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Investigating market value

andintellectual capital for S&P500


Jui-Chi Wang
International Trade Department, Hsing-Wu College, Taipei, Taiwan
Abstract
Purpose The purpose of this study is to examine and answer the following research questions: how
does the US electronic industry perform from an intellectual capital (IC) perspective? What is the
relationship between IC and company market value in the US electronic industry? This study
investigated the relationship between IC and company market value in the US Standard & Poors 500
(US S&P 500) publicly traded electronic companies from 1996 to 2005.
Design/methodology/approach The Ohlson model theory was reviewed and to form the
research models. Secondary data were retrieved from S&Ps Compustat for quantitative analysis.
Findings When applying multiple regression technique to the research hypotheses, there emerges a
positive relationship between IC and market value of the company. Apparently, US electronic
companies are knowledge intensive and utilize IC to create their market capitalization.
Originality/value This is one of the rst empirical researches that quantitatively examine the
market value of US S&Ps 500 electronic companies from IC perspective in the long-term.
Keywords Intellectual capital, Market value, United States of America
Paper type Research paper
Introduction
The competitive advantages of companies have been transferred from tangible assets to
intangible assets intellectual capital (IC). Even though IC is important for
knowledge-based companies, inevitably, it has become essential in all companies. IC can
enhance the market competitive advantage by governing knowledge, organizational
technique, professional skill, customer relationship and experience. The sustainable prot
for modern company is based on how to establish the knowledge and then transform the
knowledge into capitalization.
The reasons for rapid spread of afrmation and discussion in IC management are
mainly from companies perceptions of the increasing importance of intangible assets
and the increased the weight of knowledge involvement in production manufacturing
process. When transitioning from industrial economy to knowledge economy, which
involves intangible assets, companies face the challenges of mobility, uncertainty and
complexity. In the new business environment, companies need to learn and control IC.
As Edvinsson and Malone (1997) point out, companies must build up their IC
mainly in the following aspects:
.
visibility and measurement for intangible asset;
.
integration and workability of knowledge by knowledge sharing in the technology;
.
excavation and classication of the IC through specialized training and
development and informational technological internet; and
.
raising the value of IC and then elaborating the nancial and leverage functions
by using knowledge rapidly and enhancing practical experience in profession
and technology in order to commercialize the transformation.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1469-1930.htm
JIC
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Journal of Intellectual Capital
Vol. 9 No. 4, 2008
pp. 546-563
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930810913159
The manifestation of knowledge is not only on designation, copyright and information,
but also comprises human resource, customer relationship and organizational system.
The degree of knowledge integration crossing over the production and service has
affected companies with unprecedented speed; therefore, it is inevitable for any
company to become involved with the transition to the knowledge era.
In the meantime, the critical point to evaluate the true value of company has been
changed. Edvinsson and Malone (1997) have stated that in order for a company to be
successful in the knowledge century it must be exible in its organizational system,
accommodate itself to the changing situation, and have considerable agility of
composition. Drucker (1994) has stressed that the most important resource of a companys
economic growth is its knowledge, collected fromits employees, customers, and suppliers.
Therefore, the distinguishing production and service features of the successful
company are customer involvement in production designation and manufacturing,
diversied specications, and creation of linkages among producers, sellers and
strategic alliance partners based on shared vision and mission.
The managerial philosophy of the knowledge-based company is to have a different
and nontraditional view of asset structure and employment. In the century in which
research and development, manufacturing and selling all can be executed by strategic
alliance partners or even customers, the number of accounting entries shown on the
nancial statements are no longer accurate for further analysis on current competitive
capability or potential future protability. This is why IC has been the source of
long-term sustainable protability and its effectiveness should be evaluated.
Problem statement
Rapidtechnological innovations have changedthe business environment for the electronic
industry worldwide over the last decade. As such, pioneers can dominate over the
laggards in the marketplace. Unfortunately, the laggards can only try to keep pace but
without any guarantee that they will be able to survive in the industry. Nevertheless, the
pioneers couldlose their innovation advantages due to the lowcost of productionprovided
bysubsequent entrants. Therefore, if it is tostaywithinthe ercelycompetitive industry, a
company needs to realize that it must not only provide a quality product to maintain its
market position, but it also needs to knowhowto utilize its intangible ICfor more effective
and efcient value creation in operational business circumstances.
