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An empirical examination of the value relevance of intellectual capital using the Ohlson (1995) valuation
model
G.E. Swartz N-P. Swartz S. Firer
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G.E. Swartz N-P. Swartz S. Firer, (2006),"An empirical examination of the value relevance of intellectual capital using the
Ohlson (1995) valuation model", Meditari Accountancy Research, Vol. 14 Iss 2 pp. 67 - 81
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 An empirical examination of the value
relevance of intellectual capital using the
Ohlson (1995) valuation model
GE Swartz N-P Swartz
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School of Accountancy School of Accountancy

University of the Witwatersrand University of the Witwatersrand

S Firer
School of Accountancy
University of the Witwatersrand

Abstract
The debate on the determinants of firm value is ongoing; and the increasing gap in the
book-to-market ratio (Lev & Sougiannis 1999) has yet to be explained in the financial
literature. This article contributes to the debate by examining whether intellectual
capital measured using the value added intellectual coefficient (VAICTM) (Pulic 1998)
contributes to the explanation of the book-to-market ratio. This study used Ohlson’s
1995 valuation model and JSE Securities Exchange (SA) (JSE) data in an attempt to
identify whether the book value of assets, accounting (accrual) earnings and VAICTM
explain the behaviour of South African share prices. The panel data least squares
model results indicate a significant relationship between share prices three months
after year end, and abnormal earnings, abnormal cash dividends, book value of assets,
the capital employed coefficient, and the human capital coefficient.
Keywords
Accrual Accounting Intellectual Capital
JSE Securities Exchange Ohlson Model
Pulic Security Valuation
South Africa Value Added Intellectual Coefficient

1 Introduction
The increasing gap in the book-to-market ratio creates a problem which confronts
businesses, users of accounting information, standard setters and regulators: it has
highlighted the insufficiency of financial statement information to explain the market value
of a firm (Lev & Sougiannis 1999). Furthermore, the efficient market hypothesis has
discredited many of the objectives that were ascribed to financial statements. This study
aims to explore whether intellectual capital, together with information from the financial
statements, can explain a firm’s market value.

Meditari Accountancy Research Vol. 14 No. 2 2006 : 67-81 67

 Empirical examination of value relevance of intellectual capital using Ohlson (1995) valuation model

Barth, Beaver and Landsman (2001) have identified three main arguments used to
explain the widening book-to-market ratio. First, Fama and French (1993, 1995) suggest
that higher returns are demanded to hedge against the possibility of financial distress than
in the past. Second, Lakonishok, Schleifer and Vishny (1994) associate the gap with a
mispricing of ‘glamour companies’. Finally, Frankel and Lee (1998) attribute the difference
to errors in the market’s expectation of future earnings. Although these explanations do
provide interesting insights into the book-to-market ratio gap, they do not yield a
satisfactory explanation (Lev & Sougiannis 1999).
A number of recent studies have attempted to test whether elements of financial
statements are ‘value relevant’. Three competing explanations for the role played by the
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book value of assets in valuing companies are explored by Collins, Pincus and Xie (1999):
the first relates to the use of the book value as a control for scale differences (Barth &
Kallapur 1996); the second relates to the use of the book value as a proxy for expected
normal earnings (Ohlson 1995; Penman 1992); and the final explanation relates to the use
of the book value as a proxy for an abandonment option, or liquidation value (Berger, Ofek
& Swary 1996). According to Collins et al. (1999), their results support the second and
third explanations, namely that book value serves as a value relevant proxy for expected
normal earnings, and as a proxy for an abandonment value.
In a series of papers, Ohlson (1995, 2001) and Feltham and Ohlson (1995, 1996)
developed a valuation model that identifies the distinct roles played by accrual earnings,
book value and dividends in equity valuation. The papers devise a cohesive theory of
company value by relying on the concept of ‘clean surplus’: a concept that can easily be
traced to residual income theory and Modigiliani and Miller’s (1958) ‘MM’ valuation
models. However, unlike other present value models, the Ohlson (1995) model uses data
obtained from annual financial statements only. The valuation model incorporates both the
bottom line items of the two traditional financial statements (accrual earnings from the
income statement and net total assets from the balance sheet). The model does however
include an ‘other information’ variable that is difficult to specify. Most recent empirical
studies which use the Ohlson (1995) model, for example, Garrod and Rees (1998), Amir
(1993), Louder, Khurana and Boatsman (1996) and Swartz (2005), use dividends as a
surrogate for the ‘other’ information variable. However, these studies conclude that
additional work is required to specify this variable fully.
One possible specification that is omitted by the book values used in the Ohlson (1995)
model is intellectual capital. The results and findings from previous studies investigating
the relationship between company performance and intellectual capital predict that
intellectual capital will increasingly become the ‘pivotal factor in corporate growth and
development’, and is ‘becoming the preeminent resource for creating economic wealth’
(Luthy 1998: 2). The role of intellectual capital in creating value has become crucial in
achieving a competitive advantage in the market (Usoff, 2002). This role is also highlighted
by Drucker (1993:54), who states that ‘knowledge has become the key economic resource
and the dominant and perhaps even the only source of competitive advantage. In this light,
this article includes an intellectual capital variable as part of the ‘other’ information
specification, and aims to test whether accrual accounting information and intellectual
capital contribute to the explanation of share prices. The value added intellectual co-
efficient (VAIC TM) (Pulic 1998) is used to measure intellectual capital performance.

