ABSTRACT

This study examined the effect of Intellectual Capital(IC) on corporate valuation of quoted firms in Nigeria. This work adopted the Ex post-facto research design using the Panel Data. The study covered a period of ten years (2004-2013). Sample size of Twenty One(21) firms. Purposive Sampling Method select three firms from each of the seven sectors studied. Data were sourced from firms’ annual financial statements and Nigerian Stock Exchange using content analysis approach. Six hypotheses guided the study. The independent variable is Intellectual Capital while the dependent variable is corporate valuation. Intellectual Capital was measured using Human Capital Efficiency (HCE), Structural Capital Efficiency(SCE) and Capital Employed Efficiency (CEE). The proxies for the dependent variable were Price Earnings (P/E)Ratio, Market to Book Value Ratio(M/BV), Earnings per Share(EPS), Net Assets per Share(NAPS), Gross Revenue per Share(GRPS) and Share Price(SP). The study adopted the Value Added Intellectual Coefficient (VAIC) Model as developed by Pulic (1998) to examine the effect of Intellectual Capital and firms’ values. E-View Statistical Tool 8.0 was used in data analyses. Analyses were done using Multiple Regression and Correlation Coefficient Analysis. The analyses were done at 5% level of significance. Results revealed that HCE had a positive and significant effect on EPS, NAPS, GRPS and SP but showed it had a negative and insignificant influence on P/E Ratio. HCE had a positive and insignificant effect on M/BV Ratio. SCE had a positive and insignificant effect on P/E Ratio. It also had a negative and insignificant effect on firm’s EPS, M/BV and NAPS. SCE had a negative and significant effect on SP. Findings further indicate that CEE had positive and insignificant influence on P/E Ratio, M/BV Ratio, EPS and NAPS respectively. CEE had a negative and insignificant effect on GRPS and SP. The study concludes that Human Capital(HC) and Capital Employed(CE) if properly harnessed can tremendously enhance value creation potentials of firms in Nigeria. The implication of the findings is that investing in HE and CE will lead to growth in corporate values of firms in Nigeria while investing in structural capital can be counter- productive. The study therefore recommends that companies should invest substantial part of their earnings on human capital via co-ordinated knowledge development since it has the highest influence on firms and is also capable of stimulating other value creation potentialities to enhance firms’ values. They should also provide the much-needed infrastructure that will support a productive work force but devise strategies that could revamp the nature of their Structural Capital for it to support enhanced growth in corporate values.

CHAPTER ONE

INTRODUCTION

1.1                Background of the Study:

Globalization and the conscientious efforts of the International Accounting Standards Board (IASB) in recognizing intangible assets as an integral part of corporate assets heralded key debates on defining the place of intellectual assets in corporate valuation and by extension financial reporting. These moves together with global economic down turn heightened firms‟ quest for strategies that could ensure an all-encompassing corporate valuation model. In view of the tremendous challenges posed the afore mentioned, corporate managers also sought for ways of harnessing tangible assets as well as the intangible assets at firms‟ disposal by encouraging knowledge development which they hoped could create values(Deep & Narwal, 2014). These circumstances have been argued to have culminated into the knowledge economy that is driven by „Intellectual Capital‟(Triparthy, Sar & Sahoo, 2015).

Stewart(1997) refers to Intellectual Capital(IC) as ‘Brain Power‟. He described it as the sum of the knowledge that a company has that gives it a competitive edge in the market place. He recognized IC as being capable of value creation that will increase wealth. Edvinsson(1997) as cited by Milost(2013) postulates that intellectual capital is the derived insights about head value and future capabilities based on Human Capital, Structural Capital and Relational Capital. Banimahd, Mohammadrezeai & Mohammadrezeai(2012) and Sudarsanam, Sorwar & Marr(2003) note that human capital basically contains knowledge provided by employees in the form of competencies, commitment, motivation and loyalty. Accordingly human capital could come from advice or tips with key components as known-how, technical expertise and problem-solving capabilities, education, attitudes and entrepreneurial spirit. Structural capital includes organizational culture, intellectual procedure, processes, philosophy, systems, databases and contracts. Customer capital also referred as relational capital is the ability of  a  company to protect its relationship with

customers and other stakeholders. Customer satisfaction, relationship with network of suppliers, repeated business and relationship with strategic partners, financial growth and price sensitivity can all be considered as indicators of customer capital (Banimahd, Mohammadrezaei & Mohammadrezaei, 2012).

