Journal of Intellectual Capital

Emerald Article: Investigating market value and intellectual capital for S&P 500 Jui-Chi Wang

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To cite this document: Jui-Chi Wang, (2008),"Investigating market value and intellectual capital for S&P 500", Journal of Intellectual Capital, Vol. 9 Iss: 4 pp. 546 - 563 Permanent link to this document: http://dx.doi.org/10.1108/14691930810913159 Downloaded on: 21-05-2012 References: This document contains references to 42 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 2064 times.

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JIC 9,4

Investigating market value and intellectual capital for S&P 500

Jui-Chi Wang
International Trade Department, Hsing-Wu College, Taipei, Taiwan
Abstract
Purpose The purpose of this study is to examine and answer the following research questions: how does the US electronic industry perform from an intellectual capital (IC) perspective? What is the relationship between IC and company market value in the US electronic industry? This study investigated the relationship between IC and company market value in the US Standard & Poors 500 (US S&P 500) publicly traded electronic companies from 1996 to 2005. Design/methodology/approach The Ohlson model theory was reviewed and to form the research models. Secondary data were retrieved from S&Ps Compustat for quantitative analysis. Findings When applying multiple regression technique to the research hypotheses, there emerges a positive relationship between IC and market value of the company. Apparently, US electronic companies are knowledge intensive and utilize IC to create their market capitalization. Originality/value This is one of the rst empirical researches that quantitatively examine the market value of US S&Ps 500 electronic companies from IC perspective in the long-term. Keywords Intellectual capital, Market value, United States of America Paper type Research paper

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Journal of Intellectual Capital Vol. 9 No. 4, 2008 pp. 546-563 q Emerald Group Publishing Limited 1469-1930 DOI 10.1108/14691930810913159

Introduction The competitive advantages of companies have been transferred from tangible assets to intangible assets intellectual capital (IC). Even though IC is important for knowledge-based companies, inevitably, it has become essential in all companies. IC can enhance the market competitive advantage by governing knowledge, organizational technique, professional skill, customer relationship and experience. The sustainable prot for modern company is based on how to establish the knowledge and then transform the knowledge into capitalization. The reasons for rapid spread of afrmation and discussion in IC management are mainly from companies perceptions of the increasing importance of intangible assets and the increased the weight of knowledge involvement in production manufacturing process. When transitioning from industrial economy to knowledge economy, which involves intangible assets, companies face the challenges of mobility, uncertainty and complexity. In the new business environment, companies need to learn and control IC. As Edvinsson and Malone (1997) point out, companies must build up their IC mainly in the following aspects: . visibility and measurement for intangible asset; . integration and workability of knowledge by knowledge sharing in the technology; . excavation and classication of the IC through specialized training and development and informational technological internet; and . raising the value of IC and then elaborating the nancial and leverage functions by using knowledge rapidly and enhancing practical experience in profession and technology in order to commercialize the transformation.

The manifestation of knowledge is not only on designation, copyright and information, but also comprises human resource, customer relationship and organizational system. The degree of knowledge integration crossing over the production and service has affected companies with unprecedented speed; therefore, it is inevitable for any company to become involved with the transition to the knowledge era. In the meantime, the critical point to evaluate the true value of company has been changed. Edvinsson and Malone (1997) have stated that in order for a company to be successful in the knowledge century it must be exible in its organizational system, accommodate itself to the changing situation, and have considerable agility of composition. Drucker (1994) has stressed that the most important resource of a companys economic growth is its knowledge, collected from its employees, customers, and suppliers. Therefore, the distinguishing production and service features of the successful company are customer involvement in production designation and manufacturing, diversied specications, and creation of linkages among producers, sellers and strategic alliance partners based on shared vision and mission. The managerial philosophy of the knowledge-based company is to have a different and nontraditional view of asset structure and employment. In the century in which research and development, manufacturing and selling all can be executed by strategic alliance partners or even customers, the number of accounting entries shown on the nancial statements are no longer accurate for further analysis on current competitive capability or potential future protability. This is why IC has been the source of long-term sustainable protability and its effectiveness should be evaluated. Problem statement Rapid technological innovations have changed the business environment for the electronic industry worldwide over the last decade. As such, pioneers can dominate over the laggards in the marketplace. Unfortunately, the laggards can only try to keep pace but without any guarantee that they will be able to survive in the industry. Nevertheless, the pioneers could lose their innovation advantages due to the low cost of production provided by subsequent entrants. Therefore, if it is to stay within the ercely competitive industry, a company needs to realize that it must not only provide a quality product to maintain its market position, but it also needs to know how to utilize its intangible IC for more effective and efcient value creation in operational business circumstances. Lev (2002) investigated the market-to-book value ratio for United States Standard & Poors 500 (US S&P 500) companies from 1977 to 2001 and found that over 80 percent of company market value was not included in the nancial statements. Since the gap between nancial value and market value increased dramatically (Figure 1), in addition to considering the gures shown on nancial statements, a company should also consult the information from IC indicators, such as human capital, relationship capital and innovation capital. The real value of company has to consider its intangible assets, such as human resources, skills, knowledge, processes and innovation capabilities. The alternative ranking of knowledge capital for the ten smartest companies can provide a more comprehensive and balanced view of traditional and information age companies (Table I). However, the change from tangible to intangible has not made a signicant change in traditional accounting and measurement systems as in the traditional Fortune 500 company ranking shown below.

