Advertisement

Review of Quantitative Finance and Accounting

, Volume 45, Issue 2, pp 279–304 | Cite as

The stock market valuation of intellectual capital in the IT industry

  • Hung-Chao Yu
  • Wen-Ying Wang
  • Chingfu Chang
Original Research

Abstract

This study adopts the P/V ratio developed from the residual income valuation model to examine whether Taiwan’s IT companies with more intellectual capital are more likely to be mispriced by the stock market. We focus on four types of intellectual capital: human capital (measured by employees holding graduate degrees and ratio of labor costs to net sales), innovation capital (measured by R&D intensity and royalty ratio), process capital (measured by working capital turnover and fixed asset turnover), and relational capital (measured by marketing expense ratio and sales growth rate). Using 751 firm-observations in Taiwan’s IT industry during 2003–2006, the empirical results show that Taiwan’s stock market appears to overprice IT companies’ innovation capital but underprice their human, process, and relational capital. Notably, the mispricing problem is more prominent on the human capital than on the other three types of intellectual capital. A further test indicates that the mispricing of intellectual capital is due to Taiwan’s domestic investors rather than foreign institutional investors. Particularly, the mispricing problem is more prominent on the human and relational capital. The implications of these findings are discussed.

Keywords

Intellectual capital Human capital Innovation capital Process capital Relational capital Mispricing 

JEL Classification

M41 G11 G32 G14 

Notes

Acknowledgments

We would like to thank participants at AAA 2009 Annual Meeting (New York, US) and one anonymous reviewer for their valuable comments on an early version of this paper. All the errors are ours. Great help and assistance from Ling-Ching Chan and Ting-Kai Chou are highly acknowledged.