68 Meditari Accountancy Research Vol. 14 No. 2 2006 : 67-81

 Swartz, Swartz & Firer

This study is important in the South African context because of the significance of
emerging economies for the overall well-being and balance of the global economy – it is
important to achieve greater understanding of the development of intellectual capital in
different socio-political and economic settings (Firer & Mitchell Williams 2003).
A panel data least squares approach was used in this study to test the original Ohlson
(1995) model directly, adjusted for an intellectual capital variable (VAICTM), and for
characteristics peculiar to emerging markets. The data used in the analysis was obtained
from the Bureau of Financial Analysis (the BFA McGregor database for JSE-listed firms).
The testing sample included 154 firms and the data covered a period of eight years. Only
firms reporting the required information were included in the final sample. The results
indicated that book value (net asset value per ordinary share), earnings (abnormal earnings
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per share), abnormal dividends and intellectual capital (the value added intellectual co-
efficient (VAICTM)) were significantly related to share price.
The remainder of the article is organised as follows: Section 2 provides a review of the
relevant literature. Section 3 depicts the research environment, specifies the model and
discusses the methodology and data selection process. The results of the empirical work are
presented in Section 4. Finally, the conclusion, implications, limitations and possible
directions for future research are set out in Section 5.

2 Literature review
Most recent empirical studies which use the Ohlson (1995) model, for example, Garrod and
Rees (1998), Louder et al., (1996), Woldegabir (2004) and Swartz (2005), conclude that,
although the model provides a useful foundation for value relevance research, additional
work is required to fully specify the additional information variable. This is evidenced by
the low coefficients of determination, which range from 0.15 to 0.46. Stober (1999) and
Ohlson (2001) in reviewing the empirical applications of the model emphasise the omission
of difficult to measure, knowledge intensive intangible assets, or intellectual capital, from
the Ohlson (1995) model specification.
The link between systems of high performance work practices and company performance
was investigated by Huselid (1995), who concluded that these practices have a significant
impact on company performance. Youndt, Snell, James and David (1996) examined the
relationship between human resource management, manufacturing strategy and company
performance. They concluded that human resource systems are directly related to a
company’s performance. Van Buren (1999) examined the relationship between a core set of
intellectual capital indicators and a company’s performance. The study concluded that
intellectual capital is associated with a company’s performance. Low (2000) identified the
importance of non-financial intangibles, examining their role in a company’s performance,
concluding that improvements in critical intangible resources result in increased market
value.
Firer and Stainbank (2003) investigated whether the performance of a company’s
intellectual capital can explain organisational performance. The study concluded that the
performance of a company’s intellectual capital can explain profitability and productivity,
but not market valuation.
The above review of literature on empirical studies in this field clearly indicates the
usefulness of intellectual capital. Hence, it was deemed essential to undertake an empirical
investigation into intellectual capital in the context of the South African economy.