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Figure 1. Gap between market value and book value

Rank 1 2 3 4 5 6 7 8 9 10

Rank (F 500) 8 138 201 34 1 110 49 19 32 88

Name General Electric Pzer Microsoft Philip Morris Exxon Mobil Intel SBC Communications Intl Business Machines Verizon Communications Merck

Knowledge capital (mio US$) 254,381 219,202 204,515 188,538 176,409 173,984 155,402 148,679 141,471 139,494

Table I. Top ten smartest companies

Source: Stewart (2001)

Marr and Adams (2004) emphasizes the importance of IC measurement for most twenty-rst century companies and the capabilities and core competencies of the companies should be enhanced through IC. Since IC is intangible, yet important for a company, how can we take a measurement that supports a logical and structured approach to management? Is IC closely related to market capitalization? The purpose of this study is to examine and answer the following research questions: RQ1. How does the US electronic industry perform from an IC perspective? RQ2. What is the relationship between IC and company market value in the US electronic industry? Literature review IC is associated with concrete representation of a companys real value. It controls the knowledge, experience, organizational technique, customer relationship and professional accomplishment, then draw out the hidden value for the company. The ascendancy and

inferiority of IC directly reect on the markets competitive competence for company, and can even affect investors evaluations and perceptions of the company. Therefore, Adam Smiths 1776 book The Wealth of Nations, which initiated the classical school of economic theory, stated that a nations wealth arises from tangible production factors, such as labor, land and capital. This theory is no longer meaningful in the modern knowledge-based economy and these tangible production factors are now applied to the law of diminishing returns. In contrast, according to the law of increasing return, when a company continually develops the IC infrastructure and investment, the market value of the company will appreciate and excess the book value several times since IC is the core differentiator and driver of a company. The following graph (Figure 2) created by Edvinsson (1997), clearly demonstrates the four phases of extended organizational intangible capital and market value creation development and investment. When a company invests in IC, the invisible benecial result could exceed the cost saving; for example, increase customer satisfaction, streamline internal processes, and improve employee performance. What is not shown on the nancial statements are invisible values of human resources, creativity, competence basis, information systems, organizational infrastructure, customer relationships, and research and development (Chen, 2002). Andriessen and Stem (2004) evaluated IC in the European Union in order to strengthen the position of its knowledge-based economy to be most competitive and dynamic and reach new strategic goal of sustainable economic growth with greater cohesion for its society, so-called Lisbon Agenda. They dened IC as all intangible resources that are available to an organization, that give a relative advantage, and which in combination are able to produce future benets. The research indicated that the greater investment in IC, the greater the IC asset. In addition, there is a strong relationship between human capital and structural capital. Finally, the high value of IC may not always create high productivity; however, low value of IC certainly leads to low productivity. Seetharaman et al. (2002) dened IC indicators as brands, competitive advantage, customer relationship, human capital, products, trade marks, research and development.

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Figure 2. Market capitalization value over time

