Reid (University of St Andrews) and Julia A. Smith (University of Strathclyde Business School)
Abstract
The paper uses a range of
primary-source empirical evidence to address the question: ‘why is it to hard
to value intangible assets?’ The setting
is venture capital investment in high technology companies. While the investors are risk specialists and
financial experts, the entrepreneurs are more knowledgeable about product
innovation. Thus the context lends
itself to analysis within a principal-agent framework, in which information
asymmetry may give rise to adverse selection, pre-contract, and moral hazard,
post-contract. We examine how the
investor might attenuate such problems and attach a value to such high-tech
investments in what are often merely intangible assets, through expert due
diligence, monitoring and control.
Qualitative evidence is used to qualify the more clear cut picture
provided by a principal-agent approach to a more mixed picture in which the
‘art and science’ of investment appraisal are utilised
by both parties alike.
JEL codes: G11, G24, M41, O3
Keywords:
Venture capital, high technology, accounting information, intangible assets, financial reporting.
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