Conference Agenda

When liabilities are deemed improbable or cannot be reliably estimated by management, they are not recorded on the balance sheet. Instead, they are disclosed qualitatively in the company's filings. Examples include obligations related to pending or future lawsuits, product liability, environmental matters, false advertising, or patent and copyright infringements. We refer to these obligations as intangible liabilities (IL). We construct a firm-level, text-based measure of IL. IL is positively related to firm size, volatility, and share turnover, and is negatively correlated with accounting performance, abnormal returns, and Tobin’s Q. IL also predictably varies across industries. Moreover, IL predicts future lawsuits against firms and the future deterioration of their reputations. Companies with higher IL trade at lower valuation ratios and have significantly higher future crash risks. A portfolio that is long on high IL and short on low IL yields an annual abnormal return of 3% after accounting for common factors. Overall, the results suggest that intangible liabilities are a significant determinant of firm value and stock returns.