User-Generated Capital and Firm Value: Theory and Evidence from Internet Media Firms



Users collectively spend billions of person-hours per year creating user-generated content which then becomes an asset that produces a stream of value for fellow users, and of course, the host site itself, labeled user-generated capital. We provide an equilibrium framework on the consumption, formation and monetization of user-generated capital, and quantify their implications for market values of Internet media firms that have been recently growing fast over the period 2000-2013. First, we build a dynamic general equilibrium model of users’ time allocation among competing websites so as to study the dynamics of and interactions among user-side consumption and investment of user-generated capital and firm-side investment in the website quality. Analytic results of the model show that improvements in the Internet firm’s investment-efficiency and monetization-capability of user-generated capital immediately increase the firm’s value by shifting up the users’ expected time spent on the website. Second, we examine how the firm’s market value is related to the firm-level characteristics and various metrics of user engagement to viewership. We find that for Internet media firms, the market-to-book value ratio is significantly higher than for all other firms, especially significantly more so with greater online user engagement and better capabilities to monetize such user engagement. Third, we calibrate the model to the U.S. data and carry out a counterfactual experiment in which user-generated capital on Internet firm’s website permanently increases by ten percent due to improvements in this firm’s either investment-efficiency or monetization-capability of user-generated capital. We find that Internet firm’s value increases by seven to 17 percent due to increase in user-generated capital stock.