Intellectual capital and its determinants in Italian listed companies

Forte, William; Tucker, Jon; Matonti, Gaetano; Nicolo, Giuseppe

Abstract

PURPOSE: The purpose of the paper is to match the intellectual capital (IC) measurement methods and the reporting practices of a group of Italian listed firms, in order to examine potential convergence in practice. The study applies a holistic market-based approach, focused on the market-to-book ratio (MtB), to investigate the relationship between this ratio and potential determinants of the value of IC. Included in the determinants are intangible assets, as defined by IAS 38.
This paper contributes to the IC measurement research literature, examining the relationship between the market to book ratio and potential determinants of IC value (such as intangible assets, R&D expenses, goodwill, and so on) in order to examine whether part of the difference between market value and book value may be attributed to such determinants, recognizing that not all of the difference may be attributed to IC value. Thus, we wish to examine in an Italian context whether market value recognizes firms that invest more in IC assets by examining the relationship between the MtB ratio and factors that potentially explain the excess of market value over book value.
RESEARCH DESIGN AND METHODOLOGY: This paper employs The “market-capitalization approach” which measures IC value as the difference between the company’s market capitalization and its book value, assuming that a positive firm IC value occurs where the MtB ratio is greater than unity. This study examines the relationship between MtB ratios and selected determinants drawn from the literature (Morariu, 2014 ; Goebel , 2015; Cheng and Liu, 2015). Our empirical study is conducted for a panel of 148 Italian companies listed on the Milan Stock Exchange at the end of 2013, and draws upon annual reports for the financial years 2009-2013. For completeness we estimate two types of regression models: a logistic panel regression and a Tobit model in which the dependent variable (the market to book ratio) is regressed against independent variables including total assets and individual intangible assets components, ROA, size, age, leverage, concentrated and family ownership, auditor type, and industry type. In the logistic regression model we employ a dichotomous dependent variable taking the value 1 if the market to book ratio is above 1, and the value 0 otherwise; while in the Tobit Model we employ a continuous dependent variable for the market to book ratio.
FINDINGS: The two models produce very interesting results, showing that in the Italian context the market-to-book ratio is a good predictor of IC value. The logistic regression analysis shows a significant positive association between the MtB ratio and total intangible assets, firm profitability (ROA) and using a Big 4 auditor; and it shows a significant negative relationship between the MtB ratio and firm age and firm size. The Tobit model (employed as a robustness check) indicates a significant negative association between the MtB ratio (continuous variable) and total intangible assets and leverage; and it shows a significant positive relationship between the MtB ratio and ROA, RD, Big 4 audit and firm size.
IMPLICATIONS AND LIMITATIONS: This study has some important implications for researchers, practitioners, and accounting standard setters. The annual reports of the sample companies show a significant overlap of intangible assets and IC value, and while structural capital and relational capital are largely visible, human capital is in general overlooked in the financial statements.
The limitations of this study are inherent in the research methodology and the market-to-book approach itself. First, it is difficult to find complete financial and governance firm data for the five-year period under investigation. Second, there exist some weaknesses in the MtB ratio itself as a proxy for IC value caused by factors such as the application of historic cost accounting and market value fluctuations due to other (non-modelled) environmental or economic factors.

• Presentation Conference Type: Conference Paper (unpublished)
• Conference Name: 11th Interdisciplinary Workshop on Intangibles, Intellectual Capital and Extra-financial Information - EIASM
• Start Date: Sep 17, 2015
• End Date: Sep 18, 2015
• Acceptance Date: Sep 1, 2015
• Publication Date: Nov 17, 2015
• Deposit Date: Nov 10, 2015
• Publicly Available Date: Jan 11, 2017
• Peer Reviewed: Peer Reviewed
• Keywords: Italy, listed companies, intellectual capital
• Public URL: https://uwe-repository.worktribe.com/output/803119
• Publisher URL: http://www.eiasm.org/r/about-eiasm
• Additional Information: Title of Conference or Conference Proceedings : 11th Interdisciplinary Workshop on Intangibles, Intellectual Capital and Extra-financial Information - EIASM
• Contract Date: Jan 11, 2017