The relational side of intellectual capital: an empirical study on brand value evaluation and financial performance
| DOI | https://doi.org/10.1108/JIC-05-2020-0167 |
| Published date | 01 December 2020 |
| Date | 01 December 2020 |
| Pages | 479-515 |
| Subject Matter | Knowledge management,Information & knowledge management,HR & organizational behaviour,Organizational structure/dynamics,Accounting & finance,Accounting/accountancy |
| Author | Enrico Laghi,Michele Di Marcantonio,Valentina Cillo,Niccolo Paoloni |
The relational side of intellectual
capital: an empirical study
on brand value evaluation
and financial performance
Enrico Laghi
University of Rome La Sapienza, Rome, Italy
Michele Di Marcantonio
Universita degli Studi di Bari Aldo Moro, Bari, Italy
Valentina Cillo
Link Campus University, Roma, Italy, and
Niccolo Paoloni
Roma Tre University, Roma, Italy
Abstract
Purpose –This study aims to validate a direct method to measure relational capital through the estimation of
corporate brands. Considering the influence of relational capital management in leading performance and
brand development, we consider brand value as a proxy for relational capital. The main research goal is to
extend the previous literature on intellectual capital, financial performance and brand management by
elaborating and testing an original approach for valuating corporate brands using regression analysis on
multiples based on firm-specific accounting data and market information.
Design/methodology/approach –The authors propose two econometric models, for both listed and
non-listed companies, which consider brand valuations made by primary consulting entities (Interbrand,
Brand Finance, BrandZ, European Brand Institute) and multiples derived from accounting and market data of
firms. Models were tested on a sample of nonfinancial firms for the period from 2006 to 2019, distinguishing
between IAS/IFRS-based and US GAAP-based reporting standards.
Findings –The empirical results show that the identified set of market and accounting multiples proved to be
significant information for estimating the value of brands within the IAS/IFRS framework, while a lower
explanatory power was assessed for US GAAP firms. Furthermore, the empirical evidence confirm that the
direct, relative approach based on multiples is more accurate for valuating listed firms than non-listed firms.
Robustness analysis demonstrates that findings do not change significantly when the reference datasets and
the main assumptions of the models are altered.
Research limitations/implications –The statistical significance of the analysis is limited by the
non-objective nature of brand value estimates. The use of additional sources for brand valuations might allow
for the further assessment of the robustness of the relationships identified.
Practical implications –Due to their efficacy and ease of use, the proposed models represent valid practical
tools for managers, investors, analysts and professional evaluators.
Originality/value –This work contributes to the existing literature through the identification of significant,
stable relationships between brand values and the main economic, financial and asset characteristics of firms;
the identification of those relationships would allow for the extension of the multiples approach also to the
evaluation of brands.
Keywords Intellectual capital, Relational capital, Customer capital, Brand value, Brand equity, Brand
valuation, Intangible assets, Relative valuation, Multiples, Financial performance
Paper type Research paper
1. Introduction
Given the importance of company valuation, the development of valid methodological
approaches and valuation techniques for estimating the value of brands has become a major
The relational
side of
intellectual
capital
479
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1469-1930.htm
Received 21 May 2020
Revised 6 August 2020
8 October 2020
Accepted 29 October 2020
Journal of Intellectual Capital
Vol. 23 No. 3, 2022
pp. 479-515
© Emerald Publishing Limited
1469-1930
DOI 10.1108/JIC-05-2020-0167
topic from a standpoint of both economic and business administration doctrine and
professional valuation practice.
Over the last few decades, the interest of scholars and practitioners in the topic has grown
further, due to the rise in the economic importance of intellectual capital, the information
economy and the service industry worldwide and the growing recognition that intangible
assets are important determinants of firms’values (Barth et al., 1998).
As a result, interest in intangible assets has grown strongly in many OECD countries, to
such an extent that the growth rate of intangible investments has exceeded that of tangible
investments (Corrado et al., 2016;Demmou et al., 2019). The assessment of intangible
resources becomes strategic not only in the capital markets and in the mergers and
acquisitions, but also to bolster the efficiency of processes, to improve the productivity and to
support sustainable resources management (Crema and Verbano, 2013).
In the literature, a range of different definitions of intangible resources may be found.
Many studies identified several similarities between the definitions of intangible resources
and intellectual capital (IC). Both, in fact, can be defined as a set of intangible assets that
allows firm to generate added value (Reed et al., 2006). Scholars identified three components of
IC: human capital (HC), which embodies the knowledge, talent and experience of employees
(Bontis and Fitzenz, 2002); structural capital (SC), which represents the codified knowledge
bases that reside within the firm (Subramaniam and Youndt, 2005); and relational capital
(RC), which is the knowledge embedded in the relationships with stakeholders (Ngah and
Ibrahim, 2009).
Several authors stress that human capital (“HC”) is at the heart of intellectual capital
creation. Nevertheless, human capital can disappear when employees leave the company
(Bontis, 1999). By contrast, structural capital (“SC”) belongs to firms “structurally,”including
innovative capital, relational capital (“RC”) and organizational infrastructure.
