intellectual capital: can it be an alternative investment strategy in capital markets? associate...

INTELLECTUAL CAPITAL: CAN IT BE AN INTELLECTUAL CAPITAL: CAN IT BE AN ALTERNATIVE INVESTMENT STRATEGY IN ALTERNATIVE INVESTMENT STRATEGY IN CAPITAL MARKETS?CAPITAL MARKETS?

Associate Professor Serhat YANIKAssociate Professor Serhat YANIK

Assistant Professor Basak TURAN ICKEAssistant Professor Basak TURAN ICKE

Research Assistant Yusuf AYTURKResearch Assistant Yusuf AYTURK

Istanbul University, Faculty of Political SciencesIstanbul University, Faculty of Political Sciences

Presentation OutlinePresentation OutlineIntroduction and Problem Definition

Intellectual CapitalValue Relevance of Intellectual CapitalReporting of Intellectual Capital and Market Efficiency

Research Methodology and Data DescriptionPortfolio Formation MethodologyValue Added Intellectual Capital – VAICMain hypothesis

Results of Analysis

Conclusion and ImplicationsYANIK, ICKE and AYTURK YANIK, ICKE and AYTURK

Istanbul UniversityIstanbul University

Introduction and Problem DefinitionIntroduction and Problem DefinitionIn today’s business environment, the main aim of any company is

to maximize the shareholders’ valueto maximize the shareholders’ value. In value creation, firms use cash generating assets. These are tangible and intangible assets. In the knowledge age, intangible assets are more important than the tangibles for the value creation in firms.

Intellectual capital Intellectual capital is a special kind of intangible asset. According to the widely accepted definition of intellectual capital, it refers to the sources of non-physical (added) value the sources of non-physical (added) value for a company or organization: human capital human capital (e.g. skills, experience, training etc.), relational capital relational capital (e.g. customer and stakeholder relations, brands, agreements) and structural capital structural capital (e.g. company culture, working environment, systems, immaterial rights) (Stahle et al., 2011, p.532).

YANIK, ICKE and AYTURK YANIK, ICKE and AYTURK Istanbul UniversityIstanbul University

Introduction and Problem DefinitionIntroduction and Problem Definition


Human capital Customer capital Structural capitalKnowledge Customer relationships InformationSkills (e.g. problem solving) Customer retention R&DCompetences Customer satisfaction PatentsExpertise Favorable contracts CopyrightsMotivation Reputation TrademarksInnovation Brand image LicensesEntrepreneurial spirit Sales channels ProcessesLeadership qualities Distribution channels BPRAdaptability Supplier relationships Manual of SOPsIntellectual agility Business collaborations Best practicesValues Franchising agreements DatabasesEmployee satisfaction Market intelligence IT systemsEmployee turnover Networking systemsVocational qualifications MISEducation Management philosophyTraining Corporate culture

Table 1: The components of intellectual capital

Introduction and Problem DefinitionIntroduction and Problem DefinitionMouritsen (1998, p.462) points out that intellectual capital intellectual capital is

broad organizational knowledge unique to a firmunique to a firm, which allows the firm constantly to adapt to changing conditions. Intellectual capital can be accepted as a competitive advantage a competitive advantage for the company and it is a key factor in value creation value creation and increases free cash flows in any firm.

In the literature, value relevancy of intellectual capital value relevancy of intellectual capital has been analyzed in numerous studies by using different intellectual capital metric.

Chen et al. (2005) Chen et al. (2005) found a positive relationship between market value and intellectual capital by using Taiwanese data set.


Introduction and Problem DefinitionIntroduction and Problem DefinitionKamath (2008) Kamath (2008) analyzed value relevance of intellectual capital

for Indian pharmaceutical firms and found that intellectual capital does not explain market valuations of firms.

Vafaei et al. (2011) Vafaei et al. (2011) also examined the value relevance of intellectual capital disclosures by using data set covered the listed companies in Britain, Australia, Hong Kong and Singapore. Their results revealed that intellectual capital disclosure is positively associated with market prices of limited number of companies in the study.

Wang (2008) Wang (2008) examined the relationship between intellectual capital and market value in US for listed electronic companies in Standard & Poor’s 500 Index.


Introduction and Problem DefinitionIntroduction and Problem DefinitionCalisir et al. (2010) Calisir et al. (2010) found no significant relationship between

market valuation (P/B Ratio) and intellectual capital for Turkish ITC firms.

Yalama and Coskun (2007) Yalama and Coskun (2007) investigated intellectual capital performance of banks listed in Istanbul Stock Exchange by using data envelopment analysis and found that the portfolio constructed based on IC has the highest return.


