A Mortality-Adjusted Discount Rate for Intangible Asset Valuation: Theoretical Derivation, Sector Calibration, and Preliminary Empirical Evidence
Year: 2026
Type: preprint
Abstract: Every conventional discount rate used in intangible asset valuation - WACC, levered cost of equity (Ke), and unlevered cost of equity (Ku) - is derived from observable equity prices of firms that carry debt. Even Ku, the theoretically cleanest of the three, is estimated by unlevering the Ke of comparable companies, thereby importing their capital structures into the asset-level rate. This paper proposes Ko, a mortality-adjusted operational discount rate derived entirely from risk-free rates, market risk premia, and empirically calibrated sector survival curves - with substantially reduced dependence on capital structure: the mortality premium πmort and the risk-free rate Rf require no leverage data, while the systematic component βu×ERP retains a residual dependence on sector comparables’ leverage via standard unlevering. Ko is formally derived as Ko = Rf + βu × ERP + πmort, where πmort = −ln[S(T+H)/S(T)]/H is the conditional mortality premium, S(t) is the Weibull survival function calibrated from establishment cohort data, T is the firm's age at valuation, and H is the asset's useful life horizon. We calibrate Ko across 19 NAICS sectors using 30 years of U.S. Bureau of Labor Statistics cohort data. Cross-sectoral mortality premia range from 0.21% (Healthcare) to 21.49% (Transportation and Warehousing), producing Ko values between 7.40% and 28.68% against a sector-average Ku of 7.19%. The differential in intangible asset value between Ko and Ku ranges from 0.9% to 53.9% depending on sector mortality profile and firm age. These figures apply to assets with full operational continuity dependence (transferability factor φ=1); for separable assets such as patents and registered trademarks, the effective mortality premium scales as φ×πmort where φ∈[0,1]. Illustrative application to the NovaDerm Therapeutics LLC case (NAICS 325620) demonstrates that Ko converges within 1.73 percentage points of the Duff & Phelps build-up rate - achieved through a structurally independent derivation that requires no leverage assumption, no comparable company selection. The systematic risk component retains a residual dependence on sector comparables via standard unlevering, acknowledged in Section 2.1. Ko operationalizes the survival-conditioned discounting established by Skogsvik (2006) and Damodaran’s truncation-risk analysis, extending it to the intangible-asset PPA level with a sector-cohort calibration and a transferability adjustment. Ko separates and makes observable the capital structure contamination identified in purchase price allocation practice under IFRS 3 and ASC 805. Ko further provides a tractable, auditable rate for intangible asset valuation in M&A contexts.
Author: Freitas, Ruben Xavier de
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7166306206