Article
Towards a Better Understanding of the Dynamics of Value Creation in R&D Intensive Small Firms
Standard financial and economic theories suggest that the stock value of R&D intensive High Technology Small Firms (HTSF) undergo a geometric random walk. Such a model neglects to account for observed periods where firms experience large fluctuations due to uncertainty related to its R&D activities, external competitive or regulatory environments. Empirical evidence also shows that the behavior of these firms is difficult to describe – let alone predict – using this Gaussian process. With ambidexterity as a theoretical basis, we show that the value of HTSF can be statistically described as the result of a combination of two distinct random walks: an exploitative steady state component characterized by Neo-Marshallian equilibrium and low volatility; and a more dynamic component with high volatility reflecting bursts of large and rapid changes associated with Schumpeterian outcomes of explorative processes. A mixture of two normal distributions provides an overall function that is more reflective of the empirical evidence and provides a quantitative measure for the theory that firms engage in concurrent exploration/exploitation activities. A linear relationship between the two components of the mixture distribution that describe the stock value of these firms also emerges. By understanding this dual nature and its impact on stock value, firms can better manage resources and prepare for the increase in variability that are associated with exploration activities. A more accurate financial description of HTSF that reduces or that anticipates uncertainty may lead to financial tools and option pricing methods that put a premium on the value of HTSF markets, incentivizing investors to invest more in such firms.
Objectives
According to the framework of knowledge economy, production and management of knowledge are key aspects of firm’s activity nowadays. Intellectual capital (IC) is the crucial factor for company survival in the market. Therefore it is vital to realize the way that this capital helps to create firm value. The purpose of this study is to test empirically one aspect of the relationship between intellectual capital components and business performance – the influence of intellectual capital structure on process of firm’s value added creation.
Data
In order to analyze the process of intellectual capital transformation into the company value, the balanced panel data were collected. The sample consists of 64 British firms in 6 industries: retail and wholesale trade, machinery manufacture, chemicals manufacture, transport and telecommunications, oil extraction and producing. The panel includes five years: from 2005 to 2009. In order to obtain comprehensive data of chosen companies we used Amadeus Database (Bureau Van Dijk) as like as information from companies’ websites.
Methods
As far as there is no singular method of measuring value added by intellectual capital, we used five the most common methods: EVATM, MVATM, FGVTM, VAICTM, P/B ratio. We also used 14 variables as proxies for intellectual capital components.
The models are estimated with pooled cross-sectional OLS method.
Results
Most strongly influence of the intellectual assets structure is reflected in VAIC and FGV. At the same time, EVA and P/B ratio have weak or not significant relationship with the structure of the intellectual assets portfolio.
It should also be noted that models with human capital proxy in the denominator show a significant positive dependency between a ratio of the intellectual capital components and value added.
Moreover consideration of the industry factor changes the results only slightly.
Conclusions
The present study advances our understanding of how to manage knowledge-related resources and contributes to effective investment management. The results confirm that structure of intellectual assets has quite stable linear effect on the value added created by the company. The effect is observed both in the short and long term period. Consequently, management should consider not only an accumulated volume of intellectual capital, but also the ratio between these components in order to increase company value.
This paper aims to analyse the contribution of intellectual resources to companies’ value. Most of the relevant empirical studies cover issues concerning the impact of intellectual capital on companies’ performance. This research is more specific and focuses on the unbiased estimation of intellectual resources’ contribution to their value.
The paper highlights an approach to decision-making for investments, identifying the costs for companies’ growth in value. The hedonic pricing approach is applied in order to test the hypotheses put forward in this study. One of the research questions is related to the assumption that the hedonic prices of intellectual resources differ according to external factors: country and industry. ANOVA is used to identify group differences among different national markets and industries. We have used fixed-effect regressions in order to avoid the endogeneity problem.
The authors revealed that hedonic pricing tool is valid for evaluating intellectual capital.
Awareness of corporate value growth importance for all stakeholders as well as strengthening of intangible assets' role in the process of value creation makes it necessary to study the mechanism of intellectual capital transformation in the resulting indicators. However existing studies show poor development of methods for measuring of value created by the components of company's intellectual capital which makes analysis of the effectiveness of its use and impose limitations on value management. This paper is devoted to theoretical review and formulation of the problems for further analysis of value creation and destruction as a result of using both tangible and intangible assets.
“Intellectual capital” is a new term for key resources of a firm that enable it to compete on challenging market. Such assets as IT-systems, brand, employees’ knowledge and competencies are crucial for any company. However, large stocks of these resources do not lead to success automatically. The main purpose of this paper is to find out how interconnections between intellectual capital components contribute to company value. We test empirically linear and non-linear relationship between intellectual capital components and business performance with the assumption of their mutual influence on each other. From the theoretic point of view we combine the theory of intellectual capital with Value-Based Management concept and Resource-Based View in order to investigate the way that firm’s intellectual resources transform into its value.
There are two main problems when dealing with intellectual capital. The first one is intellectual capital evaluation. Previous papers on this topic are usually based on either questionnaire data or information from financial reports. However, questionnaire survey has significant disadvantage as the data obtained include subjective opinion of respondents. Financial reports lack for information about amount of firm’s intellectual capital. Therefore we propose another way to estimate intellectual capital components. Each of three components – human capital, structural capital and relational capital – is measured through the set of financial and non-financial proxy indicators which are collected from company’s reports and its web-site. Further these data are aggregated in first principal components through factor analysis to obtain the comprehensive view of intellectual capital structure. The second problem is to measure the value that has been created by intellectual resources. We chose two measures – market capitalization and market-to-book ratio.
Proposed method of analysis of intellectual capital is used on the sample of 59 firms from European countries with high level of economic and knowledge development. The sample covers five year period (from 2005 to 2009). We used the LS method to assess the direct and indirect relationships between intellectual capital and corporate value.
This study contributes in different ways. Firstly, it helps researchers and management to understand what synergetic effects between intellectual capital’s components take place. Secondly, it proposes an application of principal components method for investigating intellectual capital. Also it helps to recognize the level of homogeneity of intellectual capital elements that are combined in human capital, structural capital or relational capital and therefore are interpreted as describing one aspect of firm’s activity.
Value-based management concept regards corporate value growth for all stakeholders as the main company purpose which nowadays is primarily provided by intangible assets. However analysis of the process of converting intellectual capital (IC) and its components into the company financial performance is still a challenging research area. The main aim of the current study is to investigate the intellectual capital transformation into the company value on the basis of available information.