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In the USA and Europe, nancial reports have been criticized for being inadequate and for concealing the true value of a company from its stockholders, nancial analysts, and the evaluation process of acquisitions or mergers since the gap between nancial report and market value of a company has been greaten by intangible IC. Firer and Williams (2003) investigated the relationship between a companys resource base (physical, human and structural capitals) and dimensions of corporate performance (protability, productivity, and market valuation) in 75 South Africa companies. Using correlation and multiple regression statistical methods, they concluded that physical capital affects a companys performance although IC has become increasingly important in South Africa. Chen et al. (2005) investigated the relationship between IC and a rms market value and nancial performance. Their regression model evaluated the relationship between market value/book value ratio and value creation. Moreover, they examined the relationship between IC and the rms current and future nancial performance. The statistical ndings supported a signicantly positive relationship among IC, market value and nancial performance. They also noted that IC could be indicative of future nancial performance; predictors of research and development provide further information on structural capital because they have a positive relationship with protability and market value for listed companies in Taiwan. As analyzed by Liang and Yao (2005), net income is the most signicantly explanatory capability in market value of Taiwan information electronic company when examined on intangible asset, balanced scorecard and IC, respectively. Also, economic added-value and residual income are statistically supported in evaluating and explaining business performance. Moreover, the results are signicant when a non-nancial performance concept was applied to and tested on different market segments of upstream, midstream and downstream companies. The IC factors of 58 Fortune 500 companies were analyzed by Abdolmohammadi (2005) from 1993 to 1997, who found evidence that it is effective to employ IC disclosure on market value. The ndings also showed that new economy sectors companies report on information technology and intellectual property and companies in old economy sectors companies report on partnership and brand as their IC. Tseng and James Goo (2005) categorized IC framework in term of human capital, organizational capital, innovation capital and relationship capital. They then examined the relationship between IC and corporate market value of a company based on three perspectives: IC, resource-based and nance. The research subjects were Taiwanese manufacturers and data were collected from a database and a survey. The result is a signicant positive relationship between IC and market value of a company when methodologies of TobinQ, market/book value and value-added intellectual coefcient (VAICe) were utilized. Bassi and van Buren (1999) investigated 500 US corporations and found a positive relationship between IC investment and nancial performance. Know-how, customer knowledge, employees expertise and process are all included in IC. If a company continued to invest on IC, it can improve its competitive advantage; nevertheless, if a company kept continuous efforts on services and products, there is a deferred effect on nancial performance rather instead of an immediate short-term output. The American Society for Training and Development (ASTD), Inc. has developed a model for IC management that groups measurement indicators according to IC and

nancial performance. IC measurement indicators are human capital, customer capital, innovation capital and process capital. Return on equity, EPS, ROA, market value, market share, new sales, revenue per employee, total shareholder return and growth rank in industry are nancial performance measurements (van Buren, 1999). Formal evaluation processes and systems for IC management have been created and developed by several companies, but not every company is aware of the importance of these processes and systems. Because of the difculty of precise denition, identication and measurement, IC is not fully shown on the nancial statements. However, in order to increase the likelihood of future success, management should reform IC management to maximize the companys value. The importance of IC has been increasingly discussed and recognized. Table II summarizes the major denitions of IC. Ohlson model There are several reasons for a company to evaluate its market valuation: to compare itself to other companies in the stock market, to set the price of initial public offering (IPO), to calculate the created value for a company by its CEO, and to help the CEO make strategic decisions whether to continue, sell and expand the company, or acquire

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Researcher Bontis (1996)

Constructs

Intellectual capital (IC) denitions IC may provide a new resource-base for an organization to compete and win IC is the sum of the hidden assets of the company, such as brands, trademarks and patents and also includes all assets that are not shown in the nancial statements. IC is a companys the most important source of sustainable competitive advantages IC is knowledge, information, intellectual property and experience; it is a collective brainpower or useful knowledge IC refers to the difference between a companys market value and book value IC is knowledge that can be converted into value IC is the effective use of knowledge as opposed to information IC is all intangible resources that are available to an organization, that give a relative advantage, and which in combination are able to produce future benets IC is the sum of all knowledge that an organization is able to leverage in the process of conducting business to gain competitive advantage

Human capital Structural capital Relational capital Roos and Roos (1997) Human capital Structural capital

Stewart (1997) Edvinsson and Malone (1997) Sveiby (1998) Bontis (1999) Andriessen and Stem (2004) Youndt et al. (2004)

Human capital Structural capital Customer capital Human capital Structural capital Customer capital Personnel competence Internal structure External structure Human capital Structural capital Relational capital Human resources Organizational resources Relational resources Human capital Organizational capital Social capital