References

  1. Abbott LJ, Parker S, Peters GF (2004) Audit committee characteristics and restatements. Audit J Pract Theory 23(1):69–87CrossRefGoogle Scholar
  2. Abdel-khalik AR (1975) Advertising effectiveness and accounting policy. Acc Rev 50(4):657–670Google Scholar
  3. Aboody D, Lev B (1998) The value-relevance of intangibles: the case of software capitalization. J Account Res 36(Suppl):161–191CrossRefGoogle Scholar
  4. Ahmed K, Goodwin J (2007) An empirical investigation of earnings restatements by Australian firms. Accont Financ 47(1):1–22CrossRefGoogle Scholar
  5. Ali A, Hwang LS, Trombley MA (2003) Residual-income-based valuation predicts future stock returns: evidence on mispricing vs. risk explanations. Account Rev 78(2):377–396CrossRefGoogle Scholar
  6. Amir E, Lev B (1996) Value-relevance of nonfinancial information: the wireless communications industry. J Account Econ 22(1–3):3–30CrossRefGoogle Scholar
  7. Anderson EW, Fornell C, Lehmann DR (1994) Customer satisfaction, market share, and profitability: findings from Sweden. J Mark 58(1):53–66CrossRefGoogle Scholar
  8. Ayanian R (1983) The advertising capital controversy. J Bus 56(3):349–363CrossRefGoogle Scholar
  9. Bae SC, Kim D (2003) The effect of R&D investments on market value of firm: evidence from the U.S., Germany, and Japan. Multinational. Bus Rev 11(3):51–75Google Scholar
  10. Ballester M, Livnat J, Sinha N (2002) Labor costs and investments in human capital. J Account Audit Financ 17(4):351–373Google Scholar
  11. Balsam S, Krishnan J, Yang JS (2003) Auditor industry specialization and earnings quality. Audit J Pract Theory 22(3):71–97CrossRefGoogle Scholar
  12. Banker RD, Potter G, Srinivasan D (2000) An empirical investigation of an incentive plan that includes nonfinancial performance measures. Account Rev 75(1):65–92CrossRefGoogle Scholar
  13. Barron OE, Byard D, Kile C, Riedl EJ (2002) High-technology intangibles and analysts’ forecasts. J Account Res 40(2):289–312CrossRefGoogle Scholar
  14. Barth ME, Beaver WH, Hand JRM, Landsman WR (1999) Accruals, cash flows, and equity values. Rev Accont Stud 4(3–4):205–229CrossRefGoogle Scholar
  15. Bhagat S, Welch I (1995) Corporate research and development investments: international comparisons. J Account Econ 19(2–3):443–470CrossRefGoogle Scholar
  16. Bharadwaj AS, Bharadwaj SG, Konsynski BR (1999) Information technology effects on firm performance as measured by Tobin’s q. Manag Sci 45(7):1008–1024CrossRefGoogle Scholar
  17. Bhargava S (1994) Profit sharing and the financial performance of companies: evidence from UK panel data. Econ J 104(426):1044–1056CrossRefGoogle Scholar
  18. Bloch H (1974) Advertising and profitability: a reappraisal. J Polit Econ 82(2):112–128CrossRefGoogle Scholar
  19. Bowen RM, Andrew CC, Rajgopal S (2010) Whistle-blowing: target firm characteristics and economic consequences. Account Rev 85(4):1239–1271CrossRefGoogle Scholar
  20. Bröcheler V, Maijoor S, van Witteloostuijn A (2004) Auditor human capital and audit firm survival: the Dutch audit industry in 1930-1992. Account Org Soc 29(7):627–646CrossRefGoogle Scholar
  21. Brown S, Lo K, Lys T (1999) Use of R2 in accounting research: measuring changes in value relevance over the last four decades. J Account Econ 28(2):83–115CrossRefGoogle Scholar
  22. Brynjolfsson E, Yang S (1999) The intangible costs and benefits of computer investments: evidence from the financial markets. Working paper, MIT Sloan School of ManagementGoogle Scholar
  23. Bublitz B, Ettredge M (1989) The information in discretionary outlays: advertising, research, and development. Account Rev 64(1):108–124Google Scholar
  24. Bushee BJ, Matsumoto DA, Miller GS (2004) Managerial and investor response to disclosure regulation: the case of Reg FD and conference calls. Account Rev 79(3):617–643CrossRefGoogle Scholar
  25. Cañibano L, Garćia-Ayuso M, Sánchez P (2000) Accounting for intangibles: a literature review. J Account Lit 19:102–130Google Scholar
  26. Chan SH, Martin J, Kensinger J (1990) Corporate research and development expenditures and share value. J Financ Econ 26(2):255–276CrossRefGoogle Scholar
  27. Chan L, Lakonishok J, Sougiannis T (2001) The stock market valuation of research and development expenditures. J Financ 56(6):2431–2456CrossRefGoogle Scholar
  28. Chauvin KW, Hirschey M (1993) Advertising, R&D expenditures and the market value of the firm. Financ Manag 22(4):128–140CrossRefGoogle Scholar