The emergence of knowledge and its preference to production economy has also been argued to have ushered in a paradigm shift from a period when firms were exclusively assessed on their physical assets(tangible assets) to an era of an all-encompassing platform that saw firms‟ worth being an aggregate of both tangible and intangible assets(Maditinos, Chatzoudes, Tsairidis & Theriou(2011). This is because the „Knowledge Economy‟ views as important factor „Intellectual Capital‟ of firms as it distinguishes a firm‟s capabilities in creating a sustainable competitive advantage in the market (Djhamil, Razafindrambinina & Tandeans, 2013). Further to this, traditional financial reporting that only coveres the value of tangible assets while ignoring intangible assets has been argued to underestimate the true value of firms (Tripathy,et al., 2015; Anuonye, 2015, Berzkalne & Zelgalve, 2014; Henry, 2013 ).

According to Mehralian, Rasekh, Akhavan & Sadeh(2012), in the current century, the industrial development model must elaborately accommodate knowledge-based and innovation intensive companies by providing valuations models which is not achievable by the traditional techniques. They argued that intangible assets of knowledge and intellectual capital are exceedingly overwhelming conventional valuating means such as land, property and capital assets and intellectual assets is turning into the determinants and credible sources of companys‟ success. The pharmaceutical, telecom firms among others are involved in high capital intensive knowledge development through Research and Development(R&D) and this is likely to have a large impact on their economic success(Mehralian,et al,2012). They argued that investors are likely to seek for indicators of „good- knowledge-handling‟ in order to assess whether their investment will be an appropriate decision.

Previous studies have also attributed the rate of growth in the value of stock of high-brid telecom industries and other knowledge-based firms to the impact of their huge investments in intellectual capital (Stewart, 1997; Banimahd, et al. 2012; Surdarsanam, Sowar & Marr,2003; Berzkalne & Zelgalve, 2014). The market estimates the value of companies with intangible assets to be significantly higher than the calculated book value (Chen, Chen & Yuchang, 2005; Raihi-Belkaoui, 2003). Frykman & Tolleryd(2010) note that the absence of Intellectual Capital in conventional accounting means that the non-financial assets of a company are not reflected in the balance sheet.

Intellectual Capital is also argued to have the capacity of filling the difference between market value and book value of firms (Ahangar, 2011 and Rahman, 2012). Intellectual capital if well harnessed and properly managed could enhance firms‟ competitive advantage through enhancing value creation efficiency from human creativity, the firms‟ operational structure and customer– supplier relationship (Malik, Aslam & Latiff, 2012). Epetimehin & Ekundayo(2011) note that intellectual capital is a vital corporate asset and will melt away, unless company do something to stop the brain-drain and retain critical knowledge. Anuonye(2015) argues that financial performance in relation to Intellectual Capital connotes notable actions or achievements which accrue to an enterprise as a result of IC measurement and application including its effect on Earnings per Share(EPS).

The International Accounting Standards Board(IASB) as earlier highlighted through International Accounting Standard(IAS)38 on Intangible Assets and the subsequent International Financial Reporting Standards 3 on Business combinations further attest to the need for integration of Intellectual capital in asset value of firms. IAS 36 on Impairment of Assets applied by IFRS adopting countries and the treatment of Goodwill, Research and Development and other identifiable intangible assets all give credence to the need for incorporating Intellectual Capital in financial reporting(Vafei, Taylor & Ahmed, 2011). To further buttress this point, Berzkalne & Zelgalve(2014) argue that though intellectual capital and knowledge assets are difficult to discern and quantify, their results will none the less be reflected in the company’s greater productivity, efficiency and overall profitability. Further to the above submissions,Chen, Chen & Yuchang(2005) opine that the limitations of financial statements in explaining company value underline the fact that the source of economic value is not only in production of material goods but also in the creation of intellectual capital. IC‟s ability to enhace value creation is further argued to be evident in blue chip companies with high share prices that are known to have relatively less investments in tangibles when compared to their intellectual investments(Ngari, Gichira, Aduda & Waititu, 2013).