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 Empirical examination of value relevance of intellectual capital using Ohlson (1995) valuation model

3 Research environment and model specification

3.1 Ohlson’s (1995) model
The determinants of firm value in value relevance research remain an enigma. The
usefulness of annual financial statements in determining a company’s share price in
particular has been increasingly questioned due to the increasing gap between book values
(as reflected in the annual financial statements) and the market prices of equity (obtained
from the stock markets). A large body of finance and accounting research has emerged
attempting to test whether firms’ book values are related to the market values of those
firms. This article focuses on Ohlson’s (1995) model.
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Ohlson’s (1995) model is a balanced model, relying on the ‘clean surplus’ relation (Xt –
dt) as the retained earnings of a given period:
bvt = bvt-1 + xt - dt (1)
where:
bvt = company book value at Time t,
xt = earnings for Period t,
dt = dividends for Period t.
The clean surplus relation can be analysed further by ruling out infinite growth in book
value, implying an accrual accounting-based expression for equity value, namely:
∞ ~a
Pt = bvt + Σ Rf Et[xt+ τ ] (2)
τ=1

where abnormal earnings (~a denotes abnormal) are defined as follows:

~a
xt ≡ xt – (Rf – 1)bvt-1 (3)
Abnormal earnings are therefore equal to earnings less a capital charge (the risk free rate),
based on the concept that the inclusion of book value in the model represents normal
earnings on capital invested. Any earnings in excess of normal earnings are therefore
abnormal.
The third specification made by Ohlson’s (1995) model concerns the time variant
behaviour of normal earnings. Hence, the role of other information is recognized. The
information dynamic is formulated by adding another information variable, vt, to include
information other than abnormal earnings, which is yet to have an impact on the
information available.
~a a
x τ+1 = ω xτ + vt + έ1 t+1 (4a)
vt+1 = γvt + έ2 t+1 (4b)
where the disturbance terms έ1 t+1 and έ2 t+1 are with zero means and constant variances. The
parameters of the process ω and γ are fixed and known. The superscript ‘a’ on coefficient xτ
denotes abnormal earnings.
Combining equation (2) with equations (4a) and (4b) yields a linear function for Pt:

70 Meditari Accountancy Research Vol. 14 No. 2 2006 : 67-81

 Swartz, Swartz & Firer

a
Pt = bvt + α1xτ + α2 vt (5)
Hence, Equation 5 implies that the market value is equal to the book value of the firm’s
assets, adjusted for abnormal earnings and other information that modifies the prediction of
future profitability. The model therefore elegantly incorporates accrual accounting
variables, distinguishing it clearly from other valuation models such as Modigliani and
Miller’s (1958) earnings (cash flows) capitalization model, or Gordon’s dividend growth
model.

3.2 Cost of capital

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Thus far the model has not included any measure of risk, as the discount rate used has been
the risk free rate, Rf (see Equations 2 and 3), based on risk neutrality. The model can be
modified to introduce risk in the anticipated dividend sequence. One possible approach
suggested is replacing Rf with some factor ρ, which adjusts Rf for risk by introducing a risk
premium, determined by the company’s cost of capital or the expected market return
determined from models such as the capital asset pricing model (CAPM), which implies
that ρ = Rf + β. However, this approach has been criticised as being empirically inadequate
– so, for example, Fama and French (1996) argue that betas do not explain average return
or size. Similarly, Bowie and Bradfield (1998) investigated beta stability on the JSE and
found that thin trading conditions caused distortions. Van Rensburg and Robertson (2003),
in a similar study on the JSE, found an unambiguous empirical contradiction of the CAPM.
Fama and French (1992) suggest using variables such as the price earnings (PE) ratio and
the cash flow to price ratio as a surrogate for the discount rate. The use of the PE ratio is
further supported by Cheng and McNamara (2000), who argue that the PE ratio captures the
risk and growth of companies. This study adopted a similar approach to that used by Cheng
and McNamara (2000) in using the PE ratio as a surrogate for the cost of capital.

3.3 Specification of the ‘other’ information variable

The empirical application of Ohlson’s (1995) and Feltham and Ohlson’s (1995, 1996)
valuation models was reviewed by Stober (1999), who concluded that the collective models
provide a rigorous foundation for value relevance studies, and emphasized the need to pay
close attention to specification issues, in particular of the ‘other’ information variable.
Ohlson (1998) himself has discussed the specification issues in greater detail, and he
emphasizes the crucial role of the ‘other’ information variable in predicting the
expectations of future earnings. Ohlson (2001) stresses the need for the correct measure of
the ‘other’ information variable, arguing that current residual income is unlikely to explain
goodwill adequately.
Hand and Landsman (1998) take a different view on the specification of the ‘other’
information variable: they set vt at zero, and then split net dividends into cash dividends and
other capital flows (share repurchases and issuances). They conclude that including cash
dividends is consistent with information theories of dividends, where dividends signal
future profitability, and therefore act as a surrogate for vt.

