Intellectual Capital, Financial Performance and Market Valuation : A Study on IT and Pharmaceutical Companies in India

In the new economy, Intellectual Capital (IC) has been identified as one of the most important factors in driving economic growth. Rapid globalization characterized by advances in technology, research and development and increasing competition has been essentially driven by growth in IC. Companies operating in industries like banking, software, pharmaceuticals, hotel, etc. can be said to be extensively dependent on IC as an asset for generating revenues. Until the recent years, the true value of IC was missing from the balance sheets of firms as the focus of economists as well as accountants was primarily the transaction model comprising of historic value of tangible performance. The evidence for the same can be derived from the ever-increasing gap between market and book value of firms. As IC is the sum of hidden resources of any organization not being fully reflected in the accounting statements, neither IC nor its components are capable of being identified and analyzed by the managers. Nevertheless, looking beyond the assets reported in financial statements should be a critical exercise for every organization wholly or partly dependent on intangibles for its value creation. The present study is based on Pulic's Value Added Intellectual Coefficient (VAIC) as a measure of IC of a firm to empirically examine the relationship between IC and traditional measures of financial performance, namely, profitability, productivity and market valuation using a sample of 10 BSE 100 IT and Pharmaceuticals companies for the period 2008-12