Lev (2002) investigated the market-to-book value ratio for United States Standard &
Poors 500 (US S&P 500) companies from 1977 to 2001 and found that over 80 percent
of company market value was not included in the nancial statements. Since the gap
between nancial value and market value increased dramatically (Figure 1), in addition
to considering the gures shown on nancial statements, a company should also
consult the information from IC indicators, such as human capital, relationship capital
and innovation capital.
The real value of company has to consider its intangible assets, such as human
resources, skills, knowledge, processes and innovation capabilities. The alternative
ranking of knowledge capital for the ten smartest companies can provide a more
comprehensive and balanced view of traditional and information age companies
(Table I). However, the change from tangible to intangible has not made a signicant
change in traditional accounting and measurement systems as in the traditional
Fortune 500 company ranking shown below.
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Marr and Adams (2004) emphasizes the importance of IC measurement for most
twenty-rst century companies and the capabilities and core competencies of the
companies should be enhanced through IC. Since IC is intangible, yet important for a
company, how can we take a measurement that supports a logical and structured
approach to management? Is IC closely related to market capitalization? The purpose
of this study is to examine and answer the following research questions:
RQ1. How does the US electronic industry perform from an IC perspective?
RQ2. What is the relationship between IC and company market value in the US
electronic industry?
Literature review
IC is associated with concrete representation of a companys real value. It controls the
knowledge, experience, organizational technique, customer relationship and professional
accomplishment, then draw out the hidden value for the company. The ascendancy and
Figure 1.
Gap between market value
and book value
Rank Rank (F 500) Name Knowledge capital (mio US$)
1 8 General Electric 254,381
2 138 Pzer 219,202
3 201 Microsoft 204,515
4 34 Philip Morris 188,538
5 1 Exxon Mobil 176,409
6 110 Intel 173,984
7 49 SBC Communications 155,402
8 19 Intl Business Machines 148,679
9 32 Verizon Communications 141,471
10 88 Merck 139,494
Source: Stewart (2001)
Table I.
Top ten smartest
companies
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inferiority of IC directly reect on the markets competitive competence for company, and
can even affect investors evaluations and perceptions of the company.
Therefore, Adam Smiths 1776 book The Wealth of Nations, which initiated the
classical school of economic theory, stated that a nations wealth arises from tangible
production factors, such as labor, land and capital. This theory is no longer meaningful in
the modern knowledge-based economy and these tangible production factors are now
applied to the law of diminishing returns. In contrast, according to the law of increasing
return, when a company continually develops the IC infrastructure and investment, the
market value of the companywill appreciate and excess the book value several times since
IC is the core differentiator and driver of a company. The following graph (Figure 2)
created by Edvinsson (1997), clearly demonstrates the four phases of extended
organizational intangible capital and market value creation development and investment.
When a company invests in IC, the invisible benecial result could exceed the cost
saving; for example, increase customer satisfaction, streamline internal processes, and
improve employee performance. What is not shown on the nancial statements are
invisible values of human resources, creativity, competence basis, information
systems, organizational infrastructure, customer relationships, and research and
development (Chen, 2002).
Andriessen and Stem (2004) evaluated IC in the European Union in order to
strengthen the position of its knowledge-based economy to be most competitive and
dynamic and reach new strategic goal of sustainable economic growth with greater
cohesion for its society, so-called Lisbon Agenda. They dened IC as all intangible
resources that are available to an organization, that give a relative advantage, and
which in combination are able to produce future benets.
The research indicated that the greater investment in IC, the greater the IC asset.
In addition, there is a strong relationship between human capital and structural capital.
Finally, the high value of IC may not always create high productivity; however, low
value of IC certainly leads to low productivity.
Seetharaman et al. (2002) dened IC indicators as brands, competitive advantage,
customer relationship, human capital, products, trade marks, research anddevelopment.
Figure 2.
Market capitalization
value over time
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In the USA and Europe, nancial reports have been criticized for being inadequate and
for concealing the true value of a company fromits stockholders, nancial analysts, and
the evaluation process of acquisitions or mergers since the gap between nancial report
and market value of a company has been greaten by intangible IC.
Firer and Williams (2003) investigated the relationship between a companys
resource base (physical, human and structural capitals) and dimensions of corporate
performance (protability, productivity, and market valuation) in 75 South Africa
companies. Using correlation and multiple regression statistical methods, they
concluded that physical capital affects a companys performance although IC has
become increasingly important in South Africa.
Chen et al. (2005) investigated the relationship between IC and a rms market value
and nancial performance. Their regression model evaluated the relationship between
market value/book value ratio and value creation. Moreover, they examined the
relationship between IC and the rms current and future nancial performance.