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 Empirical examination of value relevance of intellectual capital using Ohlson (1995) valuation model

3.4 Intellectual capital

Stober (1999) and Ohlson (2001) emphasize the omission from Ohlson’s (1995) model
specification of assets that are difficult to measure, knowledge intensive and intangible, or
intellectual capital. The creation, management, and maintenance of intellectual capital fall
within a field that is broadly known as knowledge management, according to Firer and
Mitchell Williams (2003), whose paper investigates intellectual capital valuation models,
attempting to place a value on three intangible factors of an organisation identified as its
knowledge and know-how, created by and stored in its people (human capital), its
relationships (social capital), and its organisational information technology systems and
processes (organisational capital).
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Previous studies have illustrated the increasing importance of a company’s intellectual

capital to its overall value. For example, the Brookings Research Institute found that in
1962, 62% of a company’s value was represented by its physical capital, but that this
percentage had declined to 38% in 1992. Luthy (1998) described the growing significance
of intellectual capital by stating that intellectual capital was becoming the pre-eminent
resource for creating wealth and that the relative importance of tangible assets had
decreased over time, due to the increasing importance of intangible, knowledge-based
assets.
Resource-dependence theories have resulted in a number of intellectual capital valuation
models which indicate that all facets of human resources need to be fully incorporated into
valuation models (see, for example, Barney 1991; Grant 1991; Pulic 1998; Sveiby 2000,
2001). These theories argue that human resource assets enable a firm to increase its
performance and wealth-creation potential.
Thus far, intellectual capital has been described as a broad term that is considered to be
synonymous with a firm’s intangible assets. However, to date, there is no precise agreement
on the definition of intellectual capital. Stewart (1997:67) defines intellectual capital as
‘packaged useful knowledge’. Brookings (1996:12) offers a more comprehensive
definition, stating that intellectual capital refers to the ‘combined intangible assets which
enable a company to function’. It is beyond the scope of this article to assess the respective
merits of the various definitions of intellectual capital. Hence, for the purposes of this
study, intellectual capital is simply defined as the enhanced value of a firm attributable to
assets, generally of an intangible nature, resulting from the company’s organisational
function, processes and information technology networks, the competency and efficiency of
its employees and its relationship with its customers (Mitchell Williams 2000c).
As yet there is no fully accepted measure of intellectual capital and the success of its
application by a business. Generally speaking, the methods used to measure intellectual
capital can be classified into two main groups (Firer & Mitchell Williams 2003).
The first group adopts an approach where the value of intellectual capital is expressed in
financial terms at an organisational level, with a specified benchmark of a perceived value,
such as shareholders’ equity. Common measures of intellectual capital at the organisational
level are the calculated intangible value, Tobin’s q, and the market-to-book ratio (Stewart
1997). The primary premise of these measures is the relationship of intellectual capital to
shareholder value.
The second group of measures uses a component-by-component analysis of the
intellectual capital held by a firm. So, for example, intellectual capital may be considered to