Introduction and Problem DefinitionIntroduction and Problem DefinitionIntellectual capital is the most important asset in any firm in cash

flow generating process. In an efficient stock market, this information must be evaluated and reflected into market prices of listed companies. Otherwise, a profit opportunity not priced in the market appears and investors can gain excess returns.

In this respect, some studies investigated the relationship the relationship between intellectual capital and stock returnsbetween intellectual capital and stock returns.

Pantzalis and Par (2009) Pantzalis and Par (2009) measure human capital intangibles (EVHC) of firms and construct portfolios of low EVHC firms and portfolios of high EVHC firms.

Hurwitz et al. (2002) Hurwitz et al. (2002) investigated the relationship between intangibles performance and stock returns.


Introduction and Problem DefinitionIntroduction and Problem DefinitionDegree of intellectual capital is an important indicator of indicator of

subsequent financial performancesubsequent financial performance of companies. Investing in intellectual capital affects the long-term cash generating capability of companies.

Intellectual capital information is not reported directly by Turkish not reported directly by Turkish publicly held companiespublicly held companies. However, analysts can easily access such information by interviewing with company managers or calculating widely used VAIC metric from annual reports.

Intellectual capital information is required to be reflected in be reflected in market prices in an efficient marketmarket prices in an efficient market. Efficient markets hypothesis states that all publicly available information on common stocks is already reflected in current prices and any strategy cannot beat the market (generating abnormal returns above the market index).


Introduction and Problem DefinitionIntroduction and Problem DefinitionIn this study, we examine the relationship between stock we examine the relationship between stock

returns and intellectual capital levels of Turkish publicly held returns and intellectual capital levels of Turkish publicly held companies. companies.

Following a portfolio formation methodology, we construct two equity portfolios depending on the VAIC metrics of each company listed in ISE 30 Index to analyze whether high VAIC portfolio outperforms the market index and/or low VAIC portfolio.


Research Methodology and Data DescriptionResearch Methodology and Data Description

In this paper, we investigateinvestigate whether common stocks with higher intellectual capital higher intellectual capital can beat the market beat the market and whether common stocks with higher intellectual capital outperform outperform lower intellectual capitallower intellectual capital. We test our hypotheses by using a portfolio formationportfolio formation and performance evaluationperformance evaluation research methodology.

Each April, following the announcement of last year financial Each April, following the announcement of last year financial statements of the listed firms in Istanbul Stock Exchange (ISE), statements of the listed firms in Istanbul Stock Exchange (ISE), we form two different investment portfolios based on VAIC we form two different investment portfolios based on VAIC metrics of blue chip firms listed in ISE 30 Index. metrics of blue chip firms listed in ISE 30 Index.


We restrict restrict our sample to only blue chip firmsonly blue chip firms rather than including all the firms in ISE because of the data limitation. data limitation. We test our hypothesis especially for institutional investors. In Turkey, institutional investors institutional investors (mutual funds, pension funds and banks) primarily invest in blue chip firms as equity investing. Real estate Real estate investment trusts and holding companies are excluded. investment trusts and holding companies are excluded.

After the formation of investment portfolios with the lowest and highest intellectual capital, we calculate equally weighted equally weighted monthly returns of these portfolios during the following year. monthly returns of these portfolios during the following year. This investment strategy is followed for the period 2006 – 2010 for the period 2006 – 2010 by using preceding year financial statements of the firms listed in ISE 30 Index.




Table 2: Number of firms included in this study

Reporting Period Performance Evaluation Period Sample Size2005 April 2006 – March 2007 22

2006 April 2007 – March 2008 23

2007 April 2008 – March 2009 21

2008 April 2009 – March 2010 25

2009 April 2010 – March 2011 24


One of the most popular intellectual capital metrics is Value Value Added Intellectual Capital (VAIC)Added Intellectual Capital (VAIC) developed by Pulic (1998, Pulic (1998, 2000, and 2004).2000, and 2004). This metric can be practically applied by using only financial reports of a business financial reports of a business which makes VAIC metric widely used in the literaturewidely used in the literature..

VAIC = HCE + SCE + CEEVAIC = HCE + SCE + CEE

VAIC: Value Added Intellectual CapitalHCE: Human Capital EfficiencySCE: Structural Capital EfficiencyCEE: Capital Employed Efficiency



We compared the performance of equally weighted portfolios to the performance of a benchmark portfolio (ISE 100 Index and ISE 100 Index-a benchmark portfolio (ISE 100 Index and ISE 100 Index-based mutual fund)based mutual fund).