Again the concept of hidden value as propounded by Roos & Ross(1998) concerning valuation of companies is evident and symbolized by Microsoft and Intel Corporations where intangible assets constituted 94% and 85% respectively of their market value. IC is also evident in the outcome of a cross-sectional study of pharmaceutical companies which indicate that the difference between market value and book value is 30-fold in which intellectual capital has a significant role in company valuation(Brookings,1996).

Some studies have also argued that the maximization of firms’ value is often attributable to firms‟ ability to manage its key resources namely: people, material and process which are denoted in ‘Intellectual capital’ (Sofian, Rasid & Mehri, 2011; Mojtahedi, 2013; Vafei, Taylor & Ahmed, 2011; Banimahd, et al., 2012; Berzkalne & Zelgalve, 2014; Saeed, Farahmand & Khorasani, 2013). Intellectual Capital has been identified as key to the growth of firms as it is an asset of the company and any increase in intellectual capital may enhance the value of company as well (Henry, 2013; Ahangar,2011; Pulic, 1998; Maditinos, Chatzoudes, Tsairidis & Theriou, 2011).

Extant literature on Intellectual capital and its value creation capacities has led to the development of methods for its measurement, since traditional financial tools are not able to capture all of its aspects (Campsi & Costa, 2008; Nazari and Herremans, 2007). Pulic(1998) developed a model considered very popular among scholars for the measurement of value added of intellectual assets known as Value Added Intellectual Coefficient(VAIC). The model uses value added as a symptom

of value creation through its components (Human Capital, Structural Capital and Relational Capital (Anuonye, 2015; Berzkalne & Zelgalve, 2014; Pouraghajan, Ramezani & Mohammadzadeh, 2013; Salman, Mansor, Babatunde & Tayib,2012; Asadi,2012;). VAIC measures how much new value has been created per invested monetary unit of resources. The VAIC model monitors and measures the extent to which a company produces added values based on intellectual capital efficiency or intellectual resources (Chiucchi, 2013; Chang, 2013; Epetimehin & Ekundayo, 2011; Ekwe, 2012; Ahangar, 2011). This model is also adopted in this study.

The rest of this study will empirically examine the extent to which intellectual capital affects the corporate valuation of quoted firms in Nigeria.

1.2        Statement of Problem

The justification or otherwise for the place of intellectual capital often refered to knowledge assets in driving the earnings and indeed the other corporate valuation indices of firms has constituted a challenging academic puzzle in the past few decades. Some scholars have identified intellectual capital as being a key driver of corporate value enhancement (Henry, 2013; Vafei, et al., 2011; Banimahd, et al., 2012; Berzkalne & Zelgalve, 2014 ). Others further submit that intellectual capital provides a platform through which firms enjoy competitive advantage, well and above their contemporaries (Sofian, Rasid & Mehri, 2011; Mojtahedi, 2013; Boda & Szlavik, 2012; Saeed, et al. 2013).

According to Naidenova & Oskolkova(2013), intellectual capital plays an important role in several business sectors which rely heavily on research and development or human capital for their survival(Onafalujo, Eke & Akinlabi, 2011; Asadi, 2012;Berzkalne,2013). Okpala & Odogwu(2010) submit that Human Capital Efficiency is significantly correlated with stock prices. Samilogu(2006) and Tan, Plowman, & Hancock(2007) submit that an increase in intellectual capital will increase the value of firms and financial performance. Berzklane & Zelgalve(2014) indicate a statistically significant and positive relationship between IC and company value. Banihahd, et al.(2012) argue that IC has a positive relationship with firm’s size but that there is no relationship between market valuation and intellectual capital. Ekwe(2012) found out a statistically strong relationship between the components of intellectual capital and Market to Book Value (M/BV) Ratio.