The statistical ndings supported a signicantly positive relationship among IC,
market value and nancial performance. They also noted that IC could be indicative of
future nancial performance; predictors of research and development provide further
information on structural capital because they have a positive relationship with
protability and market value for listed companies in Taiwan.
As analyzed by Liang and Yao (2005), net income is the most signicantly
explanatory capability in market value of Taiwan information electronic company
when examined on intangible asset, balanced scorecard and IC, respectively. Also,
economic added-value and residual income are statistically supported in evaluating
and explaining business performance. Moreover, the results are signicant when a
non-nancial performance concept was applied to and tested on different market
segments of upstream, midstream and downstream companies.
The IC factors of 58 Fortune 500 companies were analyzed by Abdolmohammadi
(2005) from 1993 to 1997, who found evidence that it is effective to employ IC disclosure
on market value. The ndings also showed that new economy sectors companies
report on information technology and intellectual property and companies in old
economy sectors companies report on partnership and brand as their IC.
Tseng and James Goo (2005) categorized IC framework in term of human capital,
organizational capital, innovation capital and relationship capital. They then examined
the relationship between IC and corporate market value of a company based on three
perspectives: IC, resource-based and nance. The research subjects were Taiwanese
manufacturers and data were collected from a database and a survey. The result is a
signicant positive relationship between IC and market value of a company when
methodologies of TobinQ, market/book value and value-added intellectual coefcient
(VAICe) were utilized.
Bassi and van Buren (1999) investigated 500 US corporations and found a positive
relationship between IC investment and nancial performance. Know-how, customer
knowledge, employees expertise and process are all included in IC. If a company
continued to invest on IC, it can improve its competitive advantage; nevertheless, if a
company kept continuous efforts on services and products, there is a deferred effect on
nancial performance rather instead of an immediate short-term output.
The American Society for Training and Development (ASTD), Inc. has developed a
model for IC management that groups measurement indicators according to IC and
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nancial performance. IC measurement indicators are human capital, customer capital,
innovation capital and process capital. Return on equity, EPS, ROA, market value,
market share, new sales, revenue per employee, total shareholder return and growth
rank in industry are nancial performance measurements (van Buren, 1999).
Formal evaluation processes and systems for IC management have been created and
developed by several companies, but not every company is aware of the importance of
these processes and systems. Because of the difculty of precise denition,
identication and measurement, IC is not fully shown on the nancial statements.
However, in order to increase the likelihood of future success, management should
reform IC management to maximize the companys value.
The importance of IC has been increasingly discussed and recognized. Table II
summarizes the major denitions of IC.
Ohlson model
There are several reasons for a company to evaluate its market valuation: to compare
itself to other companies in the stock market, to set the price of initial public offering
(IPO), to calculate the created value for a company by its CEO, and to help the CEO
make strategic decisions whether to continue, sell and expand the company, or acquire
Researcher Constructs Intellectual capital (IC) denitions
Bontis (1996) Human capital
Structural capital
IC may provide a new resource-base for an
organization to compete and win
Relational capital
Roos and Roos (1997) Human capital
Structural capital
IC is the sum of the hidden assets of the company,
such as brands, trademarks and patents and also
includes all assets that are not shown in the nancial
statements. IC is a companys the most important
source of sustainable competitive advantages
Stewart (1997) Human capital
Structural capital
Customer capital
IC is knowledge, information, intellectual property
and experience; it is a collective brainpower or useful
knowledge
Edvinsson and
Malone (1997)
Human capital
Structural capital
IC refers to the difference between a companys
market value and book value
Customer capital
Sveiby (1998) Personnel competence IC is knowledge that can be converted into value
Internal structure
External structure
Bontis (1999) Human capital
Structural capital
IC is the effective use of knowledge as opposed to
information
Relational capital
Andriessen and
Stem (2004)
Human resources
Organizational
resources
Relational resources
IC is all intangible resources that are available to an
organization, that give a relative advantage, and
which in combination are able to produce future
benets
Youndt et al. (2004) Human capital
Organizational capital
Social capital
IC is the sum of all knowledge that an organization is
able to leverage in the process of conducting
business to gain competitive advantage
Source: This study
Table II.
Summary of IC
constructs and denitions
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551
and merge with others (Fernandez, 2001). Investors, managers and debtors always pay
the attention of the evaluation of a companys intrinsic value.
There are many evaluative models, such as multiples model, discounted cash ow
(DCF) model, adjusted book value model, model of discount of dividends (MDD), free
cash ow (FCF) model, residual income model (RIM). These evaluation models vary in
complexity, but all try to disclose the interaction among cost of opportunities,
forecasting, and market efciency.