Considering the growing gap between market and book values of firms, investigation into
how to measure firms’relational capital and whether the capital markets are efficient with
regard to relational capital has been drawing widespread interest on the part of researchers
(Chen et al., 2005, p. 161).
Relational capital is the category of IC which, in most cases, is likely to be managed in the
worst manner as compared with the overall set of intangible assets. It represents the value of
communications of the firm with customers and stakeholders. The features of relational-
customer capital include market share, customer retention and profits resulting from any
customer (Anderson et al., 1994). However, without the capital of customers, the market value
or firm’s business performance cannot be achieved (Prahalad and Ramaswamy, 2000;Garc
ıa-
Merino et al., 2014). Therefore, in order to establish the value of the brand, it is necessary to
estimate how much the brand is worth on the market and, therefore, the consumers’
willingness to pay a higher price for branded products or services (Anselmsson et al., 2014). In
this sense, the concepts, connections and images associated with the corporate brand are
reflected in the interaction between customers and the firm’s tangible and intangible assets
(Cillo et al., 2019a,b).
Although the importance of IC for the economic well-being (Roos et al., 1997) is widely
recognized, the problem of measuring a resource whose nature is intangible and non-financial
remains unexplored. In this regard, one of the main concerns is that there is still no specific
method that further explains how resources can be measured, evaluated and used, how to
create value using IC and how to explain the relationship between resources and firm value
(Bontis et al., 1999).
Essentially, there are still two basic gaps associated with the study of relational capital:
how to measure it (Low, 2000), and how to create more value from it (Abdolmohammadi, 2005;
Sirmon et al., 2007).
These questions still pose a challenge.
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In order to extend the understanding of the role of relational capital in measuring and
enhancing firms’value and profitability, this study aims to validate a direct method to
measure relational capital through the estimation of corporate brands. Considering the
influence of relational capital management in leading performance and brand development,
we consider brand value as a proxy for relational capital (Bornemann et al., 1999;Castro et al.,
2004). In light of the importance of this doctrinal gap, the main research goal of this paper is to
estimate the value of a brand through regressions analysis on variables calculated as a
function of market and accounting data of the corresponding firm (the input). Furthermore,
we analyze whether listing on an organized market contributes toward better financial
performance.
This paper contributes to the literature as follows. First, our study contributes to the
existing literature about intellectual capital and brand management by proposing and testing
an original evaluation approach aimed at estimating the brand of a given firm following a
direct, relative approach based on multiples. To the extent of our knowledge, no study has
been dedicated to estimating brands on a relative basis, using basic market and accounting
data, following an approach similar to the direct market multiples methodology adopted for
the evaluation of firms (see section 2.2). Indeed, what appears to be lacking from a doctrinal
standpoint is the identification of significant, stable relationships between relational capital
and the main economic, financial and asset characteristics of firms resulting from financial
statements and stock prices (Maditinos et al., 2011); the identification of those relationships
would allow for an extension in the multiples approach to also cover the valuation of brands.
Furthermore, from a practical standpoint, International Accounting Standards [IAS]/
International Financial Reporting Standards [IFRS] (“IAS/IFRS”) and US Generally Accepted
Accounting Principles (“US GAAP”) currently have significant deficits and differences with
respect to the recognition of intangible assets in the balance sheet, due in part to the difficulty
in reliably measuring their costs and values.
In this vein, this paper proposes a new evaluation approach aimed at estimating the value
of corporate brands through standardized models based on multivariate regression analysis
on multiples. To this aim, we have defined two original econometric models, for both listed
and non-listed firms, which consider brand valuations made by primary consulting entities
and multiples derived from accounting and market data of firms. The models were tested on a
sample of non-financial firms for the period from 2006 to 2019, distinguishing between IAS/
IFRS and US GAAP accounting standards. Furthermore, a robustness analysis was carried
out with respect to the main assumptions of the models and the datasets considered for tests.
Our results extend the understanding of the role of relational capital in enhancing firms’
value and profitability.
The theoretical contribution of our work lies in the identification of significant and robust
quantitative relationships between relational capital and a set of accounting and market data
of firms; furthermore, we compare the value relevance of this information based upon the
IAS/IFRS and the US GAAP accounting framework at a global level, focusing on both the
crisis and the post-crisis periods –with reference to the global financial crisis observed from
2006–2007 –which were determined conventionally as the years 2006–2013 and 2014–2019
respectively. Our study also has important practical implications.
The paper is organized as follows. Section 2 is devoted to a review of the literature on the
relational side of intellectual capital, focusing on relational capital and Brand value, as wellas
to the analysis of the main theoretical approaches and models used for managing brand
valuation and financial performance. This section thus provides the necessary background to
analyze the results of the methodology reported in section 4.Section 3 presents the analytical
approach that we propose, outlining the reference sample of observations and the
econometric models used for estimating the value of brands on a peer basis using
accounting and market data. Section 4 reports the empirical results of the regression analyses
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