In contrast to the above submissions, some empirical studies could not establish any statistical relationship between intellectual capital and firms’ values while others show an inverse relationship. Jensen(1998) found no statistical significant relationship between Intellectual Capital and organizational market values. Puntilo (2009) indicate an inverse relationship between intellectual capital as defined by structural capital and M/BV ratio. Besharati, Mazhari & Mahdavi (2012) found no relationship between IC and innovative capital with financial performance and values of firms in Tehran Stock Exchange. Firer & Stainbank (2003) used the Value Added Intellectual Coefficient (VAIC) in South Africa and submit that there is no significant relationship between IC and profitability, productivity and market value. Zou & Huan(2011) opine that Capital Employed Efficiency and Structural Capital Efficiency(SCE) have a negative correlation with Technical Efficiency while Human Capital Efficiency(HCE) has a positive correlation with Technical Efficiency.

Anuonye (2015) argues that IC components are positively but insignificantly related with Earnings per Share (EPS) in Nigeria. Kamath(2008) avers that IC has positive influence on profitability and productivity but not with market values. Maditinos, et al.(2011) argue that IC is negatively and significantly related with Market to Book Value(M/BV). Saeed, et al. (2013) submit that only IC (Human Capital and Capital Employed) is positively and significantly related with Growth in Revenue. Banimahd, et al.(2012) argue that IC is positively and significantly related with profitability and productivity but not market valuation measured by firms‟ M/BV Ratio. Pouraghajan, Ramezani & Mohammadzadeh (2013) argue that there is no significant relationship between Value Added of Human Capital and M/BV ratio but is positively and significantly related to revenue growth. Tanideh(2013) found out that there is no relationship between Intellectual Capital and firms‟ value.

The above submissions clearly indicate that the task of reaching a consensus on the effect of Intellectual Capital and corporate valuation is yet to be rested. This study becomes very imperative, as there also exists the obvious gap created dearth of locally groomed study that could serve the peculiar needs of our socio-economic environment. Further to this, the few local studies reviewed, were skewed towards the financial sector(banks and insurance). However, the peculiar nature of the firms in the financial sector may limit the applicability of findings from such studies. Again, most of the past studies reviewed were mono-sector based; our multi/cross-sectoral approach further creates a platform for a more encompassing study that could serve specific and yet diverse interest groups including industry players, valuation experts, the academia and a host of others of various sectors in the economy.

The few previous reports also had very few dependent variables. This study adopted a multi-facet approach by studying one main independent and six dependent variables across seven economic sectors in Nigeria, thereby, enhancing the value creation potentials of the report. A study of this nature becomes expedient also in the face of prevailing economic downturn faced by firms and as the accounting profession through the IFRS standards seeks to properly integrate the intangible assets in financial reporting  and hence the justification for this study.

1.3              Objectives of the Study:

The broad objective of this study is to evaluate the effect of   intellectual capital                                                                                                          on corporate valuation of quoted firms in  Nigeria.  The specific objectives of the study are:

• To determine the effect of Intellectual Capital on Price Earnings (P/E) Ratio of firms in Nigeria.
• To ascertain the effect of Intellectual Capital on the Market to Book Value (M/BV) Ratio of

firms in Nigeria.

• To evaluate the effect of Intellectual Capital on Earnings per Share (EPS) of firms in Nigeria.
• To appraise the effect of Intellectual Capital on the Net Asset per Share (NAPS) Value of firms in Nigeria.
• To ascertain the effect of Intellectual Capital on the Gross Revenue per Share(GRPS) of firms in Nigeria.
• To examine the effect of Intellectual Capital on the Share Prices (SP) of firms in Nigeria.

1.4              Research Questions:

In order to achieve the afore-stated objectives, the following research questions will be addressed in this study:

• To what extent does Intellectual Capital affect Price Earnings (P/E) Ratio of firms in Nigeria?
• How does Intellectual Capital affect the Market/Book Value (M/BV) Ratio of firms in Nigeria?
• To what extent does Intellectual Capital affect the Earnings per Share(EPS) of firms in Nigeria?
• To what extent does Intellectual Capital affect the Net Asset per Share (NAPS) of firms in Nigeria?
• How does Intellectual Capital affect the Gross Revenue per Share (GRPS) of firms in Nigeria?
• To what extent can Intellectual Capital affect the Share Price (SP) of firms in Nigeria?