In 1995, Ohlson demonstrated how to evaluate the market value for a company by
using a linear formulation with three accounting variables (e.g. earnings, book value
and dividends) and concepts that exerted great academic inuence on a companys
evaluation in the capital market. The major variables for the Ohlson model (MO) are
tabulated in Table III.
Ohlson made three assumptions while developing the model. First, the nancial theory
assumes that a companys market value is equal to the discounted future dividends and
the representation of present value of expected dividends or MDD is equal to:
P
t

X
1
t 1
R
2t
f

~
d
tt
1
The second assumption, the change in book value between two periods is equal to the
difference between net income (earnings) and dividends at time t; or is equal to net income
minus dividends at time t (clean surplus relation CSR):
bv
t
bv
t21
x
t
2d
t
2
The theory of CSRis that dividend at time t will deduct the amount of book value at time t,
but the net income at time t will not be affected by dividends at time t at all. In summary,
dividends can reduce the book value; however, current net income is not affected by
dividends. The relationships are shown in the following mathematical equations:
d
t
X
t
0;
d
t
bv
t
21
Symbol Ohlson model variable denition
P
t
Market value, or price of the stock at time t
d
t
Net dividend paid at time t
R
f
1 plus the risk free rate
E
t
: Expected value operator conditioned on the time t information
x
t
Earnings between period t 2 1 and t
bv
t
Book value at time t
x
a
t
Abnormal earnings (residual earnings) at time t
v
t
Information other than abnormal earnings at time t
v Parameter of persistence for abnormal earnings, to evaluate the sustainability
of abnormal earnings
g Parameter of persistence for information other than abnormal earnings, to
evaluate the sustainability of information other than abnormal earnings
1
1
; 1
2
Represent the terms of stochastic errors assumed for having mean zero and
normal distribution
Table III.
Ohlson model variables
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Abnormal earnings x
a
t
is dened as that net income (earnings) at time t minus book value
at time t 2 1 multiple by normal rate of return, and its equation is given by:
x
a
t
x
t
2R
f
21bv
t21
3
To combine equation (2) CSR with equation (3) abnormal earnings equation and apply
themto equation (1) MDD, equation (1) can be re-written as the residual income valuation
model (RIM) and its equation is given by:
p
t
bv
t

X
1
t 1
R
2t
f
E
t
~ x
a
tt

4
From equation (4) RIM, the market value of a company is composed of two portions.
The rst portionis bookvalue at time t, andthe secondportionis the measuredvalue of the
expected residual income. The denition of the second portion is the present value of the
ows of the future economic results still not incorporated into the net worth current
accounting (Cupertino and Lustosa, 2005).
Next, linear information dynamics (LID), the most important empirical specication
for a company valuation research in the MO, assumed the time-series behavior of
abnormal earnings. Two accounting variables (abnormal earnings and the information
other than abnormal earnings) are included in LID. Abnormal earnings can be
estimated with linear regression analysis and its equation for period t 1 is dened as:
~ x
a
t1
vx
a
t
v
t
~ 1
1;t1
5
Where the information other than abnormal earnings at time t 1 is dened as:
~ v
t1
g v
t
~ 1
2;t1
6
Suppose that abnormal earnings x
a
t
and the information other than abnormal earnings
v
t
all satisfy an autoregressive process of a single interval (regular). Additionally, the
parameter of persistence for abnormal earnings v should not be negative and it is
usually given by 0 # v , 1; parameter of persistence for information other than
abnormal earnings g should be less than 1 and it is hypothesized by 0 # g , 1.
Combining the RIM in equation (4) with the information dynamics in equations (5)
and (6) yield the following linear valuation function of MO:
p
t
bv
t
a
1
x
a
t
a
2
v
t
7
Ohlson (1995) suggested that security prices should be determined by book value,
discounted future abnormal earnings and information other than abnormal earnings as
shown in the equation (7).
Methodology
Research design
The study adopts an empirical research method and uses secondary data for
quantitative analysis. The LID concept of the MO has been applied to this study. Based
on the hypothesis of CSR in the accounting-based valuation model, the price of stock
equals book value plus future discounted abnormal earnings (Ohlson, 1995). However,
reviewing the denition of abnormal earnings and translating CSR, the price of stock
can be explained by book value plus net income at time t.
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553
For the linear equations of this study, non-nancial measures (e.g. Information other
than abnormal earnings) are also included as independent variable (equations (6) and (7)),
such as human capital, customer capital, innovation capital, process capital and IC,
respectively.