72 Meditari Accountancy Research Vol. 14 No. 2 2006 : 67-81

 Swartz, Swartz & Firer

consist of three main components, namely human capital, customer capital and
infrastructure capital. If the component-by-component approach is used, each component is
valued separately using a measure appropriate for that component. Difficulties in aligning
various component measures have led to criticism of the component-by-component
approach to measuring intellectual capital (Firer & Mitchell Williams 2003). Another
limitation of the component-by-component approach is that such measures have usually
been designed to fit the characteristics of one single company or industry. The
generalisability of such measures is therefore questionable (Firer & Mitchell Williams
2003).
Mindful of the respective criticisms of the various measures of intellectual capital, two
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screening criteria were adopted in selecting the measure for intellectual capital performance
for this article. These criteria were, first, that the basic underlying feature of the measure
should be based on a key component of intellectual capital rather than a measure of
physical capital; and, second, that the measure should be simple enough to enhance
understanding and to allow relative ease in collecting data. The use of an uncomplicated
intellectual capital measurement model can be supported for various reasons, including
behavioural, cognitive and cost/benefit reasons (Firer & Mitchell Williams 2003). With
increased complexity, there is an increased risk of ambiguity and thus there is the potential
that the measure may reduce the understandability and applicability of the intellectual
capital model. It is also suggested that the value of an intellectual capital measurement
model comprising log checklists and complicated simulations between indicators may be
compromised by the inability of stakeholders to comprehend all the indicators at once
(Mitchell Williams 2000a). Finally, from a pragmatic perspective, it can be argued that if
the cost of designing, implementing, administering and updating the intellectual capital
measurement model outweighs the benefits derived from it by company management and
its stakeholders, there is little incentive to use it.
In view of the two screening criteria outlined above, the value added intellectual
coefficient (VAICTM) (Pulic 1998) was selected to underpin the measurement of intellectual
capital performance in this study. This measure is considered to be a ‘universal indicator
showing [the] abilities of a company in value creation and representing a measure for
business efficiency in a knowledge based economy’ (Pulic 1998:9). VAICTM is an analytical
procedure designed to enable the management of a company, its shareholders and other
stakeholders to effectively monitor and evaluate the efficiency of value added (VA) by a
company’s total resources and by each key resource component. VAICTM is the sum of
three separate indicators: first, capital employed efficiency (CEE) – an indicator of the
value added (VA) efficiency of the capital employed; second, human capital efficiency
(HCE) – an indicator of the value added (VA) efficiency of human capital; and third,
structured capital efficiency (SCE) – an indicator of the value added (VA) efficiency of
structured capital. The following formula can be employed:
VAICTMi = CEEi + HCEi + SCEi (9)
Where VAICTMi = VA intellectual coefficient for Firm i;
CEEi = VAi /CEi ; VA capital employed coefficient for Firm i;
HCEi = VAi /HCi ; human capital coefficient for Firm i; and
SCEi = SCi / VAi ; structured capital coefficient for Firm i;

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 Empirical examination of value relevance of intellectual capital using Ohlson (1995) valuation model

VAi = Ii+ DPi + Di +Ti + Mi + Ri ; VA for Firm i computed as the

sum of interest expenses (Ii); depreciation expenses (DPi);
dividends (Di); corporate taxes (Ti); equity of minority
shareholders in the net income of subsidiaries (Mi); profits
retained for the year (Ri);
CEi = book value of the net assets for Firm i;
HCi = total investment in salaries and wages for Firm i;
SCi = VAi - HCi ; structured capital for Firm i
Human capital is measured through the total investment in salaries and wages (staff costs)
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for the financial year (Pulic 1998). The book value of net assets of a company is measured
by the physical capital employed by a company (Mitchell Williams 2000b, 2001; Pulic
1998). Human capital and structural capital are reverse proportional; the less human capital
participates in value creation, the more structural capital is involved (Pulic 1999).
The main reasons to support the use of the above measure are described as follows (Firer
& Mitchell Williams 2003):
the measure is unique in its flexibility for application to both the macro and the micro
economic levels. The methodology can therefore be applied in developing an
understanding of the intellectual capital performance of a single company, a group of
companies, specific business sectors or an entire capital market;
the methodology provides a standardised and consistent basis of measurement, thereby
enabling national and international comparison; and
all data used in the equation are based on audited information; calculations can therefore
be considered to be objective and verifiable.
The documented evidence therefore illustrates that Ohlson’s (1995) valuation model has
been revised and re-specified for specific purposes and environments, and empirically
tested. Furthermore, the inclusion of Pulic’s (1998) measure of intellectual capital as an
additional specification of the ‘other’ information variable appears to be appropriate. The
remaining sections of this article depict the research environment and specify the vt
variable.

3.5 Research environment

A central feature of this study is its focus on South Africa. There were a number of reasons
for this focus: South Africa is an emerging economy seeking to attract foreign capital and
investment and it is not always easy to distinguish South Africa from the common
perception of the entire southern African region, as illustrated by the Rand’s volatility and
the events in Zimbabwe (PricewaterhouseCoopers 2003). Valuation problems in emerging
markets include thin trading, illiquidity, pyramid structures and information asymmetry
(Bruner et al. 2002).