1.5              Research Hypotheses:

In view of the research questions, the following null hypotheses are formulated to guide  this study:

1. Intellectual Capital has no significant effect on Price/Earnings(P/E)Ratio of firms in Nigeria.
2. Intellectual Capital does not significantly affect Market to Book Value Ratio (M/BV) of firms in Nigeria.
3. Intellectual Capital does not significantly affect Earnings per Share (EPS) of firms in Nigeria.
4. Intellectual Capital has no significant effect on Net Asset Value (NAPS) of firms in Nigeria.
5. Intellectual Capital has no significant effect on Gross Revenue per Share (GRPS) of firms in Nigeria.
6. Intellectual Capital does not significantly affect Share Price (SP) of firms in Nigeria.

1.6              Significance of the Study:

This study will be of immense benefits to diverse interest groups namely: Human Resources Managers, Employees of Corporate Organisations, Trade/Labour Unions, Accounting Regulating Bodies such as Financial Reporting Council of Nigeria. It will also be apt to Professional Accounting Bodies such as the Institute of Charetered Accountants of Nigeria and Association of National Accountants of Nigeria, Reseachers and the Academia amidst other accounting associations in Nigeria.

Specifically, the Human Resource Managers will find this report apt as it will deepen their knowledge and understanding on the bottom line effect and implications of their decision concerning hiring, training and even motivating staff. The report provides a better platform for appraising human capital assets and other components of intellectual capital available to the firms. This knowledge will in turn help them device better strategies on how to encourage staff through enhanced welfare packages. They will through the report also appreciate better the need for training of staff which will enhance better corporate performance and firms‟ valuation.

Financial Analysts will benefit from this report as they will appreciate the indices that enhance better corporate valuation across the firms in Nigeria and therefore be in a better position to advice their clients. Other groups that will benefit from the study are scholars of accounting especially those carrying out research in related topics. This is because this study has further enriched the literature that is available for such studies in the developing countries and Nigeria in particular.

The Trade/Labour Unions will find this study very useful tool as it will provide them with an informed basis for pressing further on the welfare of their members as they appreciate the enormous contributions of their members who have constituted the human assets and drivers of the other arms of intellectual capital. Employers of Labour will also come to terms, treat issues concerning the intellectual assets of the firms with caution, and try to place a premium on them before they permanently loose them and all the attendant values attached. The various strata of government especially the directors of personnel and establishments in the various government agencies will employ this report as reference material to better appreciate the unique place and endowments of their employees and deploy this report in planning, directing, controlling and harnessing available IC for enhancing their performance.

Research and Academia will find this study very apt. Scholars will find this report rewarding and relevant as it has provided a platform for further debate in Intellectual Capital. The academia led by the university system and relevant accounting bodies will find this study relevant, as the recommendation could guide policies and curriculum/standards for the integration of the study of intellectual capital related courses into their system. This study will also help aid financial/corporate reporting in Nigeria and other developing countries.

1.7  Scope of the Study

This study assesses the effects of Intellectual Capital(IC) on Corporate Valuation of quoted companies in Nigeria. The study is carried out in Nigeria and was based on Twenty-One companies selected from seven sectors of the economy. The sectors studied are: Healthcare, Information and Communications Technology (ICT), Oil and Gas, Food & Beverages, Personal/Household

Consumables, Breweries and Conglomerates. The study is in line with classification of industries by how technologically and knowledge-based they are as noted by previous studies (Francis & Schipper, 1999; Vafei, Taylor & Ahmed, 2011; Banimahd, et al. 2012; Sofian, et al, 2011; Boujelbene & Affes, 2013).

This study covered a ten-year period(2004 to 2013). The choice of 2004 as base year is that it marked a period that heralded the information/knowledge revolution era through Information and Communication Technology(ICT) in Nigeria. Nigerian having liberalized its communication industry by registering other carriers apart from NITEL such as MTN, ECONET now Airtel and even Glo among others under the government of Gen. Obasanjo. Again, the period marked the pre and post global financial meltdown era and globalization. This was a period when many firms had a conscious rethink on how to ensure corporate survival, a move that saw many firms making very bold and deliberate investments on Intellectual capital   by encouraging knowledge development as a way of ensuring competitive advantage and enhanced value creation in the face of fierce competition and recession.

