Evaluating the scope of IC in firms' value
| DOI | https://doi.org/10.1108/14691930710774876 |
| Pages | 470-493 |
| Date | 31 July 2007 |
| Published date | 31 July 2007 |
| Author | Luis Enrique Valladares Soler,Diego Jesús Cuello de Oro Celestino |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Evaluating the scope of IC in
firms’ value
Luis Enrique Valladares Soler
Universidad Europea de Madrid, Madrid, Spain, and
Diego Jesu
´s Cuello de Oro Celestino
Universidad de Burgos, Burgos, Spain
Abstract
Purpose – The paper seeks to discuss empirically and contrast the hypothesis of the Theory of
Intellectual Capital, which maintains that the difference between the market value of a firm and its
book value can be explained exclusively in terms of internal, intangible assets that are peculiar to the
firm.
Design/methodology/approach – The paper takes the form of a conceptual discussion, graphical
analysis, basic descriptive statistics and basic correlational statistics.
Findings – Not all overvaluation of corporate assets can be explained by intangible assets of an
internal nature. A significant portion can be explained by external factors, unrelated to the
management of the firm, such as the general economic cycle or the sector of economic activity in which
the firm is active. Hence, any economic importance that intellectual capital might hold for business
management is bounded.
Research limitations/implications – The research is limited to the upper echelons of the largest
US firms according to their ranking and the database of the Fortune 500 magazine. Subsequent phases
in the research will attempt to observe other populations of firms.
Practical implications – The purpose of the new accountancy of the firm in the information and
knowledge society must not be to balance financial positions with the market valuation of the firm.
There are external factors that are beyond management’s control. Prudent accounting practices
preserve their value. Corporate leadership must focus its action on the internal assets that are open to
management, on those that are a source of value creation.
Originality/value – This article reviews, discusses and empirically contrasts a fundamental
hypothesis of the Theory of Intellectual Capital and points to a more reasonable path through which to
establish the relation between intangible assets and the difference between the market value and the
book value of a firm.
Keywords Intellectualcapital, Accountancy, Market value, Intangible assets
Paper type Research paper
Introduction
This research focuses on the study of the recurrent gap between the market value of
firms and their book value. Ever since Tobin (1969) formulated his now classic Q-ratio,
attempts have been made to construct more formal explanations for this difference
between what the market is ready to pay for the assets of a firm and what the
accountants have set down in the books as a prudent estimate of the value of those
assets. The theory imposed with ever-greater insistence is that this difference may be
explained as the intellectual capital of the firm, which is constituted by a set of
intangible assets that are available to the firm and that the accountants do not record in
conventional financial statements, but which the market does in fact perceive and
appraise when valuing the firm’s shares. Over the last two decades, ever since the
The current issue and full text archive of this journal is available at
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JIC
8,3
470
Journal of Intellectual Capital
Vol. 8 No. 3, 2007
pp. 470-493
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930710774876
pioneering research of Sveiby and Risling (1986), nigh on 30 models have been
proposed to measure intellectual capital and all of them explicitly or tacitly consider
that the entire difference observed between the market value of firms and their book
value is perfectly attributable to a set of intangible assets that belong solely and
exclusively to the firm and which constitute its intellectual capital. Nevertheless, this
difference has shown itself to be quite changeable over the years and across the
different sectors of economic activity. The research described here sets out to review
this fundamental premise outlined above. What portion of the difference observed
between the market value of firms and their book value can effectively be explained in
terms of their intellectual capital or other internal factors? What portion of this
difference can be explained on a prior basis by other factors that on the contra ry lie
outside the internal dynamics of the firm?
The following develops the approach to this research problem, beginning with a
discussion of the basic criteria proposed by Roos et al. (2001) when analysing the five
most valuable US firms at the time of their research. To do so, the same analysis
performed by Roos et al. (2001) has been reproduced in a slightly lengthier list of firms
and for a time-span of over ten years. In this analysis, the ratio between the market
value and the net assets is proposed as a better measure of a firm’s overvaluation than
the percentage of hidden value proposed by the latter authors. Through the use of
graphical analysis and some basic descriptive statistics, it may be seen that it is
unreasonable to attribute the entire difference between the market value of firms and
their book value to their intellectual capital, at least for the sub-group of firms under
analysis and for the period in question. Instead, it seems reasonable to attribute a
portion of that difference to external factors related to their sector of economic activity
and to the general cycle of the economy, without leaving aside, of course, all the factors
that might be related to the principles and accountancy methods applied in the
determination of a firm’s book value.
To complete this article, a methodological statistical verification of the proposed
problem is shown based on data from the 14 most valuable US firms on the market
selected from the Fortune 500 database. The function that best fits to the data from the
selected firms over the last 19 years is estimated, and the variance proportion of the
ratio between the market value of the firms and their book value that can be explained
by the general cycle of overvaluation and undervaluation of corporate assets is then
calculated. The same is done for the sector of economic activity in which the firm
operates and the principal variables considered in this research project are correlated
with other financial variables taken from the Fortune 500 database, as well as with
three dummy variables for direct measurement of the intellectual capital under thre e
hypotheses of constant growth, geometric growth and logarithmic growth.
The research problem
The difference between the book value and the market value of firms has always
attracted the attention of academics and professionals in the field of corporate
management. The book value is understood to mean total assets minus liabilities,
which gives the net asset value of the shares. The market value of a firm is the product
of the total number of shares issued by a firm multiplied by the price or quoted value of
these shares on the stock exchange, at any given moment. Strangely enough, in the real
Evaluating IC in
firms’ value
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