  29. Chen M, Cheng S, Hwang Y (2005) An empirical investigation of the relationship between intellectual capital and firms’ market value and financial performance. J Intellect Cap 6(2):159–176CrossRefGoogle Scholar
  30. Chen CR, Lung PP, Wang FA (2009) Mispricing and the cross-section of stock returns. Rev Quant Financ Accont 32(4):317–349CrossRefGoogle Scholar
  31. Chen SS, Chen YS, Liang WL, Wang YZ (2014) R&D spillover effects and firm performance following R&D increases. J Financ Quant Anal (Forthcoming)Google Scholar
  32. Cohen L, Diether K, Malloy C (2013) Misvaluing innovation. Rev Financ Stud 26(3):635–666CrossRefGoogle Scholar
  33. Colombo MG, Grilli L (2005) Founders’ human capital and the growth of new technology-based firms: a competence-based view. Res Policy 34(6):795–816CrossRefGoogle Scholar
  34. Core JE, Guay WR, Buskirk AV (2003) Market valuations in the new economy: an investigation of what has changed. J Account Econ 34(1–3):43–67CrossRefGoogle Scholar
  35. Davis HD, Noland BE (2003) Understanding human capital through multiple disciplines: the educational needs index. Soc Indic Res 61(2):147–174CrossRefGoogle Scholar
  36. Dean J (2004) Heard in Asia: with Taiwan economy robust, financial stocks likely to gain. Asian Wall Str J, July 1, M1 Google Scholar
  37. Dechow PM, Hutton AP, Sloan RG (1999) An empirical assessment of the residual income valuation model. J Account Econ 26(1–3):1–34CrossRefGoogle Scholar
  38. Deeds DL (2001) The role of R&D intensity, technical development and absorptive capacity in creating entrepreneurial wealth in high technology start-ups. J Eng Technol Manag 18(1):29–47CrossRefGoogle Scholar
  39. Dontoh A, Radhakrishnan S, Ronen J (2004) The declining value-relevance of accounting information and non-information-based trading: an empirical analysis. Contemp Accont Res 21(4):795–812CrossRefGoogle Scholar
  40. Edvinsson L, Malone MS (1997) Intellectual capital: realizing your company’s true value by finding its hidden brainpower. Harper Business, New YorkGoogle Scholar
  41. Einhorn B, Kovac M, Engardio P, Roberts D (2005) Why Taiwan matters. Bus Week 3933(May 16):76–81Google Scholar
  42. Ely K, Waymire G (1999) Accounting standard-setting organizations and earnings relevance: longitudinal evidence from NYSE common stocks, 1927–93. J Account Res 37(2):293–317CrossRefGoogle Scholar
  43. Erickson G, Jacobson R (1992) Gaining comparative advantage through discretionary expenditures: the returns to R&D and advertising. Manag Sci 38(9):1264–1279CrossRefGoogle Scholar
  44. Fama EF, French KR (1992) The cross-section of expected stock returns. J Financ 47(2):427–465CrossRefGoogle Scholar
  45. Foster G, Gupta M (1997) The customer profitability implications of customer satisfaction. Working paper, Stanford University and Washington UniversityGoogle Scholar
  46. Frankel R, Lee CMC (1998) Accounting valuation, market expectation, and cross-sectional stock returns. J Account Econ 25(3):283–319CrossRefGoogle Scholar
  47. García-Meca E, Martínez I (2007) The use of intellectual capital information in investment decisions: an empirical study using analyst reports. Int J Account 42(1):57–81CrossRefGoogle Scholar
  48. Gebhardt WR, Lee CMC, Swaminathan B (2001) Toward an implied cost of capital. J Account Res 39(1):135–176CrossRefGoogle Scholar
  49. Gode D, Mohanram P (2003) Inferring the cost of capital using the Ohlson-Juettner model. Rev Account Stud 8(4):399–431CrossRefGoogle Scholar
  50. Goodwin J, Ahmed K (2006) Longitudinal value relevance of earnings and intangible assets: evidence from Australian firms. J Int Account Audit Tax 15(1):72–91CrossRefGoogle Scholar
  51. Green JP, Stark AW, Thomas HM (1996) UK evidence on the market valuation of research and development expenditures. J Bus Financ Account 23(2):191–216CrossRefGoogle Scholar
  52. Gu F, Lev B (2001) Intangible assets: measurement, drivers, usefulness. Working paper, Boston University, Boston, MAGoogle Scholar
  53. Hall BH (1993) The stock market’s valuation of R&D investment during the 1980’s. Am Econ Rev 83:259–264Google Scholar
  54. Han BH, Manry D (2004) The value-relevance of R&D and advertising expenditures: evidence from Korea. Int J Account 39(2):155–173CrossRefGoogle Scholar
  55. Hirschey M, Weygandt J (1985) Amortization policy for advertising and research and development expenditures. J Account Res 23(1):326–335CrossRefGoogle Scholar
  56. Hirshleifer D, Hsu PH, Li DM (2013) Innovative efficiency and stock returns. J Financ Econ 107:632–654CrossRefGoogle Scholar