The heteroscedasticity (e.g. unequal dispersion) issue should be considered for
sample of different sizes, so the variable of company asset is considered by adding to
the linear equation because of the avoidance of the scale effect from different sample
companies. Therefore, the amount of company asset is selected and added to the linear
equation of price model as suggested by Easton (1999) in order to obtain normal
distribution across all variable values (e.g. homoscedasticity). In this study, the
variable of company asset will be added to the regression equation of the price model.
Although indicator selection should depend on a companys internal and external
strategic demand and objective, but to select the appropriate indicators for each
category, Sveiby (2003) has suggested that only one or two indicators be selected for
each category in order to keep it simple while still providing a meaningful picture and
feedback for a managers understanding and investigation. In this study, human
capital, customer capital, innovation capital and process capital are selected to reect
the multidimensional nature of IC (Marr, 2005). These four dimensions are also the
same areas of IC measurement developed by the ASTD and could provide a more
comprehensive picture for IC assessment (Edvinsson and Malone, 1997; Brooking et al.,
1998, Dzinkowski, 2000). The selected proxy variables for these four dimensions are
supported by previous academic research in IC measurement as shown in Table IV.
The symbol and denition of variables for these models is tabulated in Table V.
Based on the concept of linear regression equation from the MO, the market value of
a company is its stock price, which is the dependent variable in this study. Book value,
IC dimension Proxy variable Previous research supported
Human capital Number of employees Edvinsson and Malone (1997), Liebowitz and Suen
(2000) and Marr and Adams (2004)
Sales/employees Stewart (1997), Liebowitz and Suen (2000), Tsan
(2002), Wu (2003) and Chen (2004)
Net income/employees Brennan and Connell (2000), Dzinkowski (2000) and
Tsan (2002)
Customer capital Sales growth rate ASTD (1999), van Buren (1999), Brennan and Connell
(2000), Dzinkowski (2000), Tsan (2002), Chen (2004)
and Marr and Adams (2004)
Advertising expense Edvinsson and Malone (1997), Tsan (2002), Wu
(2003) and Chen (2004)
Innovation capital Research and
development
Edvinsson and Malone (1997), van Buren (1999),
Hsieh (2000), Tsan (2002) and Chen (2004)
Process capital Selling, general and
administration
expenses/sales
Edvinsson and Malone (1997), Roos and Roos (1997),
Stewart (1997), ASTD (1999), van Buren (1999) and
Tsan (2002)
Selling, general and
administration
expenses/employees
Edvinsson and Malone (1997) and Chen (2004)
Source: This study
Table IV.
Proxy variables for IC
multidimensional
measurements
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net income and assets are control variables employed for every model. The
relationships among nancial, non-nancial performance measurements and market
value have been extended by the following linear regression equations for H1-H5.
First, the hypothesis for human capital model is as follows:
H1. There will be a signicant relationship between human capital and market
value of the company:
H
0
: a
1
a
2
. . . a
k
0
There will not be a signicant relationship between human capital and market value of
the company:
H
1
: a
1
a
2
. . . a
k
0
There will be a signicant relationship between human capital and market value of the
company:
P@
it
a
0
a
1
BV@
it
a
2
NI@
it
a
3
Asset@
it
a
4
Empl#
it
a
5
Sales@Em
it
a
6
NI@Em
it
[
it
H2. There will be a signicant relationship between customer capital and market
value of the company:
H
0
: a
1
a
2
. . . a
k
0
There will not be a signicant relationship between customer capital and market value
of the company:
H
1
: a
1
a
2
. . . a
k
0
There will be a signicant relationship between customer capital and market value of
the company:
P@
it
a
0
a
1
BV@
it
a
2
NI@
it
a
3
Asset@
it
a
4
Sgrorate
it
a
5
AD@
it
[
it
Symbol Variable denition
P@
it
Market value (per share) of i company at time t
BV@
it
Book value (per share) of i companys equity at time t
NI@
it
Net income (per share) of i company at time t
Asset@
it
Total asset value (per share) of i company at time t
Empl#
it
Number of employees of i company at time t
Sales@Em
it
(Sales/total employees) of i company at time t
NI@Em
it
(Net income/total employees) of i company at time t
Sgrorate
it
Sales growth rate (Sales
it
2Sales
it21
=Sales
it21
) of i company at time t
AD@
it
Advertising expenses (per share) of i company at time t
RD@
it
Research and development expenses (per share) of i company at time t
SGASales
it
(Selling and general administration expense/sales) of i company at time t
SGA@Em
it
(Selling and general administration expense/employees) of i company at time t
Table V.