Source: This study

Table II. Summary of IC constructs and denitions

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and merge with others (Fernandez, 2001). Investors, managers and debtors always pay the attention of the evaluation of a companys intrinsic value. There are many evaluative models, such as multiples model, discounted cash ow (DCF) model, adjusted book value model, model of discount of dividends (MDD), free cash ow (FCF) model, residual income model (RIM). These evaluation models vary in complexity, but all try to disclose the interaction among cost of opportunities, forecasting, and market efciency. In 1995, Ohlson demonstrated how to evaluate the market value for a company by using a linear formulation with three accounting variables (e.g. earnings, book value and dividends) and concepts that exerted great academic inuence on a companys evaluation in the capital market. The major variables for the Ohlson model (MO) are tabulated in Table III. Ohlson made three assumptions while developing the model. First, the nancial theory assumes that a companys market value is equal to the discounted future dividends and the representation of present value of expected dividends or MDD is equal to: Pt
1 X

t ~ R2 f dt t

t 1

The second assumption, the change in book value between two periods is equal to the difference between net income (earnings) and dividends at time t; or is equal to net income minus dividends at time t (clean surplus relation CSR): bvt bvt21 xt 2 d t 2

The theory of CSR is that dividend at time t will deduct the amount of book value at time t, but the net income at time t will not be affected by dividends at time t at all. In summary, dividends can reduce the book value; however, current net income is not affected by dividends. The relationships are shown in the following mathematical equations:

d t 0; X t
Symbol Pt dt Rf E t : xt bvt xa t vt v g Table III. Ohlson model variables 11 ; 12

d t 21 bvt

Ohlson model variable denition Market value, or price of the stock at time t Net dividend paid at time t 1 plus the risk free rate Expected value operator conditioned on the time t information Earnings between period t 2 1 and t Book value at time t Abnormal earnings (residual earnings) at time t Information other than abnormal earnings at time t Parameter of persistence for abnormal earnings, to evaluate the sustainability of abnormal earnings Parameter of persistence for information other than abnormal earnings, to evaluate the sustainability of information other than abnormal earnings Represent the terms of stochastic errors assumed for having mean zero and normal distribution

Abnormal earnings xa t is dened as that net income (earnings) at time t minus book value at time t 2 1 multiple by normal rate of return, and its equation is given by: xa 3 t xt 2 R f 2 1bvt 21 To combine equation (2) CSR with equation (3) abnormal earnings equation and apply them to equation (1) MDD, equation (1) can be re-written as the residual income valuation model (RIM) and its equation is given by: pt bvt
1 X

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t ~a R2 f Et x t t

t 1

From equation (4) RIM, the market value of a company is composed of two portions. The rst portion is book value at time t, and the second portion is the measured value of the expected residual income. The denition of the second portion is the present value of the ows of the future economic results still not incorporated into the net worth current accounting (Cupertino and Lustosa, 2005). Next, linear information dynamics (LID), the most important empirical specication for a company valuation research in the MO, assumed the time-series behavior of abnormal earnings. Two accounting variables (abnormal earnings and the information other than abnormal earnings) are included in LID. Abnormal earnings can be estimated with linear regression analysis and its equation for period t 1 is dened as:
a ~a x ~1;t1 t 1 vxt vt 1

Where the information other than abnormal earnings at time t 1 is dened as: ~ t 1 g vt 1 v ~2;t1 6

Suppose that abnormal earnings xa t and the information other than abnormal earnings vt all satisfy an autoregressive process of a single interval (regular). Additionally, the parameter of persistence for abnormal earnings v should not be negative and it is usually given by 0 # v , 1; parameter of persistence for information other than abnormal earnings g should be less than 1 and it is hypothesized by 0 # g , 1. Combining the RIM in equation (4) with the information dynamics in equations (5) and (6) yield the following linear valuation function of MO: pt bvt a1 xa t a 2 vt 7

Ohlson (1995) suggested that security prices should be determined by book value, discounted future abnormal earnings and information other than abnormal earnings as shown in the equation (7). Methodology Research design The study adopts an empirical research method and uses secondary data for quantitative analysis. The LID concept of the MO has been applied to this study. Based on the hypothesis of CSR in the accounting-based valuation model, the price of stock equals book value plus future discounted abnormal earnings (Ohlson, 1995). However, reviewing the denition of abnormal earnings and translating CSR, the price of stock can be explained by book value plus net income at time t.

