Abstract
The purpose of this paper is to compare two of the most commonly utilized methods employed to measure the Intellectual Capital (IC) value: Market to Book (MtB) ratio and the Value Added Intellectual Coefficient (VAIC), in order to determine the most suitable in the context of Italian listed firms and their respective relationships with some key IC determinants. The study is conducted for a sample of Italian listed firms over the period 2009-2014. Different tests are employed to compare VAIC and MtB, while two linear panel regression models with fixed effects models are performed in order to test the relationship between IC value and selected determinants. The results suggest that the MtB ratio is a better estimator of IC value than VAIC. MtB, IA and profitability – are significant positive drivers, while leverage and size are significant negative drivers. For VAIC, only profitability and leverage are significant determinants, both having a positive effect. Recognised limitations in measuring IC value through MtB are partially mitigated because the sample is composed of listed companies preparing financial statements according to IFRS since 2005. Managers should try to avoid rigidity in their organisational structure and to focus on an IC investment strategy. The results could be beneficial for financial analysts and investors in selecting the best method for IC measurement. The paper makes an innovative comparison between two alternative IC metrics, to determine which is more effective in capturing IC value in an Italian listed firms’ context. Further, it identifies some key determinants of IC value. Key words: Intellectual capital, intangible assets, market-to-book ratio, value added intellectual coefficient (VAIC), Italian listed firms.
Highlights
This paper proposes a comparison between two competing measures of Intellectual Capital (IC) value, the Market to Book (MtB) ratio and Value Added Intellectual Coefficient (VAIC), both of which are widely employed in the IC literature (Bramhandkar et al, 2007; Morariu, 2014)
Another innovation of this study is that it employs the VAIC as a dependent rather than as an independent variable
The investment in intangible assets does not influence VAIC as it appears to be influenced more by the revenues generated by past investments in assets
Summary
Khalique et al (2015: 225) argue that “intellectual capital represents a combination of intangible assets or resources, such as knowledge, know-how, professional skills and expertise, customer relationships, information, databases, organisational structures, innovations, social values, faith, and honesty. These can be used to create organisational value and provide a competitive edge to an organisation”. Dumay (2016: 169) emphasizes the concept of “value” rather than “wealth” by defining IC as follows: “[IC] is the sum of everything everybody in a company knows that gives it a competitive edge [...] Intellectual Capital is intellectual material, knowledge, experience, intellectual property, information [...] that can be put to use to create [value]”. Intellectual Capital can be identified with those hidden values, which due to the prudent attitude of the standard setters are not recognised in the financial statements but valued by the market, contributing to enrich the difference between market value and book value (Chen et al, 2005; Dumay, 2009; Maditinos et al, 2011)
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