The study also covered a period when information and communication technology virtually took over and moderated how business are run through ICT which is evident in a knowledge economy. The study covered only firms listed on the Nigerian Stock Exchange (NSE) and did not consider companies from other countries.

1. Limitations of the Study: Some of the key limitations of this study are:

Dearth of   Dedicated Research Databases: In the course of this work, the researcher observed that there was the absence of dedicated databases, which could serve as a one-stop shop for data needed for this study. Study revealed that neither the Nigeria Stock Exchange nor the firms or any other organization maintained such platforms. The researcher however sought out the needed data from the individual firms‟ annual reports and accounts and the Nigerian Stock Exchange Fact Book.

Volume of Unquoted Firms in Nigerian Stock Exchange: Since Intellectual Capital is all about knowledge and many of the high-knowledge based organisations who operate in Nigeria were found not to publicly quoted. They were therefore excluded from the study as the researcher could not assess the needed data. Firms in the Information and Communication industry such as MTN Nigeria, GLO Nig., Airtel Nig Ltd., DSTV, Multi Choice Nigeria were not listed. Firms in the healthcare industry such as Emzor Nig. Ltd, Swipha Nig., and JUHEL Nig Ltd among others were not studied in view of this constraint. The researcher however resorted to studying only those companies that were publicly quoted since assessing the other companies‟ records may be impossible.

Issue of the Emerging Nature of the Research Topic: There was clear case of dearth of relevant materials in the form of textbooks in Nigeria because of the emerging nature of the topic. As such, this work was substantially done using scholarly journal articles. Though many of the sudies were conducted outside the shores of this country, a good number of articles and home grown thesis on related topics were reviewed in the course of the work. The combination of these materials provided the study a robust basis to appreciate the topic better.

Limitations as per the Number of Years some firms have been Listed in the Stock Exchange: It was also discovered that many of the firms who currently operate at the exchange were listed after 2004 and could therefore not have enough data which could serve the purpose of the study. These companies were eliminated from the number of firms that qualified for this study while those that had enough data were studied.

Though the afore-mentioned challenges existed , the researcher had devised adequate strategies to as stated above which had ameliorated the effects they would have had and therefore not reasonable enough to undermine the results of the study.

1.9              Operational Definition of Terms:

• Intellectual Capital: Intellectual Capital(IC) also known as Intellectual Assets is defined as the knowledge that transforms raw materials and makes them more valuable (Stewart,1997).

It includes the talent of staff, the value of proprietary knowledge, processes and the value of relationships with customers and suppliers. Intellectual Capital comprises of the Human Capital, Structural Capital and Relational Capital.

• Human Capital: This consists of the knowledge, skills, experiences, abilities of individuals and talents of firm’s employees and managers. It ranges from specific technicalities to softer skills like salesmanship. This important element contributes to firm value creation and financial growth. Human Capital (HC) is valued and interpreted as employee expenses.
• Structural Capital: This is described as organisational culture, intellectual procedure, process, philosophy, systems, databases and contracts. It comprises knowledge assets that are indeed company property. Structural capital consists of intellectual property such as patents, copyrights and trademarks. Structural capital is difference between produced benefit (VA) and human capital.
• Relational Capital: This is the ability of a company to protect its relationship

with customers and other stakeholders. It includes the customer satisfaction, relationship with network of suppliers, repeat business, and relationship with    strategic partners, financial growth and price sensitivity.

• Intellectual Property: It is an intangible assets, which can be bought, sold, licensed, exchanged or gratuitously given away like any other property. An asset is something that transforms raw material into something more valuable. It is a subset of Intellectual capital comprising of such assets as patents, copyright and ownership of intellectual property may be transferred.
• Knowledge Asset: This concept defines as resources that underpin capabilities, which in turn can be transformed into core competencies that allow organisations to execute their strategy in order to achieve better business performance.
• Corporate Valuation: Corporate valuation defines the processes/basis of determining the

actual worth of a firm or an organization.

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