  57. Hitt MA, Bierman L, Shimizu K, Kochhar R (2001) Direct and moderating effects of human capital on strategy and performance in professional service firms: a resource based perspective. Acad Manag J 44(1):13–28CrossRefGoogle Scholar
  58. Huselid MA (1995) The impact of human resource management practices on turnover, productivity, and corporate financial performance. Acad Manag J 38(3):635–672CrossRefGoogle Scholar
  59. Ittner CD, Larcker DF (1998a) Are nonfinancial measures leading indicators of financial performance? An analysis of customer satisfaction. J Account Res 36(Suppl):1–35CrossRefGoogle Scholar
  60. Ittner CD, Larcker DF (1998b) Innovations in performance measurement: trends and research implications. J Manag Account Res 10:205–238Google Scholar
  61. Jensen MC (1993) The modern industrial revolution, exit, and the failure of internal control systems. J Financ 48:831–880CrossRefGoogle Scholar
  62. Johanson U, Mårtensson M, Skoog M (2001) Mobilizing change through the management control of intangibles. Account Org Soc 26(7–8):715–733CrossRefGoogle Scholar
  63. Kim EH, Singal V (1994) Opening up of Stock Markets: lessons from and for emerging economics. Working paper. http://ssrn.com/abstract=5429
  64. Kleinbaum DG, Kupper LL, Muller KE, Nizam A (1997) Applied regression analysis and other multivariable methods, 3rd edn. Duxbury Press, North ScituateGoogle Scholar
  65. Knight DJ (1999) Performance measures for increasing intellectual capital. Strateg Leadersh 27(2):22–25CrossRefGoogle Scholar
  66. Lee K, Witteloostuijn AV (1998) Human capital, social capital, and firm dissolution. Acad Manag J 41(4):425–440CrossRefGoogle Scholar
  67. Lev B (2001) Intangibles: management, measurement, and reporting. Brookings Institute Press, Washington, DCGoogle Scholar
  68. Lev B, Sougiannis T (1996) The capitalization, amortization and value relevance of R&D. J Account Econ 21(1):107–138CrossRefGoogle Scholar
  69. Lev B, Zarowin P (1999) The boundaries of financial reporting and how to extend them. J Account Res 37(2):353–385CrossRefGoogle Scholar
  70. Lev B, Sarath B, Sougiannis T (2005) R&D reporting biases and their consequences. Contemp Account Res 22(4):977–1026CrossRefGoogle Scholar
  71. Lev B, Radhakrishnan S, Zhang W (2009) Organization capital. Abacus 45(3):275–298CrossRefGoogle Scholar
  72. Liang CJ, Yao ML (2005) The value-relevance of financial and nonfinancial information-evidence from Taiwan’s information electronics industry. Rev Quant Financ Account 24(2):135–157CrossRefGoogle Scholar
  73. Lim LLK, Dallimore P (2004) Intellectual capital: management attitudes in service industries. J Intellect Cap 5(1):181–194CrossRefGoogle Scholar
  74. Linck JS, Netter JM, Yang T (2009) The effects and unintended consequences of the Sarbanes-Oxley Act on the supply and demand for directors. Rev Financ Stud 22(8):3287–3328CrossRefGoogle Scholar
  75. Linsmeier TJ, Thornton DB, Venkatachalam M, Welker M (2002) The effect of mandated market risk disclosures on trading volume sensitivity to interest rate, exchange rate, and commodity price movements. Account Rev 77(2):343–377CrossRefGoogle Scholar
  76. Liu YJ (2004) Research on the role of foreign investors on Taiwan’s securities exchange markets. Research Commissioned by the Taiwan Securities ExchangeGoogle Scholar
  77. Lu C, Kao L, Chen A (2012) The effects of R&D, venture capital, and technology on the underpricing of IPOs in Taiwan. Rev Quant Financ Account 39(4):423–445CrossRefGoogle Scholar
  78. Mavrinac S, Siesfeld T (1998) Measures that matter: an exploratory investigation of investor’s information needs and value priorities. Organisation for Economic Co-operation and Development (OECD)Google Scholar
  79. Merton RC (1987) A simple model of capital market equilibrium with incomplete information. J Financ 42(3):483–510CrossRefGoogle Scholar
  80. Mouritsen J, Larsen HT, Bukh PND (2001) Intellectual capital and the ‘capable firm’: narrating, visualizing and numbering for managing knowledge. Account Org Soc 26(7–8):735–762CrossRefGoogle Scholar
  81. Myers J, Myers L, Omer T (2005) Exploring the term of the auditor client relationship and the quality of earnings: a case for mandatory auditor rotation. Account Rev 78(3):779–799CrossRefGoogle Scholar
  82. Neter J, Kutner MH, Wasserman W, Nachtsheim CJ (1996) Applied linear statistical models, 4th edn. McGraw-Hill, Boston, MAGoogle Scholar
  83. Ohlson JA (1990) A Synthesis of security valuation theory and the role of dividends, cash flows, and earnings. Contemp Account Res 6(2):648–676CrossRefGoogle Scholar
