Measuring intellectual capital with financial figures: Can we predict firm profitability?

Abstract

Summary The measurement of intellectual capital (IC) is a highly discussed topic within the field of knowledge management. This paper presents a method for measuring IC to quantitatively assess whether IC supports the knowledge-based view of the firm that explains long-term differences in firm profitability. We systematically examine the landscape of IC valuation methods applied and addressed in the literature, and we extend one model by selecting monetary proxies for human, structural and relational capital. The paper presents a longitudinal panel data regression using 69 publicly traded pharmaceutical and biotechnology companies. The observation period of the panel is determined to last from the fiscal year 2002 until 2009. Our results show that IC-creating expenses indeed generate IC assets in a subsequent year and that an increase in IC is associated with a higher return on assets over time. With our results, we can also show not only that all three factors independently lead to the creation of IC but also, more importantly, their interaction. We present implications for knowledge management theory and practice. This paper presents a new way to assess the IC using easy accessible data and to verify its impact on firm performance. Furthermore, it provides a tool for managers to calculate the value of a company’s IC directly and judge its impact on firm performance. This allows managers to allocate resources to knowledge assets critical to IC that may translate into sustained competitive advantage.