3.6 Model specification

The following model was used to test the value relevance of intellectual capital:
* a
Pit = ‫ ح‬+ β x + β bv + β d + β CEE + β HCE + β SCE + δ + u (10)
t 1 it 2 it 3 it 4 it 5 it 6 it it it

74 Meditari Accountancy Research Vol. 14 No. 2 2006 : 67-81

 Swartz, Swartz & Firer

where:
Pit* = the value of Firm i’s equity at Year t + 3 months (per share)
‫ح‬t = an intercept
xit = abnormal accrual earnings per share for Firm i at Time t
a
bvit = book value of Firm i's assets at Time t (per share)
dit = a proxy for ‘other’ information, abnormal dividends of Firm i at Time t (per
share) DPSt – DPSt-1
CEEit = VAit /CEit ; VA capital employed coefficient for Firm i at Time t;
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HCEit = VAit /HCit ; human capital coefficient for Firm i at Time t; and
SCEit = SCit / VAit ; structured capital coefficient for Firm i at Time t;
VAit = Iit+ DPit + Dit +Tit + Mit + Rit ; VA for Firm i at Time t is computed as the sum
of interest expenses (Iit); depreciation expenses (DPit); dividends (Dit);
corporate taxes (Tit); equity of minority shareholders in the net income of
subsidiaries (Mit); profits retained for the year (Rit);
CEit = book value of the net assets for Firm i at Time t;
HCit = total investment in salaries and wages for Firm i at Time t;
SCit = VAit - HCit ; structured capital for Firm i at Time t;
Δi = an unobservable individual (fixed) specific effect;
u it = an error term (remainder disturbance).
Note that δi is time-invariant and accounts for any firm-specific effect, while the

disturbance u it varies from firm to firm and across time.

Abnormal earnings are calculated using normal earnings less a charge for capital. In line
with Cheng and McNamara (2000), the weighted average cost of capital is estimated using
the PE ratio as a base, charged on the net book value of the company’s assets. Hence
abnormal earnings are defined as follows:
a
Xit = Xit – WACC.TA*

where:
a
Xit = Operating earnings after taxation and finance charges
WACC = Weighted average cost of capital
TA* = Total assets – total debt
a
Total debt is subtracted from total assets because operating earnings Xit are after finance
charges. Thus, to avoid double counting the cost of debt, this is removed as a form of
finance by subtracting the value thereof from total assets.
The other information variable, vit, can either be other financial statement information or
any other publicly available information. ‘Other’ information vit is estimated using

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 Empirical examination of value relevance of intellectual capital using Ohlson (1995) valuation model

dividends (dt) and intellectual capital (VAIC ) as proxies. The use of dividends is in line
it
with the results of Cheng and McNamara (2000) and Garrod and Rees (1998). As noted
earlier, dividends as a form of information are particularly important on the JSE, as in other
emerging markets, where liquidity is important (Bhana 1991). Changes in dividends are
used to avoid conflict with the abnormal earnings variable. Hence, for the purposes of this
study, ‘other’ information is defined as follows:
dt = DPSt – DPSt-1
Colinearity between abnormal earnings and abnormal dividends should not be a problem as
earnings are accrual earnings, and dividends per share refers to the movement in dividends
and therefore only represents the informational effect.
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Intellectual capital is estimated using Pulic’s (1998) model, as discussed earlier, with
specifications included for the capital employed coefficient (CEE ), the human capital
it
coefficient (HCE ), and the structural capital coefficient (SCE ).
it it

As the model is essentially predictive using historical information, a problem of leads

and lags is present for the dependent variable Pit. Even though there are a number of studies
that confirm the JSE’s semi-strong stage of market efficiency, share prices three months
after each company’s year-end were used to allow time for the publication and analysis of
financial statements.

