Measuring competitive advantage with an asset-light valuation model

Defining competitive advantage as the ability of a firm to generate returns in excess of its synthetic normal returns; the present study develops an "asset-light" valuation model to capture intangible strategic resources, that do not appear on balance sheets and could explain abnormal returns. Three propositions are derived from the model: (1) firms emphasizing light assets over tangible assets, generate superior performance; (2) at a given level of synthetic normal returns, firms possessing more "light" assets have superior performance; and (3) to achieve a given book rate of return, firms with more light assets require fewer tangible assets as inputs. An empirical study of the global semiconductor industry significantly supports all three propositions. The results show that, the excess returns observed across an industry reflect heterogeneity in the "light assets" possessed by the firms, and provide an explanation for observed differences in performance.