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For the linear equations of this study, non-nancial measures (e.g. Information other than abnormal earnings) are also included as independent variable (equations (6) and (7)), such as human capital, customer capital, innovation capital, process capital and IC, respectively. The heteroscedasticity (e.g. unequal dispersion) issue should be considered for sample of different sizes, so the variable of company asset is considered by adding to the linear equation because of the avoidance of the scale effect from different sample companies. Therefore, the amount of company asset is selected and added to the linear equation of price model as suggested by Easton (1999) in order to obtain normal distribution across all variable values (e.g. homoscedasticity). In this study, the variable of company asset will be added to the regression equation of the price model. Although indicator selection should depend on a companys internal and external strategic demand and objective, but to select the appropriate indicators for each category, Sveiby (2003) has suggested that only one or two indicators be selected for each category in order to keep it simple while still providing a meaningful picture and feedback for a managers understanding and investigation. In this study, human capital, customer capital, innovation capital and process capital are selected to reect the multidimensional nature of IC (Marr, 2005). These four dimensions are also the same areas of IC measurement developed by the ASTD and could provide a more comprehensive picture for IC assessment (Edvinsson and Malone, 1997; Brooking et al., 1998, Dzinkowski, 2000). The selected proxy variables for these four dimensions are supported by previous academic research in IC measurement as shown in Table IV. The symbol and denition of variables for these models is tabulated in Table V. Based on the concept of linear regression equation from the MO, the market value of a company is its stock price, which is the dependent variable in this study. Book value,
IC dimension Human capital Proxy variable Number of employees Sales/employees Net income/employees Customer capital Sales growth rate Advertising expense Innovation capital Process capital Research and development Selling, general and administration expenses/sales Selling, general and administration expenses/employees Previous research supported Edvinsson and Malone (1997), Liebowitz and Suen (2000) and Marr and Adams (2004) Stewart (1997), Liebowitz and Suen (2000), Tsan (2002), Wu (2003) and Chen (2004) Brennan and Connell (2000), Dzinkowski (2000) and Tsan (2002) ASTD (1999), van Buren (1999), Brennan and Connell (2000), Dzinkowski (2000), Tsan (2002), Chen (2004) and Marr and Adams (2004) Edvinsson and Malone (1997), Tsan (2002), Wu (2003) and Chen (2004) Edvinsson and Malone (1997), van Buren (1999), Hsieh (2000), Tsan (2002) and Chen (2004) Edvinsson and Malone (1997), Roos and Roos (1997), Stewart (1997), ASTD (1999), van Buren (1999) and Tsan (2002) Edvinsson and Malone (1997) and Chen (2004)

Table IV. Proxy variables for IC multidimensional measurements

Source: This study

Symbol P@it BV@it NI@it Asset@it Empl#it Sales@Emit NI@Emit Sgrorateit AD@it RD@it SGASalesit SGA@Emit

Variable denition Market value (per share) of i company at time t Book value (per share) of i companys equity at time t Net income (per share) of i company at time t Total asset value (per share) of i company at time t Number of employees of i company at time t (Sales/total employees) of i company at time t (Net income/total employees) of i company at time t Sales growth rate (Salesit 2 Salesit21 =Salesit21 ) of i company at time t Advertising expenses (per share) of i company at time t Research and development expenses (per share) of i company at time t (Selling and general administration expense/sales) of i company at time t (Selling and general administration expense/employees) of i company at time t

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Table V. Research variable measures

net income and assets are control variables employed for every model. The relationships among nancial, non-nancial performance measurements and market value have been extended by the following linear regression equations for H1-H5. First, the hypothesis for human capital model is as follows: H1. There will be a signicant relationship between human capital and market value of the company: H 0 : a1 a2 . . . ak 0 There will not be a signicant relationship between human capital and market value of the company: H 1 : a1 a2 . . . ak 0 There will be a signicant relationship between human capital and market value of the company: P @it a0 a1 BV@it a2 NI@it a3 Asset@it a4 Empl#it a5 Sales@Emit a6 NI@Emit [it H2. There will be a signicant relationship between customer capital and market value of the company: H 0 : a1 a2 . . . ak 0 There will not be a signicant relationship between customer capital and market value of the company: H 1 : a1 a2 . . . ak 0 There will be a signicant relationship between customer capital and market value of the company: P @it a0 a1 BV@it a2 NI@it a3 Asset@it a4 Sgrorateit a5 AD@it [it

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H3. There will be a signicant relationship between innovation capital and market value of the company: H 0 : a1 a2 . . . ak 0 There will not be a signicant relationship between innovation capital and market value of the company: H 1 : a1 a2 . . . ak 0 There will be a signicant relationship between innovation capital and market value of the company: P @it a0 a1 BV @it a2 NI @it a3 Asset @it a4 RD@it [it H4. There will be a signicant relationship between process capital and market value of the company: H 0 : a1 a2 . . . ak 0 There will not be a signicant relationship between process capital and market value of the company: H 1 : a1 a2 . . . ak 0 There will be a signicant relationship between process capital and market value of the company: P @it a0 a1 BV@it a2 NI@it a3 Asset@it a4 SGASalesit a5 SGA@Emit [it