Research variable
measures
Investigating
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555
H3. There will be a signicant relationship between innovation capital and
market value of the company:
H
0
: a
1
a
2
. . . a
k
0
There will not be a signicant relationship between innovation capital and market
value of the company:
H
1
: a
1
a
2
. . . a
k
0
There will be a signicant relationship between innovation capital and market value of
the company:
P@
it
a
0
a
1
BV@
it
a
2
NI @
it
a
3
Asset@
it
a
4
RD@
it
[
it
H4. There will be a signicant relationship between process capital and market
value of the company:
H
0
: a
1
a
2
. . . a
k
0
There will not be a signicant relationship between process capital and market value
of the company:
H
1
: a
1
a
2
. . . a
k
0
There will be a signicant relationship between process capital and market value of the
company:
P@
it
a
0
a
1
BV@
it
a
2
NI@
it
a
3
Asset@
it
a
4
SGASales
it
a
5
SGA@Em
it
[
it
H5. There will be a signicant relationship between IC and market value of the
company:
H
0
: a
1
a
2
. . . a
k
0
There will not be a signicant relationship between ICand market value of the company:
H
1
: a
1
a
2
. . . a
k
0
There will be a signicant relationship between IC and market value of the company.
The combination of variable measurements from human capital, customer capital,
innovation capital and process capital will be tested for the IC model. The linear
regression equation for IC model is combined as follows:
P@
it
a
0
a
1
BV@
it
a
2
NI@
it
a
3
Asset@
it
a
4
Empl#
it
a
5
Sales@Em
it
a
6
NI@Em
it
a
7
Sgrorate
it
a
8
AD@
it
a
9
RD@
it
a
10
SGASales
it
a
11
SGA@Em
it
[
it
Populations and samples
The populations for this study are publicly traded electronic companies in US S&P 500.
According to S&P 500 Global Industry Classication Standard (GICS), US electronic
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companies are from information technology (45) and telecommunications services (50)
industry sectors. Data were retrieved from S&P Compustat database.
The study time period was from 1996 to 2005. The sample for this study has to meet
the following criteria:
.
the company should be normally and actively traded in S&P 500, not banned by
the supervision;
.
the company should apply the same accounting principle, such as the period of
accounting year;
.
the company that lacks key variable information was removed;
.
the company should have positive book value; and
.
the company should have net income based on the MO theory, so net loss
companies were removed.
Results
Sample selection process
After retrieving 15,050 samples from the Compustat database for US electronic
companies, inappropriate samples lacked variable information were deleted.
Unfortunately, advertising and R&D expenses were not available for most of the
companies in the database, so only 2,315 samples remained. Next, 381 companies that
contain negative book value and one company contains negative advertising expense
and seven companies contain data error were excluded, so 1,926 samples were selected,
containing 936 net income and 990 net loss companies (half of which had not reported a
prot for the last ten years).
Next, in order not to inuence the empirical result statistically by an inappropriate
data set, statistical diagnostics were used to identify whether the sample was an
inuential observation or not by using studentized residuals to denote outliers. It is
important to identify outliers because they cannot stand for the regression equation
due to one or more factors. One reason is that it requires a remedy since it causes an
inuential effect on the regression equation.
There is four-step procedure to nd the outliers, leverage points and inuential
observations:
(1) examine the residuals;
(2) locate predictors leverage points;
(3) identify inuential observation by single case diagnostics; and
(4) choose and remove an inuential observation.
After these actions were taken, 893 US companies were chosen for this study (Table VI).
The data should be more representative of the population and appear more valid.
Multiple regression statistics
Referring to the MO, a companys market value can be determined by the following
equation: P BV NI other information. Before testing the equations for
H1-H5, it is necessary to realize at what level book value and net income can reect a
companys market capitalization; or in other words, the non-nancial assets that a
companys market value contains.
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557
Entering BV@, NI@ and Asset@ as the independent variables and stock price as
dependent variable, adjusted R
2
is 0.471 (Table VII), which means only 47.1 percent of
stock price variation can be explained by these three control variables for US electronic
companies. About 52.9 percent of stock price variation should be explained by other
information, according to Ohlsons model theory. It can be assumed that book value
does not have a great effect on market value (coefcient: 20.037) and they are not
closely related in US electronic companies.
