Intellectual Capital and Firm Value: An Investigation of Turkish Manufacturing Companies

Abstract

This paper investigates whether intellectual capital and its components (human, relational, innovation, and process capitals) have meaningful information on firm value. Full sample consists of 148 listed Turkish manufacturing firms over the period of 2005–2017. We show that our extended Ohlson models explain the substantial part of the unexplained variation in firm market values. Specifically, we find that higher levels of measures of human capital, relational capital, process capital, innovation capital, and overall intellectual capital are directly associated with higher stock prices. Furthermore, we find that intellectual capital and its components have lagged effects on market values of firms, and human capital has a moderating effect on the relationship between other intellectual capital components and firm market values. Our main finding still holds when we re-estimate our model by addressing potential endogeneity issues and alternative conditions. Based on our findings, we recommend firm managers to do convenient resources planning on these components to raise the firm’s value. Moreover, we recommend accounting standards setters to create a separate financial reporting standard, which includes detailed information on these components that are value-relevant in making business valuation decisions.

Keywords

• Intellectual Capital
• Human Capital
• Relational Capital
• Innovation Capital
• Process Capital
• Firm Value

References

1. Alfraih, M. M. (2017). The value relevance of intellectual capital disclosure: empirical evidence from Kuwait. Journal of Financial Regulation and Compliance. 25(1), 22-38.
2. Al-Hares, O. M., AbuGhazaleh, N. M., & Haddad, A. E. (2011). The effect of 'other information' on equity valuation: Kuwait evidence. The Journal of Applied Business Research, 27(6), 57-70.
3. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120.
4. Barth, M. E. (2000). Valuation‐based accounting research: Implications for financial reporting and opportunities for future research. Accounting & Finance, 40(1), 7-32.
5. Bayraktaroglu, A. E., Calisir, F., & Baskak, M. (2019). Intellectual capital and firm performance: an extended VAIC model. Journal of Intellectual Capital, 20(3), 406-425.
6. Edvinsson, L., & Malone, M.S. (1997). Intellectual Capital: Realizing your Company’s True Value by Finding its Hidden Brainpower, Harper Business, New York, USA.
7. Eloff, A. M., & de Villiers, C. (2015). The value-relevance of goodwill reported under IFRS 3 versus IAS 22. South African Journal of Accounting Research, 29(2), 162-176.
8. Etebar, S., & Darabi, R. (2011). The role of the economic value added measure and intellectual capital in financial intermediations market value in Tehran stock exchange (TSE). Australian Journal of Basic and Applied Sciences, 5(12), 1926-1933.

9. Ferraro, O., & Veltri, S. (2011). The value relevance of intellectual capital on the firm’s market value: an empirical survey on the Italian listed firms. International Journal of Knowledge-Based Development, 2(1), 66-84.
10. Giuliani, M. (2013). Not all sunshine and roses: discovering intellectual liabilities. Journal of Intellectual Capital, 14(1), 127-144.
11. Gülcemal, T., & Çıtak, L. (2017). Entelektüel katma değer katsayısı yöntemi ile ölçülen entelektüel sermayenin firma performansı üzerindeki etkisi. Cumhuriyet Üniversitesi İktisadi ve İdari Bilimler Dergisi, 18(1), 35-55.
12. Gümrah, Ü., & Adiloğlu, B. (2011). Value relevance and reliability of goodwill and intangibles on financial statements: the case of Istanbul Stock Exchange. Istanbul University Journal of the School of Business Administration, 40(2), 155-165.
13. Hitt, M. A., Bierman, L., Shimizu, K., & Kochhar, R. (2001). Direct and moderating effects of human capital on strategy and performance in professional service firms: A resource-based perspective. Academy of Management Journal, 44(1), 13-28.
14. Huang, C. C., Luther, R., Tayles, M., & Haniffa, R. (2013). Human capital disclosures in developing countries: figureheads and value creators. Journal of Applied Accounting Research, 14(2), 180-196.
15. Huang, C., & Wang, M. C. (2008). The effects of economic value added and intellectual capital on the market value of firms: An empirical study. International Journal of Management, 25(4), 722-731.
16. Kamukama, N., Ahiauzu, A., & Ntayi, J. M. (2010). Intellectual capital and performance: testing interaction effects. Journal of Intellectual Capital, 11(4), 554-574.
17. Kucharþíková, A., Tokarþíková, E., & Blašková, M. (2015). Human capital management–aspect of the human capital efficiency in university education. Procedia-Social and Behavioral Sciences, 177, 48-60.
18. Lajili, K., & Zeghal, D. (2005). Labor cost voluntary disclosures and firm equity values: Is human capital information value-relevant?. Journal of International Accounting, Auditing and Taxation, 14(2), 121-138.
19. Liu, D. Y., Tseng, K. A., & Yen, S. W. (2009). The incremental impact of intellectual capital on value creation. Journal of Intellectual Capital, 10(2), 260-276.
20. Nazir, M. I., Tan, Y., & Nazir, M. R. (2020). Intellectual Capital Performance in the Financial Sector: Evidence from China, Hong Kong and Taiwan. International Journal of Finance & Economics, DOI: 10.1002/ijfe.2110.
21. Ohlson, J. A. (1995). Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research, 11(2), 661-687.
22. Özer, G., Ergun, E., & Yilmaz, O. (2015). Effects of intellectual capital on qualitative and quantitative performance: Evidence from Turkey. South African Journal of Economic and Management Sciences, 18(2), 143-154.
23. Roos, G., & Roos, J. (1997). Measuring your company's intellectual performance. Long Range Planning, 30(3), 413-426.
24. Samudhram, A., Stewart, E., Wickramanayake, J., & Sinnakkannu, J. (2014). Value relevance of human capital based disclosures: Moderating effects of labor productivity, investor sentiment, analyst coverage and audit quality. Advances in Accounting, 30(2), 338-353.
25. Silvestri, A., & Veltri, S. (2012). A test of the Ohlson model on the Italian stock exchange. Accounting & Taxation, 4(1), 83.
26. Starovic, D., & Marr, B. (2003). Understanding Corporate Value: Managing and Reporting Intellectual Capital. CIMA. Retrieved May 28, 2020, from https://pvp.tc/NRI0.
27. Stewart, T.A. (1998), Intellectual Capital – The New Wealth of Organizations, Nicolas Brealey Publishing, London, England.
28. Sydler, R., Haefliger, S. & Pruksa, R. (2014), Measuring intellectual capital with financial figures: Can we predict firm profitability?, European Management Journal, 32 (2), pp.244-259.
29. Tseng, C. Y., & James Goo, Y. J. (2005). Intellectual capital and corporate value in an emerging economy: empirical study of Taiwanese manufacturers. R&D Management, 35(2), 187-201.
30. Tseng, K. A., Lin, C. I., & Yen, S. W. (2015). Contingencies of intellectual capitals and financial capital on value creation. Journal of Intellectual Capital.
31. Wang, J. C. (2008). Investigating market value and intellectual capital for S&P 500. Journal of Intellectual Capital.