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H5. There will be a signicant relationship between IC and market value of the company: H 0 : a1 a2 . . . ak 0 There will not be a signicant relationship between IC and market value of the company: H 1 : a1 a2 . . . ak 0 There will be a signicant relationship between IC and market value of the company. The combination of variable measurements from human capital, customer capital, innovation capital and process capital will be tested for the IC model. The linear regression equation for IC model is combined as follows: P @it a0 a1 BV@it a2 NI@it a3 Asset@it a4 Empl#it a5 Sales@Emit a6 NI@Emit a7 Sgrorateit a8 AD@it a9 RD@it a10 SGASalesit a11 SGA@Emit [it Populations and samples The populations for this study are publicly traded electronic companies in US S&P 500. According to S&P 500 Global Industry Classication Standard (GICS), US electronic

companies are from information technology (45) and telecommunications services (50) industry sectors. Data were retrieved from S&P Compustat database. The study time period was from 1996 to 2005. The sample for this study has to meet the following criteria: . the company should be normally and actively traded in S&P 500, not banned by the supervision; . the company should apply the same accounting principle, such as the period of accounting year; . the company that lacks key variable information was removed; . the company should have positive book value; and . the company should have net income based on the MO theory, so net loss companies were removed. Results Sample selection process After retrieving 15,050 samples from the Compustat database for US electronic companies, inappropriate samples lacked variable information were deleted. Unfortunately, advertising and R&D expenses were not available for most of the companies in the database, so only 2,315 samples remained. Next, 381 companies that contain negative book value and one company contains negative advertising expense and seven companies contain data error were excluded, so 1,926 samples were selected, containing 936 net income and 990 net loss companies (half of which had not reported a prot for the last ten years). Next, in order not to inuence the empirical result statistically by an inappropriate data set, statistical diagnostics were used to identify whether the sample was an inuential observation or not by using studentized residuals to denote outliers. It is important to identify outliers because they cannot stand for the regression equation due to one or more factors. One reason is that it requires a remedy since it causes an inuential effect on the regression equation. There is four-step procedure to nd the outliers, leverage points and inuential observations: (1) examine the residuals; (2) locate predictors leverage points; (3) identify inuential observation by single case diagnostics; and (4) choose and remove an inuential observation. After these actions were taken, 893 US companies were chosen for this study (Table VI). The data should be more representative of the population and appear more valid. Multiple regression statistics Referring to the MO, a companys market value can be determined by the following equation: P BV NI other information. Before testing the equations for H1-H5, it is necessary to realize at what level book value and net income can reect a companys market capitalization; or in other words, the non-nancial assets that a companys market value contains.

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A: Sample selection Total company-years With incomplete data With negative BV and error With net loss With outlier data Final test sample B: Sample distribution 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total

Samples 15,050 (12,735) (389) (990) (43) 893 41 51 51 77 82 62 86 119 171 153 893

Remained 2,315 1,926 936 893

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Table VI. Sample selection and distribution

Entering BV@, NI@ and Asset@ as the independent variables and stock price as dependent variable, adjusted R 2 is 0.471 (Table VII), which means only 47.1 percent of stock price variation can be explained by these three control variables for US electronic companies. About 52.9 percent of stock price variation should be explained by other information, according to Ohlsons model theory. It can be assumed that book value does not have a great effect on market value (coefcient: 2 0.037) and they are not closely related in US electronic companies. H1. There will be a signicant relationship between human capital and market value of the company. Reject H0 at the 0.05 level of signicance if F . F U 6;886 ; otherwise, do not reject H0. Adjusted R 2 equals to 0.471 and indicates that 47.1 percent
H1 Human 2 0.038 0.516 0.199 0.040 2 0.010 0.049 H2 Customer 2 0.022 0.544 0.242 H3 Innovation 2 0.033 0.544 0.141 H4 Process 2 0.041 0.559 0.211 H5 Intellectual 2 0.016 0.551 0.147 0.074 2 0.074 2 0.007 0.356 2 0.028 0.113 0.007 0.103 60.5 125.26 0.000

N 893 BV@ NI@ Asset@ Empl# Sales@Em NI@Em Sgrorate AD@ RD@ SGASales SGA@Em Adj. R 2 (percent) F-value p-Value

Control variable 2 0.037 0.549 0.199

0.348 2 0.007 0.084 47.1 265.32 0.000 47.1 133.51 0.000 59 257.43 0.000 47.3 201.47 0.000 0.027 0.083 47.8 164.56 0.000