4 Results and discussion

The results of the panel data least square regression are presented in Table 1 below. The
results of the basic T-statistic indicate that the Ohlson (1995) regressors of book value of
assets (bv ), abnormal earnings (x ), and abnormal dividends (d ) all have a statistically
it it it
significant and robust effect on the dependent variable. Furthermore, the Pulic (1998)
regressors for the capital employed coefficient (CEEit), and the human capital coefficient
(HCEit) have a statistically significant and robust effect on the dependent variable.
However, the structural capital coefficient (SCEit) displays a weak relationship with the
dependent variable, and therefore is not considered to be value relevant. Structural capital
has been defined as value added minus human capital. Human capital and structural capital
are reverse proportional; the less human capital participates in value creation the more
structural capital is involved (Pulic 1999). The lack in significance of the SCEit coefficient
is therefore not unexpected, as the same structural information is contained in the book
value assets, measured at T0, and therefore the information includes the value added in the
current year; and in the abnormal earnings coefficient.
The regression statistics indicate that the panel equation fits the data relatively well; an
R2 of 0.9114 and adjusted R2 of 0.9110 indicate that the equation explains around 91% of
the variation in share prices during the sample period. In addition, all coefficient estimates,
with the exception of SCEit, are significantly different from zero at 95% confidence levels.

76 Meditari Accountancy Research Vol. 14 No. 2 2006 : 67-81

 Swartz, Swartz & Firer

Table 1 Panel data results

Model:
* a
Pit = ‫ ح‬+ β x + β bv + β d + β CEE + β HCE + β SCE + δ + u (10)
t 1 it 2 it 3 it 4 it 5 it 6 it it it
*
Dependent variable: P
it
Method: Panel least squares
Sample: 1997 2004
Cross-sections included: 154
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Variable Coefficient Std. error t-Statistic Prob.

β1 8.493600 0.111578 76.12258 0.0000

β2 45.44563 7.814148 5.815814 0.0000
β3 -1.999493 0.230031 -8.692285 0.0000
β4 -1289.808 477.4625 -2.701381 0.0070
β5 289.0229 72.75019 3.972813 0.0001
β6 -3.28E-06 1.92E-05 -0.170351 0.8648

R-squared 0.911409 Mean dependent variable 4156.530

Adjusted R-squared 0.910872 S.D. dependent variable 5262.436
S.E. of regression 1571.067
Sum squared residuals 2.03E+09

The lack of a significant relationship reflected in the structural capital coefficient (SCEit)
was further investigated by performing a panel data analysis using the Pulic (1998)
coefficients only, as reflected in Table 2 below. The results indicate that all three of the
Pulic (1998) coefficients have a statistically significant and robust effect on the dependent
variable, and therefore that the SCEit coefficient is indeed value relevant. The contradictory
results in the two panel data models indicates that although the SCEit coefficient is value
relevant, such information is already incorporated in the Ohlson (1995) model coefficients
as discussed above, and supports the conclusion that the inclusion of the structural capital
coefficient as part of the other information variable is inappropriate.
The results therefore indicate that abnormal earnings, abnormal dividends, book value of
assets, the capital employed coefficient and the human capital coefficient all have a
significantly positive and robust effect on the share price three months after the year-end
for South African listed firms.

Meditari Accountancy Research Vol. 14 No. 2 2006 : 67-81 77

 Empirical examination of value relevance of intellectual capital using Ohlson (1995) valuation model

Table 2 Panel data results

Model:
*
Pit = ‫ ح‬+ β CEE + β HCE + β SCE + δ + u (11)
t 1 it 2 it 3 it it it

*
Dependent variable: P
it
Method: Panel least squares
Sample: 1996 2004
Cross-sections included: 154
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Variable Coefficient Std. error t-Statistic Prob.

β
1 818.4691 367.3473 2.228053 0.0261
β
2 275.5066 63.80884 4.317687 0.0000
β
3 0.000370 4.83E-05 7.660574 0.0000

R-squared 0.191327 Mean dependent variable 3820.742

Adjusted R-squared 0.189773 S.D. dependent variable 4853.521
S.E. of regression 4368.781
Sum squared residuals 1.99E+10

5 Concluding remarks and suggestions for future research

This study investigated the relevance of accrual accounting data and intellectual capital
measured using VAIC™ to determine share prices. The results indicate that abnormal
earnings, the net book value of assets, abnormal dividends and intellectual capital all
provide information relevant to the establishment of market prices in an emerging market
environment.
The annual financial statements not only report earnings and the book value of assets, but
also report other accounting information such as various revenues, expenses, assets,
liabilities and cash flow information, each of which have different measurement attributes
and thus different characteristics in respect of any particular valuation model.
Disaggregation of the summary measures used in this study provide a rich field for future
research.
The focus of this study was on one single measure of intellectual capital performance.
Future studies could explore a different standardised measure for intellectual capital
performance.

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