An empirical investigation of the relationship between intellectual capital and firms’ market value and financial performance
| Published date | 01 June 2005 |
| DOI | https://doi.org/10.1108/14691930510592771 |
| Date | 01 June 2005 |
| Pages | 159-176 |
| Author | Ming‐Chin Chen,Shu‐Ju Cheng,Yuhchang Hwang |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
An empirical investigation of the
relationship between intellectual
capital and firms’ market value
and financial performance
Ming-Chin Chen
Department of Accounting, National Chengchi University, Taipei, Taiwan
Shu-Ju Cheng
Audit Services, Deloitte & Touche, Taipei, Taiwan, and
Yuhchang Hwang
School of Accountancy, Arizona State University, Tempe, Arizona, USA
Abstract
Purpose – The purpose of this article is to investigate empirically the relation between the value
creation efficiency and firms’ market valuation and financial performance.
Design/methodology/approach – Using data drawn from Taiwanese listed companies and Pulic’s
Value Added Intellectual Coefficient (VAICe) as the efficiency measure of capital employed and
intellectual capital, the authors construct regression models to examine the relationship between
corporate value creation efficiency and firms’ market-to-book value ratios, and explore the relation
between intellectual capital and firms’ current as well as future financial performance.
Findings – The results support the hypothesis that firms’ intellectual capital has a positive impact on
market value and financial performance, and may be an indicator for future financial performance. In
addition, the authors found investors may place different value on the three components of value
creation efficiency (physical capital, human capital, and structural capital). Finally, evidence is
presented that R&D expenditure may capture additional information on structural capital and has a
positive effect on firm value and profitability.
Originality/value – The results extend the understanding of the role of intellectual capital in
creating corporate value and building sustainable advantages for companies in emerging economies,
where different technological advancements may bring different implications for valuation of
intellectual capital.
Keywords Intellectualcapital, Financial performance, Valueadded, Taiwan
Paper type Research paper
Introduction
The increasing gap between firms’ market and book value has drawn wide research
attention to exploring the invisible value omitted from financial statements (e.g. Lev
and Zarowin, 1999; Lev, 2001; Lev and Radhakrishnan, 2003). Lev (2001, p. 9)
documented that, over the period of 1977-2001, the market-to-book value ratios of US
Standard and Poors (S&P) 500 corporations increased from slightly above 1 to over 5,
implying that about 80 per cent of corporate market value has not been reflected in
financial reporting.
The limitations on financial statements in explaining firm value underline the fact
that the source of economic value is no longer the production of material goods, but the
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
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IC and firms’
market value
159
Journal of Intellectual Capital
Vol. 6 No. 2, 2005
pp. 159-176
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930510592771
creation of intellectual capital. Intellectual capital includes human capital and structural
capital wrapped up in customers, processes, databases, brands, and systems(Edvinsson
and Malone, 1997), and has been playing an increasingly important role in creating
corporate sustainable competitive advantages (Kaplan and Norton, 2004, p. 4)[1].
Despite the increasing recognition of intellectual capital in driving firm value and
competitive advantages, an appropriate measure of firms’ intellectual capital is still in
infancy. Instead of directly measuring firms’ intellectual capital, Pulic (2000a, b)
proposed a measure of the efficiency of value added by corporate intellectual ab ility
(Value Added Intellectual Coefficient (VAICe)). The major components of VAIC can be
viewed from a firm’s resource base – physical capital, huma n capital, and structural
capital. VAIC is being increasingly used in business (e.g. Pulic, 1998, 2000a, b) and
academic applications (e.g. Firer and Williams, 2003).
The objective of this study is to investigate empirically the relationship between
firms’ intellectual capital and market-to-book value ratios, using Taiwan’s listed
companies as our sample. Following Firer and Williams (2003), we also use VAIC as an
aggregate measure of corporate intellectual ability. Further, we analyse whether
intellectual capital contributes to firms’ financial performance and can be used as a
leading indicator for future financial performance.
This paper contributes to the literature as follows: first, we present evidence on the
relationship between intellectual capital and firms’ market value, and the relationship
between intellectual capital and firms’ current and future financial performance, by
using data from listed companies in Taiwan. Our results extend the understanding of
the role of intellectual capital in emerging economies. While Firer and Williams (200 3)
attempted to address similar issues using data from 75 South African publicly traded
companies, their empirical findings failed to find any strong association betw een
intellectual capital and firms’ profitability (Firer and Williams, 2003, p. 356). Our
results, however, support the role of intellectual capital in enhancing firms’ value and
profitability, suggesting the value of further investigation into the role of intellectual
capital in different emerging economies, where different technological advancements
may bring different implications for the valuation of intellectual capital.
Second, while Pulic proposes the VAIC as an aggregate, standardised measure of
corporate intellectual ability, our empirical results indicate that the three com ponents
of VAIC have substantial higher explanatory power for firm market value than does
the aggregate measure of VAIC, suggesting that investors may attach different values
to the three components of VAIC.
Finally, we present evidence that the VAIC measure for structural capital, SCVA,
may not be a complete measure of structural capital, in that SCVA neglects firms’
innovative capital. Our empirical results show that after controlling for SCVA, research
and development (R&D) expenditure is positively related with firms’ market value and
profitability, suggesting R&D expenditure may capture additional information on
innovative capital that is omitted from the SCVA measure.
The remainder of this paper proceeds as follows: the next section introduces the
VAIC measure and presents related empirical research. The following section develops
the theoretical framework for our research hypotheses, and depicts empirical
procedures and samples used to test our hypotheses. The penultimate section presents
and discusses our empirical findings, and the final section concludes with our research
results and their implications.
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