The stock market valuation of intellectual capital in the IT industry

The stock market valuation of intellectual capital in the IT industry 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The stock market valuation of intellectual capital in the IT industry

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-014-0437-5
Publisher site
See Article on Publisher Site

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 22, 2014

References

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    Chen, CR; Lung, PP; Wang, FA
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    Cohen, L; Diether, K; Malloy, C
  • Market valuations in the new economy: an investigation of what has changed
    Core, JE; Guay, WR; Buskirk, AV
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    Davis, HD; Noland, BE
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    Dechow, PM; Hutton, AP; Sloan, RG
  • The declining value-relevance of accounting information and non-information-based trading: an empirical analysis
    Dontoh, A; Radhakrishnan, S; Ronen, J

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