  84. Ohlson JA (1995) Earnings, book values, and dividends in equity valuation. Contemp Account Res 11(2):661–687CrossRefGoogle Scholar
  85. Ohlson J, Juettner-Nauroth B (2005) Expected EPS and EPS growth as determinants of value. Rev Account Stud 10(2/3):349–365CrossRefGoogle Scholar
  86. Organisation for Economic Co-operation and Development (OECD) (1996) The knowledge-based economy. Organization for Economic Co-operation and DevelopmentGoogle Scholar
  87. Organisation for Economic Co-operation and Development (OECD) (1999) OECD science, technology and industry scoreboard 1999. Organization for Economic Co-operation and DevelopmentGoogle Scholar
  88. Palmrose Z-V, Scholz S (2004) The circumstances and legal consequences of non-GAAP reporting: evidence from restatements. Contemp Account Res 21(1):139–180CrossRefGoogle Scholar
  89. Peslak AR (2003) A firm level study of information technology productivity using financial and market based measures. J Comput Inform Syst 43(4):72–80Google Scholar
  90. Peteraf NA (1993) The cornerstones of competitive advantage: a resource-based view. Strateg Manag J 14(3):179–191CrossRefGoogle Scholar
  91. Porter ME (1992) Capital disadvantage: America’s failing capital investment system. Harvard Bus Rev 70(5):65–82Google Scholar
  92. Rahman S (2012) The role of intellectual capital in determining differences between stock market and financial performance. Int Res J Financ Econ 89:46–77Google Scholar
  93. Raymond L, Pare G, Bergeron F (1995) Matching information technology and organizational structure: an empirical study with implications for performance. Eur J Inform Syst 4(1):3–16CrossRefGoogle Scholar
  94. Romanus R, Maher J, Fleming D (2008) Auditor industry specialization, auditor changes, and accounting restatements. Account Horizons 22(4):389–413CrossRefGoogle Scholar
  95. Skaggs BC, Youndt M (2004) Strategic positioning, human capital, and performance in service organizations: a customer interaction approach. Strateg Manag J 25(1):85–99CrossRefGoogle Scholar
  96. Sougiannis T (1994) The accounting based valuation of corporate R&D. Account Rev 69(1):44–68Google Scholar
  97. Stewart TA (1997) Intellectual capital: the new wealth of organizations. Nicholas Brealey Publishing, LondonGoogle Scholar
  98. Sveiby KE (1997) The new organizational wealth: managing and measuring knowledge-based assets. Berrett-Koehler Publisher, San Francisco, CAGoogle Scholar
  99. Tan HP, Plowman D, Hancock P (2007) Intellectual capital and financial returns of companies. J Intellect Capital 8(1):76–95CrossRefGoogle Scholar
  100. Tsay R, Lin YM, Wang HW (2008) Residual income, value-relevant information and equity valuation: a simultaneous equations approach. Rev Quant Financ Account 31(4):331–358CrossRefGoogle Scholar
  101. Turban E, Leidner D, McLean E, Wetherbe J (2005) Information technology for management: transforming organizations in the digital economy, 5th edn. Wiley, New YorkGoogle Scholar
  102. Ulrich D (1998) Intellectual capital = competence × commitment. Sloan Manag Rev 39(2):15–26Google Scholar
  103. van Buren ME (1999) A yardstick for knowledge management. Train Dev 53(5):71–78Google Scholar
  104. Wang WY, Chang CF (2005) Intellectual capital and performance in causal models: evidence from the information technology industry in Taiwan. J Intellect Cap 6(2):222–236CrossRefGoogle Scholar
  105. Willcocks LP, Lester S (1999) Beyond the IT productivity paradox. Wiley, New YorkGoogle Scholar
  106. Wilson N, Peel MJ (1991) The impact on absenteeism and quits of profit-sharing and other forms of employee participation. Ind Labor Relat Rev 44(3):454–468CrossRefGoogle Scholar
  107. Wyatt A (2008) What financial and non-financial information on intangibles is value-relevant? A review of the evidence. Account Bus Res 38(3):217–256CrossRefGoogle Scholar
  108. You CH, Lai YC (1999) On the informational leading role of foreign institutional investors. J Financ Stud 7(3):1–26Google Scholar
  109. Yu HC, Chi WC, Hsu CY (2003) The nature of corporate income tax under a full imputation tax regime: a test of functional fixation. J Bus Finance Account 30(3–4):589–619CrossRefGoogle Scholar
  110. Zéghal D, Maaloul A (2010) Analyzing value added as an indicator of intellectual capital and its consequences on company performance. J Intellect Cap 11(1):39–60CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of Accounting, College of CommerceNational Chengchi UniversityTaipeiTaiwan, ROC

Personalised recommendations