Table VII. Multiple regression models summary

of market value variation can be explained by the number of predictors and the size of the sample from the adjusted multiple regression model. F-statistics 133.51 in ANOVA analysis is greater than FU2.10 and p-value is less than 0.05 and extremely small; therefore, the null hypothesis is rejected and it is concluded that there is a signicant relationship between human capital and market value of the company. H2. There will be a signicant relationship between customer capital and market value of the company. Reject H0 at the 0.05 level of signicance if F . F U 5;887 ; otherwise, do not reject H0. Adjusted R 2 equals 0.59 and indicates that 59 percent of market value variation can be explained by the number of predictors and the size of the sample from the multiple regression model adjusted. F-statistics 257.43 in ANOVA analysis is greater than FU2.21 and p-value is less than 0.05 and extremely small; therefore, the null hypothesis is rejected and it is concluded that there is a signicant relationship between customer capital and market value of the company. H3. There will be a signicant relationship between innovation capital and market value of the company. Reject H0 at the 0.05 level of signicance if F . F U 4;888 ; otherwise, do not reject H0. Adjusted R 2 equals to 0.473 and indicates that 47.3 percent of market value variation can be explained by the number of predictors and the size of the sample from the adjusted multiple regression model. F-statistics 201.47 in ANOVA analysis is greater than FU2.37 and p-value is less than 0.05 and extremely small; therefore, the null hypothesis is rejected and it is concluded that there is a signicant relationship between innovation capital and the companys market value. H4. There will be a signicant relationship between the process capital and market value of the company. Reject H0 at the 0.05 level of signicance if F . F U 5;887 ; otherwise, do not reject H0. Adjusted R 2 equals 0.478 and indicates that 47.8 percent of market value variation can be explained by the number of predictors and the size of the sample from the adjusted multiple regression model. F-statistics 164.56 in ANOVA analysis is greater than FU2.21 and p-value is less than 0.05 and extremely small; therefore, the null hypothesis is rejected and it is concluded that there is a signicant relationship between process capital and market value of the company. H5. There will be a signicant relationship between IC and market value of the company. Reject H0 at the 0.05 level of signicance if F . F U 11;881 ; otherwise, do not reject H0. Adjusted R 2 equals 0.605 and indicates that 60.5 percent of market value variation can be explained by the number of predictors and the size of sample from the adjusted multiple regression model. The computed F-value 125.26 is greater than FU1.79 and p-value is less than 0.05 and extremely small; therefore, the null hypothesis is rejected and it is concluded that there is a signicant relationship between IC and market value of the company. Conclusion This study has shown the relationship of investments in IC in relation to the companys stock price. Nonetheless, IC is associated with a concrete representation of the real value of a company. It controls the knowledge, experience, organizational technique, customer relationship and professional accomplishment, then draws forth the companys hidden value. Both the superiority and inferiority of IC may have a strong impact on the competitive advantage of an organization. It may also have an effect on the perceptions of investors in regards to its long-term sustainability. Thus, Adam Smiths The Wealth

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of Nations which was published in 1776 and laud out the principles of classical economics, asserts that a nations wealth could no longer take on as much meaning and importance today, when knowledge has a more central role. These concrete production factors are applied to the law of diminishing marginal returns. On the contrary, based on the law of increasing returns, when an organization constantly emphasizes its IC, its market worth will increase and exceed its book value several times over. It is important to realize that IC is a main driver of competitive advantage. Similar studies have been done to show the positive relationship among IC, market value, and nancial performance. Chen et al. (2005) reported that there is a positive relationship between a companys IC and its current and future nancial performance. Moreover, their research shows that a companys IC can be a strong indicator not only of its future nancial performance but also the creation of economic value in the market. Chen et al. (2005) also noted that structural capital may be provided in the investment of research development that also contributes to market value and protability. For US electronic companies, 47.1 percent of market value can be represented by nancial assets; for the remaining 52.9 percent, this is explained by non-nancial assets. Apparently, US electronic companies are more knowledge intensive and utilize more IC to create market capitalization. The rst hypothesized relationship is between human capital and value creation of the company. Human capital is the knowledge that individual employees acquire and use to produce goods, services, or ideas. This study suggests that while IC indicators show a positive correlation between employee productivity and market price of the company, the results do not show a strong relationship to human capital and market price of a company. Second, the relationship between customer capital and market value of a company is considered. Customer capital is the value of a companys ongoing relationship with the people or organizations to whom it sells. A good relationship with customers, suppliers, and strategic alliances can determine a companys nancial performance and success because it constitutes a value-adding resource in the supply chain. The results indicate that the IC indicators such as asset size, net income, and sales growth provide a moderating effect on the market value of the company. Third, the relationship between Innovation capital and market price is examined. Innovation capital refers to a companys revolutionary capability, innovative achievement, and potential build up of new product and service. Simply put, innovation is the application of knowledge to produce new knowledge (Drucker, 1993). In this study, R&D investments, net income, and asset size show a positive relationship with the market price of the company stock. The companys capability to innovate seems to be the most valuable capital linked to its competitiveness and constitutes a major determinant for the companys long-term survival. Fourth, the relationship between process capital and market value is discussed. Process capitals are working procedures, standardized methods or projects that can increase and enhance employees efciency and productivity. This can be seen through the companys specications, manuals and intranet. Through these, the continuing process of knowledgeand experience-sharing of employees can be duplicated applicable and innovatively exercisable within the organization. The benet of developing process capital is the ability to share and spread knowledge rapidly, to develop collective knowledge, to shorten the learning process, and to accelerate productivity of the human capital (Stewart, 1997). It is