H1. There will be a signicant relationship between human capital and market
value of the company. Reject H
0
at the 0.05 level of signicance if F . F
U6;886
;
otherwise, do not reject H
0
. Adjusted R
2
equals to 0.471 and indicates that 47.1 percent
Samples Remained
A: Sample selection
Total company-years 15,050
With incomplete data (12,735) 2,315
With negative BV and error (389) 1,926
With net loss (990) 936
With outlier data (43) 893
Final test sample 893
B: Sample distribution
1996 41
1997 51
1998 51
1999 77
2000 82
2001 62
2002 86
2003 119
2004 171
2005 153
Total 893
Table VI.
Sample selection and
distribution
H1 H2 H3 H4 H5
N 893 Control variable Human Customer Innovation Process Intellectual
BV@ 20.037 20.038 20.022 20.033 20.041 20.016
NI@ 0.549 0.516 0.544 0.544 0.559 0.551
Asset@ 0.199 0.199 0.242 0.141 0.211 0.147
Empl# 0.040 0.074
Sales@Em 20.010 20.074
NI@Em 0.049 20.007
Sgrorate 0.348 0.356
AD@ 20.007 20.028
RD@ 0.084 0.113
SGASales 0.027 0.007
SGA@Em 0.083 0.103
Adj. R
2
(percent) 47.1 47.1 59 47.3 47.8 60.5
F-value 265.32 133.51 257.43 201.47 164.56 125.26
p-Value 0.000 0.000 0.000 0.000 0.000 0.000
Table VII.
Multiple regression
models summary
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of market value variation can be explained by the number of predictors and the size of
the sample from the adjusted multiple regression model. F-statistics 133.51 in ANOVA
analysis is greater than F
U
2.10 and p-value is less than 0.05 and extremely small;
therefore, the null hypothesis is rejected and it is concluded that there is a signicant
relationship between human capital and market value of the company.
H2. There will be a signicant relationship between customer capital and market
value of the company. Reject H
0
at the 0.05 level of signicance if F . F
U5;887
;
otherwise, do not reject H
0
. Adjusted R
2
equals 0.59 and indicates that 59 percent of
market value variation can be explained by the number of predictors and the size of the
sample from the multiple regression model adjusted. F-statistics 257.43 in ANOVA
analysis is greater than F
U
2.21 and p-value is less than 0.05 and extremely small;
therefore, the null hypothesis is rejected and it is concluded that there is a signicant
relationship between customer capital and market value of the company.
H3. There will be a signicant relationship between innovation capital and market
value of the company. Reject H
0
at the 0.05 level of signicance if F . F
U4;888
;
otherwise, do not reject H
0
. Adjusted R
2
equals to 0.473 and indicates that 47.3 percent
of market value variation can be explained by the number of predictors and the size of
the sample from the adjusted multiple regression model. F-statistics 201.47 in ANOVA
analysis is greater than F
U
2.37 and p-value is less than 0.05 and extremely small;
therefore, the null hypothesis is rejected and it is concluded that there is a signicant
relationship between innovation capital and the companys market value.
H4. There will be a signicant relationship between the process capital and market
value of the company. Reject H
0
at the 0.05 level of signicance if F . F
U5;887
;
otherwise, do not reject H
0
. Adjusted R
2
equals 0.478 and indicates that 47.8 percent of
market value variation can be explained by the number of predictors and the size of the
sample from the adjusted multiple regression model. F-statistics 164.56 in ANOVA
analysis is greater than F
U
2.21 and p-value is less than 0.05 and extremely small;
therefore, the null hypothesis is rejected and it is concluded that there is a signicant
relationship between process capital and market value of the company.
H5. There will be a signicant relationship between IC and market value of the
company. Reject H
0
at the 0.05 level of signicance if F . F
U11;881
; otherwise, do not
reject H
0
. Adjusted R
2
equals 0.605 and indicates that 60.5 percent of market value
variation can be explained by the number of predictors and the size of sample from the
adjusted multiple regression model. The computed F-value 125.26 is greater than
F
U
1.79 and p-value is less than 0.05 and extremely small; therefore, the null hypothesis
is rejected and it is concluded that there is a signicant relationship between IC and
market value of the company.
Conclusion
This study has shown the relationship of investments in IC in relation to the companys
stock price. Nonetheless, IC is associated with a concrete representation of the real
value of a company. It controls the knowledge, experience, organizational technique,
customer relationship and professional accomplishment, then draws forth the
companys hidden value.