We adjust the monthly returns of portfolios according to the market model. the market model. The regression equation used in the market model is stated below;

rri,ti,t – r – rf,tf,t = α = αii + β + βii (r (rm,tm,t – r – rf,tf,t) + ε) + εi,ti,t

[rm,t – rf,t] is the market’s excess return over the risk-free rate of return. The risk-free rate of return (rf,t) is the rate of GDS Repo Index’s monthly return. [ri,t – rf,t] is portfolio’s excess return over the risk-free rate of return. The intercept term αi is supposed to capture the abnormal return unexplained by exposure to market risk factor. The slope βi is the only systematic risk factor beta coefficient. εi,t stands for residuals.



In an efficient market, In an efficient market, there must not be any positive αi generating portfolio or investing strategy. Generating positive αi means beating the market. In this respect, we test whether test whether higher VAIC portfolio beats the market.higher VAIC portfolio beats the market. Our main hypothesis is stated below;

HH00: Higher VAIC portfolio does not beat the market; α: Higher VAIC portfolio does not beat the market; αHVAICP HVAICP = 0.= 0.

HH11: Higher VAIC portfolio beats the market; α: Higher VAIC portfolio beats the market; αHVAICP HVAICP ≠ 0.≠ 0.

After testing our main hypothesis, we also compare the portfolio performance measures of high and low VAIC portfolios.



Results of AnalysisResults of Analysis


Table 3: Average VAIC values for portfoliosPeriod Lower VAIC Portfolio Higher VAIC Portfolio2005 2.21 6.132006 2.80 5.692007 3.12 6.182008 2.80 5.232009 2.74 4.94

Table 4: Summary Statistics

VariableNumber of

ObservationMean(%)

Standart Deviation

(%)

Minimum (%)

Maximum (%)

HVAICP 60 1.91 10.82 - 24.88 31.37LVAICP 60 1.11 09.50 - 24.17 24.47RF 60 0.92 0.39 0.38 02.35ISE100MF 60 0.71 08.56 - 22.33 22.48ISE100 60 0.12 09.17 - 23.12 23.77

Raw returns are not used in performance evaluation of Raw returns are not used in performance evaluation of portfolios portfolios since raw returns ignore the risk characteristics ignore the risk characteristics of the portfolios.

For a better performance evaluation of high and low VAIC portfolios we also estimate widely used market model and estimate widely used market model and calculate Jensen’s Alpha, Sharpe, Treynor and Information calculate Jensen’s Alpha, Sharpe, Treynor and Information ratio ratios.ratio ratios.




Results of AnalysisResults of AnalysisTable 5: Risk Adjusted Performance Evaluation Results

Panel A: Market Model Estimation with ISE 100 Index HVAIC Portfolio LVAIC Portfolio

(Jensen’s Alpha)α 0.01 [1.63]

0.00 [-0.55]

β 1.13 [19.08]

1.01 [30.90]

Sharpe Ratio 0.0918 0.0198Treynor Ratio 0.0088 0.0019Information Ratio 0.2123 -0.0723Panel B: Market Model Estimation with ISE 100 Index-Based Mutual Fund HVAIC Portfolio LVAIC Portfolio

(Jensen’s Alpha)α 0.01 [1.51]

0.00 [1.06]

β 1.17 [19.08]

1.06 [22.39]

Sharpe Ratio 0.0918 0.0198Treynor Ratio 0.0085 0.0018Information Ratio 0.3031 0.1384

The results prove that intellectual capital efficiency as the main cash generating source in a company is reflected into market prices of Turkish is reflected into market prices of Turkish blue chip firms during the period 2006 – 2011. blue chip firms during the period 2006 – 2011.

A strategy investing in Turkish blue chip firms with high intellectual A strategy investing in Turkish blue chip firms with high intellectual capital does not make any abnormal return. Our findings are consistent capital does not make any abnormal return. Our findings are consistent with efficient markets hypothesis.with efficient markets hypothesis.

When we compare the performance results of two different portfolios (high and low VAIC portfolios), high VAIC portfolio obviously outperforms low high VAIC portfolio obviously outperforms low VAIC portfolio. VAIC portfolio.

Sharpe, Treynor and Information ratios of high VAIC portfolio is higher Sharpe, Treynor and Information ratios of high VAIC portfolio is higher than low VAIC portfolio’s. This finding is also consistent with value than low VAIC portfolio’s. This finding is also consistent with value relevance of intellectual capital.relevance of intellectual capital.


Conclusion and ImplicationsConclusion and Implications

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