concluded that there is a positive relationship between the two variables and net income, asset size, and selling, general and administrative expenditure per employee all have a positive correlation to the two variables. Lastly, the relationship between IC and the market value of the company is described. IC is the core differentiator and driver of company in the era of the knowledge economy. The four dimensions of IC should be interactive, and create an even greater combined effect and market value for company. It is concluded that there is signicant relationship between IC and market value of a company. The research results for US electronic companies show that while book value, employee productivity and advertising expenditures show a negative correlation, the net income, number of employees, R&D investment, and sales growth rate show a positive correlation between IC and market value. The previous discussion has established that book value is not a determinant in a companys market valuation but net income; employee productivity should be improved; and advertising expense could nullify the net income, then affect the market value for US electronic companies. In assessing the real value of a company, investors have to consider intangible assets, such as the human resources, skills, knowledge, processes, and innovation capabilities of an organization. With this shift from building tangible to intangible assets and resources, leaders and managers need to understand the changing marketplace landscape. Although IC and knowledge assets are difcult to discern and quantify, the results will nonetheless be reected in the companys greater productivity, efciency, and overall protability.
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Stewart, T.A. (1997), Intellectual Capital: The New Wealth of Organizations, Currency Doubleday, New York, NY. Stewart, T.A. (2001), Accounting gets radical, Fortune, April 16, pp. 184-94. Sveiby, K.E. (1998), Measuring intangibles and intellectual capital-an emerging rst standard, available at: www.sveiby.com/articles/EmergingStandard.html Sveiby, K.E. (2003), Creating value with the intangible assets monitor, available at: www. sveiby.com/articles/CompanyMonitor.html Tsan, W.N. (2002), The measurement of intellectual capital for IT industry in Taiwan System theory perspective, Doctoral dissertation, National Central University, Jhongli, 091NCU05396004. Tseng, C.Y. and James Goo, Y.J. (2005), Intellectual capital and corporate value in an emerging economy: empirical study of Taiwanese manufacturers, R&D Management, Vol. 35 No. 2, pp. 187-201. van Buren, M.E. (1999), A yardstick for knowledge management, Training & Development, Vol. 53 No. 5, pp. 71-8. Wu, C.C. (2003), An empirical examination of relevance between intellectual capital and equity value, Master thesis, Chung Yuan Christian University, Chung Li, 091CYCU5385027. Youndt, M.A., Subramaniam, M. and Snell, S.A. (2004), Intellectual capital proles: an examination of investments and returns, Journal of Management Studies, Vol. 41, pp. 335-61. Further reading Morgan Stanley Capital International (2006), available at: www.msci.com/equity/ GICS_map2006.xls US Census Bureau Web site (2006), North American industry classication system-revisions for 2002, available at: www.census.gov/epcd/naics02/naicod02.htm About the author Jui-Chi Wang is an Assistant Professor and currently teaching at Hsing Wu College, Taiwan and also receives a degree of DBA from Argosy University, San Francisco Bay Area, CA, USA. She has published and co-authored several journal articles and conference papers in the eld of intellectual capital management and measurement, strategic balanced scorecard evaluation, business process re-engineering and nancial market strategies. She holds a MS in administrative studies multinational commerce from Boston University, MA, USA. Jui-Chi Wang can be contacted at: amandajcw@gmail.com; 090023@mail.hwc.edu.tw

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