Both the superiority and inferiority of IC may have a strong impact on the
competitive advantage of an organization. It may also have an effect on the perceptions
of investors in regards to its long-term sustainability. Thus, Adam Smiths The Wealth
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559
of Nations which was published in 1776 and laud out the principles of classical
economics, asserts that a nations wealth could no longer take on as much meaning and
importance today, when knowledge has a more central role. These concrete production
factors are applied to the law of diminishing marginal returns. On the contrary, based
on the law of increasing returns, when an organization constantly emphasizes its IC, its
market worth will increase and exceed its book value several times over. It is important
to realize that IC is a main driver of competitive advantage.
Similar studies have been done to show the positive relationship among IC, market
value, and nancial performance. Chen et al. (2005) reported that there is a positive
relationship between a companys IC and its current and future nancial performance.
Moreover, their research shows that a companys IC can be a strong indicator not only of
its future nancial performance but also the creation of economic value in the market.
Chen et al. (2005) also noted that structural capital may be provided in the investment of
research development that also contributes to market value and protability.
For US electronic companies, 47.1 percent of market value can be represented by
nancial assets; for the remaining 52.9 percent, this is explained by non-nancial
assets. Apparently, US electronic companies are more knowledge intensive and utilize
more IC to create market capitalization.
The rst hypothesized relationship is between human capital and value creation of
the company. Human capital is the knowledge that individual employees acquire and
use to produce goods, services, or ideas. This study suggests that while IC indicators
show a positive correlation between employee productivity and market price of the
company, the results do not show a strong relationship to human capital and market
price of a company.
Second, the relationship between customer capital and market value of a company is
considered. Customer capital is the value of a companys ongoing relationship with the
people or organizations to whom it sells. A good relationship with customers,
suppliers, and strategic alliances can determine a companys nancial performance
and success because it constitutes a value-adding resource in the supply chain. The
results indicate that the IC indicators such as asset size, net income, and sales growth
provide a moderating effect on the market value of the company.
Third, the relationship between Innovation capital and market price is examined.
Innovation capital refers to a companys revolutionary capability, innovative
achievement, and potential build up of new product and service. Simply put,
innovation is the application of knowledge to produce new knowledge (Drucker,
1993). In this study, R&D investments, net income, and asset size show a positive
relationship with the market price of the company stock. The companys capability to
innovate seems to be the most valuable capital linked to its competitiveness and
constitutes a major determinant for the companys long-term survival.
Fourth, the relationshipbetweenprocess capital andmarket value is discussed. Process
capitals are working procedures, standardized methods or projects that can increase and
enhance employees efciency and productivity. This can be seen through the companys
specications, manuals andintranet. Throughthese, the continuingprocess of knowledge-
and experience-sharing of employees can be duplicated applicable and innovatively
exercisable within the organization. The benet of developingprocess capital is the ability
to share and spread knowledge rapidly, to develop collective knowledge, to shorten the
learning process, and to accelerate productivity of the human capital (Stewart, 1997). It is
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560
concluded that there is a positive relationship between the two variables and net income,
asset size, and selling, general and administrative expenditure per employee all have a
positive correlation to the two variables.
Lastly, the relationship between IC and the market value of the company is
described. IC is the core differentiator and driver of company in the era of the
knowledge economy. The four dimensions of IC should be interactive, and create an
even greater combined effect and market value for company. It is concluded that there
is signicant relationship between IC and market value of a company. The research
results for US electronic companies show that while book value, employee productivity
and advertising expenditures show a negative correlation, the net income, number of
employees, R&D investment, and sales growth rate show a positive correlation
between IC and market value. The previous discussion has established that book value
is not a determinant in a companys market valuation but net income; employee
productivity should be improved; and advertising expense could nullify the net income,
then affect the market value for US electronic companies.
In assessing the real value of a company, investors have to consider intangible
assets, such as the human resources, skills, knowledge, processes, and innovation
capabilities of an organization. With this shift from building tangible to intangible
assets and resources, leaders and managers need to understand the changing
marketplace landscape. Although IC and knowledge assets are difcult to discern and
quantify, the results will nonetheless be reected in the companys greater
productivity, efciency, and overall protability.
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About the author
Jui-Chi Wang is an Assistant Professor and currently teaching at Hsing Wu College, Taiwan
and also receives a degree of DBA from Argosy University, San Francisco Bay Area, CA, USA.
She has published and co-authored several journal articles and conference papers in the eld of
intellectual capital management and measurement, strategic balanced scorecard evaluation,
business process re-engineering and nancial market strategies. She holds a MS
in administrative studies multinational commerce from Boston University, MA, USA.
Jui-Chi Wang can be contacted at: amandajcw@gmail.com; 090023@mail.hwc.edu.tw
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