Portfolio forming decisions: the role of intellectual capital
| Date | 11 July 2016 |
| Pages | 439-456 |
| Published date | 11 July 2016 |
| DOI | https://doi.org/10.1108/JIC-10-2015-0087 |
| Author | Marina Zavertiaeva |
| Subject Matter | Information & knowledge management,Knowledge management |
Portfolio forming decisions:
the role of intellectual capital
Marina Zavertiaeva
International Laboratory of Intangible-driven Economy,
National Research University Higher School of Economics, Perm, Russia
Abstract
Purpose –The purpose of this paper is to present a tool to categorize companies as potentially
profitable on the basis of an intellectual capital (IC) analysis.
Design/methodology/approach –The paper distinguishes two crucial attributions for picking
shares: IC and capitalization of IC-based growth potential. Using these two attributions, the author
creates a portfolio from a sample of European companies and annually rebalances it. To test its
attractiveness, the author then compares the portfolio with benchmarks and random portfolios during
the period from 2006 to 2013 using a Sharpe coefficient.
Findings –The comparison of the constructed portfolio with the benchmarks demonstrates the
importance of IC for market investors and the validity of the proposed tool. The Sharpe ratio of the
portfolio is significantly higher than the mean and median Sharpe ratios of random portfolios.
In addition, the importance of IC for choosing proper investment goal increases in crisis.
Research limitations/implications –This investigation can be improved by analysing other IC
such as the qualification of CEOs, participation of the company in business alliances, and a company’s
innovation activity. In addition, the paper considers only European companies.
Practical implications –The proposed tool provides a method to construct investment-attractive
portfolios on the basis of IC.
Originality/value –The paper contributes to the literature by identifying the underestimated shares on
the basis of a company’s IC and by developingan algorithm to create an IC-based investmentportfolio.
Keywords Growth, Intellectual capital, Portfolio comparisons, Sharpe coefficient
Paper type Research paper
1. Introduction
The idea of forming an investment portfolio on the basis of fundamental factors has
been thoroughly investigated. However, the knowledge economy has helped to identify
new value drivers that are intangible by nature. Therefore, investment attractiveness
lies in the influence of both tangible and intangible internal factors as well as external
factors. Although the literature broadly discusses the creation of a portfolio using
intellectual capital (IC), no consensus exists on method.
Recent research dedicated to IC and capital markets concentrates on the influence of
particular types of IC such as research and development (R&D) expenditure, R&D stock,
market capitalization, market value, or market return. Griliches (1981) reports that market
investors recognize high R&D expenditure as an influential trigger for the growth of
future earnings and returns on shares. Daniel and Titman (2006), Chan et al. (2001), and
Lev and Sougiannis (1999) empirically show that IC influences market indicators and offer
different explanations for this phenomenon. Some studies use portfolio comparisons to
show influence (Lev and Sougiannis, 1999; Chan et al., 2001; Anagnostopoulou and Levis,
2008). However, most papers attempt to find evidence of IC recognition based on the stock
market or discuss whether indicators of IC are useful to investors. Unfortunately, the lack
of relevant strategies prevents investors from categorizing companies as potentially
Journal of Intellectual Capital
Vol. 17 No. 3, 2016
pp. 439-456
©Emerald Group Publis hing Limited
1469-1930
DOI 10.1108/JIC-10-2015-0087
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
JEL Classification —J24, G11, G23, M50
439
Portfolio
forming
decisions
profitable on the basis of an analysis of IC. This paper fills this gap in the literature by
providing a distinctive tool to categorize companies as potentially profitable on the basis
of an IC analysis. The author creates a portfolio of investment-worthy companies by
means of two crucial attributes for picking shares: IC and the capitalization of IC-based
growth potential in market indicators. Although many papers examine IC, most ignore the
capitalization of IC-based growth potential in market indicators, which seems to be very
important. A company with a high IC value but low market capitalization is undervalued
by the stock market and therefore attractive for investors. Alternatively, a company may
have a high value of IC, but if this value has already been capitalized in the share price, the
time for investing in this company has passed. This study uses the market-to-book (M/B)
coefficient to determinefirms’growth potential following the findings of Chan et al. (2001),
Zeghal and Maaloul (2010), Orens et al. (2009), and Youndt et al. (2004).
The remainder of this paper is structured as follows: Section 2 reviews the literature
on the recognition of IC by the stock market. Section 3 describes the tool used to pick
companies on the basis of IC. Section 4 provides the samples and subsamples used for
the empirical testing. Section 5 presents the main findings and, specifically, the
portfolio comparisons results. Section 6 concludes with a summary of the main results,
a discussion, and future research suggestions.
2. Literature review
The literature review is divided into two research areas: capital markets and the
analysis of IC. All papers discussed attempt to discover the influence of IC on market
performance. However, the papers that analyse the problem from a capital market
perspective usually concentrate on market performance measures and techniques.
Indeed, they refer to IC as just another determinant of return or market capitalization
and do not analyse them in depth. Conversely, papers dedicated to IC recognize ma rket
performance as one of the possible outcomes and stress the nature, variety, and
measurement of IC. This paper considers both points of view.
2.1 IC
IC has a vague nature and heterogeneous structure. Therefore, the literature offers no
single definition (Clarke et al., 2011). It is usually interpreted according to the research
purpose. This study follows Kristandl and Bontis (2007, p. 1518) who define IC as the
“strategic firm resources that enable an organization to create sustainable value, but
are not available to a large number of firms”. Accounting literature describes resources
that are nonphysical and nonfinancial and usually not included in financial statements
as intangible assets. According to IFRS and US GAAP, intangible assets are
nonmonetary assets without physical substance. Both standards require the possibility
of future economic benefits and costs that can be reliably measured to recogn ize assets
as intangible. This paper ascribes a broader meaning than intangible assets to IC
because IC includes both intangible assets and assets for which it is impossible to
measure benefits and costs, such as relationships with customers and employee
knowledge and qualification. For example, patent value and goodwill are only included
in financial statements if they meet the requirements of accounting standards (Guthrie
and Petty, 2000). Therefore, financial reports do not contain all IC components that may
influence a company’s performance.
Market indicators are often regarded as an outcome of IC. The most popular
indicators are market value, Tobin’sq, and M/B ratio. Research usually measures IC
using a set of proxy indicators. However, some papers use specially developed
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