A European empirical study of the relationship between firms’ intellectual capital, financial performance and market value
| Pages | 771-788 |
| Date | 09 October 2017 |
| Published date | 09 October 2017 |
| DOI | https://doi.org/10.1108/JIC-10-2016-0105 |
| Author | Filipe Sardo,Zélia Serrasqueiro |
| Subject Matter | Information & knowledge management,Knowledge management,HR & organizational behaviour,Organizational structure/dynamics,Accounting & Finance,Accounting/accountancy,Behavioural accounting |
A European empirical study of
the relationship between firms’
intellectual capital, financial
performance and market value
Filipe Sardo and Zélia Serrasqueiro
Department of Management and Economics,
Universidade da Beira Interior, Covilha, Portugal
Abstract
Purpose –The purpose of this paper is to analyze the relationship between firms’intellectual capital (IC),
financial performance (FP) and market value (MV ) as well as the relationship between ownership
concentrations on IC performance.
Design/methodology/approach –A large sample of non-financial listed firms belonging to 14 countries in
Western Europe, for the period between 2004 and 2015, was investigated using the GMM system (1998)
dynamic estimator and the effect of lagged explanatory variables on firm’s FP and MV.
Findings –The results reveal that IC is an important resource for firms’value creation. Human capital is
found to be a key factor of firms’wealth. Results show that capital employed efficiency positively impacts on
firms’FP in the short run. The impact of IC components on firms’MV may not be immediate. The structural
capital positively affects firms’FP in the long run. Also, the results reveal that ownership concentration and
owners’management involvement constrain firms’IC performance.
Originality/value –The current study contributes to IC research by exploring a large sample of firms
across countries in Western Europe using econometric modeling. Considering that the effect of IC on firms’FP
needs time to be realized, thus to be measured, the effect of lagged explanatory variables on performance was
tested, using dynamic panel estimators, specifically the GMM system (1998) dynamic estimator.
Keywords Financial performance, Intellectual capital, Ownership concentration, Market value
Paper type Research paper
1. Introduction
In a knowledge-based economy, the importance of intellectual capital (IC) investments is
recognized because the knowledge assets affect the firm’s long-term competitive advantage
and value creation (Lev, 2001, 2004; Cabello-Medina et al., 2011). Furthermore, IC is an
important resource for firm’s innovations and human development through knowledge
share (European Commission, 2010, 2013; Nonaka and Takeuchi, 1995). The recognized
discrepancy between firm’s book value and market value (MV ) has been attributed to
hidden values that are not recognized in the annual reports. In that sense, IC has been
suggested to explain the gap between firm’s MV and book value (Lev, 2004).
The difficultiesin evaluating IC investments increase agency costs dueto the information
asymmetry between the firm and the external investors (Aboody and Lev, 2000; Lev, 2004;
Lev and Zambon, 2003). The specificities of IC investments may lead to adverse selection,
moral hazard and an opportunistic behavior of managers (Holland, 2006; Aboody and
Lev, 2000). High ownership concentration and lackof willingness to share control may block
the entrance of qualified and well-trained managers (Miller and Le Breton-Miller, 2006;
Westhead and Howorth,2006; Greco et al., 2014), and the presenceof a high number of family
members as executives can increase conflicts and loss of efficiency which affects the firm’s
objectives (Gomez-Meja et al., 2007; Miller and Le Breton-Miller, 2006; Greco et al., 2014).
Ownership concentration can have a negative effect on IC value creation and
development. On the one hand, Gedajlovic and Carney (2010) argue that firms with
ownership concentration are disadvantaged in value creation from IC. On the other hand,
Journal of Intellectual Capital
Vol. 18 No. 4, 2017
pp. 771-788
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-10-2016-0105
The current issue and full text archive of this journal is available on Emerald Insight at:
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771
Relationship
between firms’
IC, FP and MV
empirical evidence suggests that ownership concentration might positively impact on firm’s
performance and value (Shleifer and Vishny, 1986; Denis and McConnell, 2003).
This study aims to extend the literature of IC (e.g. Ballester et al., 2003; Chan et al., 2001;
Xing, 2014; ul Rehman et al., 2011; Tseng et al., 2013; Nimtrakoon, 2015) by analyzing the
impact of IC investments on firms’financial performance (FP), measured by return on assets
(ROA), and firms’MV, measured by Tobin’s Q. These measures were used in several studies
(Goebel, 2015; Bharathi Kamath, 2008; Mehralian et al., 2012; Gerpott et al., 2008). Moreover, this
study also aims to verify the influence of ownership concentration and owner’s management
involvement on the firms’IC performance in the context of countries in Western Europe.
To reach the objective of the study, a large sample of non-financial listed firms across
14 countries in Western Europe is used (Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and UK) in order to
capture some variability of the relevant variables in study, namely of IC investments.
Data were collected for the period between 2004 and 2015. Considering that the effect of IC
on firms’performance needs time to be realized, thus to be measured, Nimtrakoon (2015)
argues that studies exploring the effect of IC on lagged performance seem to require the use
of econometric modeling techniques. Thus, following this suggestion, this study tests the
effect of lagged explanatory variables on performance, using dynamic panel estimators,
specifically the GMM system (1998) dynamic estimator.
Findings allow contributing to IC literature, revealing that IC is an important resource for
firms’value creation. Human capital (HC), referring to employees’competence, knowledge
and innovativeness, is found to be a key factor for firms’wealth. Results show that capital
employed efficiency (CEE) positively impacts on firms’FP in the short run. The impact of IC
components on firms’MV may not be immediate. According to the findings of the study, the
structural capital (SC) positively affects firms’FP in the long run. If we take into
consideration that SC comprises the firms’most valuable strategic assets (Bontis et al., 2015;
Denicolai et al., 2015; Janosevic and Dzenopoljac, 2012), then it is understandable that it
takes time for employees to assimilate and adapt to firms’particularities, such as, culture
and processes. Also, results show that ownership concentration and owners’management
involvement constrain firms’IC performance.
The current paper is structured as follows. Section 2 presents a theoretical framework
and hypotheses formulation, Section 3 describes the used methodology, Section 4 presents
the results, the results discussion is presented in Section 5 and finally, Section 6 presents the
conclusion and implications.
2. Literature review and hypotheses development
2.1 IC and firm’sFP
IC can be defined as the sum of all knowledge and knowing capabilities that allow firms to
acquire and/or maintain a sustainable competitive advantage (Wang et al., 2014; Nahapiet
and Ghoshal, 1998; Youndt et al., 2004). Edvinsson and Malone (1997, p. 44) define IC as “the
possession of knowledge, applied experience, organizational technology, customer
relationships and professional skills that provide the firm with a competitive edge in the
market.”Lev (2004) interprets intangible assets as claims of future benefits, but without
physical or financial form. Moreover, there is consensus among academics that IC,
i.e., non-monetary and non-physical resource, strongly contributes to value creation through
employee’s knowledge and organizational processes, databases and relationships
(Serenko and Bontis, 2004; Youndt et al., 2004; Wang et al., 2014).
Although we can find different frameworks to conceptualize IC (Edvinsson and Malone,
1997; Sveiby, 1997; Sydler et al., 2014), there are three components that are widely accepted
among researchers, i.e., HC, SC (or organizational capital) and relational (or customer) capital
(RC) (ul Rehman et al., 2011; Wang et al., 2014; Nimtrakoon, 2015; Bontis et al., 2015).
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