Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
The Moderating Effect of Management Ownership on the
Relationship between Intellectual Capital Performance and
Market Value of Company
Parastou Aminiandehkordi*, Azlina Ahmad* *and Noradiva Hamzeh***
Intellectual capital is gaining prominence as one of the most important resources of
competitive advantage for a company in today’s knowledge-based economy. Intellectual
capital performance (ICP) has been found to positively contribute towards enhancing market
valuation of a firm. However past studies have shown effective corporate governance
mechanism is a pre-requisite to superior ICP and firm performance. Managerial ownership
has been identified as an effective corporate governance mechanism to align the interests
of shareholders and managers, thus contributing positively towards firm performance. This
study examines the moderating effect of managerial ownership on the relationship between
ICP and market value of companies. The findings showed that although ICP has a positive
effect on market value, managerial ownership does not moderate the relationship,
suggesting that risk aversion and managerial myopia may influence managerial decision on
intellectual capital investment which may subsequently affect intellectual capital
performance and firm value.
1. Introduction
The market capitalization is one of the indicators in the financial sector for evaluating the
development of a country (World Bank 2013). Based on market capitalization, Malaysia is
still lagging behind developed markets in Asia such as Japan, Korea Republic and Hong
Kong (World Bank 2013), Thus to realize its Vision 2020, Malaysia had initiated the
Knowledge-based Economy Master Plan in September 2002 as the main vehicle to
transform itself into a developed country by the year 2020. Evidences from past studies
have shown that investment in intellectual capital can lead to an increase in performance,
profitability and market value of a company (Chang 2007; Maditinos et al., 2011 and
Wang 2011), which in turn contribute towards economic growth via increase in market
capitalisation.
Although intellectual capital can be a source of competitive advantage to the companies,
the literature indicates the company managers due to their dependence on the company
for their source of revenue are usually risk-averse (Vafeas and Theodorou, 1998). They
prefer to support investment in tangible asset rather than intellectual capital, because the
tangible assets are easier to monitor and control as well as more justifiable. Additionally
tangible assets are associated with lower uncertainty and risk, which contribute towards
strengthening the position of managers (Masulis 1988; Hunsaker 1999; Vafeas and
Theodorou, 1998). According to Zhang (2011) managerial ownership would align the
_____________
* Corresponding author Mrs.Parastou Aminiandehkordi, Master student in Accounting, Faculty of
Accounting, National University of Malaysia. Email: p_aminian44@yahoo.com
**Dr. Azlina Ahmad, Faculty of Accounting, National University of Malaysia, Email: Azlina @ukm.my
***Associate Prof Dr.Noradiva Hamzeh, Faculty of Accounting, National University of Malaysia,
Email: adibz@ukm.my
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
interest of managers and shareholders towards increasing long term value of the firm, for
example by investing in intellectual capital. Managerial ownership has been identified as
an effective corporate governance mechanism to reduce the conflict between principle
and agent (Singh and Davidson, 2003). Equity holdings make managers owners thus
aligning the interests of managers and shareholder. Shareholder benefits from greater
managerial ownership due to greater incentives on the managers part to increase firm
value (Jensen and Meckling, 1976). Therefore, this study seeks to investigate the
relationship between intellectual capital performance (ICP) and market value in the
presence of managerial ownership. The extant literature shows a number of studies have
been conducted on the effect of intellectual capital in creating competitive advantages
such as profitability and market to book equity ratio (Clarke et al., 2011; Puntillo 2009;
Wang 2011) and the effect of managerial ownership on ICP (Ahmed 2009) and firm value
(Ahmed, 2009; Mueller and Spitz, 2002). What is yet to be examined is the moderating
effect of managerial ownership on the relationship between ICP and market value of
company.
In line with resource based view (RBV), value IC as a resource depends on its efficiency
or performance (Barney 1991). It means that the performance of IC indicates the value of
IC; therefore this research considers the performance of IC or intellectual capital
performance to measure IC and uses the VAIC™ model of Pulic (2000). The extent of
acceptance of this model may be evidenced by a finding by Volkov (2012) who states that
as of June 2012, VAIC model of Pulic (2000) has been used by 46 researches and has
been cited by 2373 researchers. VAIC which indicates the firm’s intellectual ability or the
performance of IC (Pulic 2000) stands for Value Added Intellectual Coefficient which
recognizes the four components of value added resources, namely, Intellectual Capital
Efficiency (ICE), Human Capital Efficiency (HCE), Structural Capital Efficiency (SCE) and
Capital Employed Efficiency (CEE) (Pulic ,2000). There is not any accepted public
definition and classification of IC (Canibano et al. 2000; Andriessen 2004 and Chu et al.
2011). Stewart (1997) described IC as “something that cannot be touched, although it
slowly makes you rich”. Edvinsson and Malone (1997) defined IC as the entire knowledge
of a firm which can be applied in conducting its businesses for the purpose of generating
value for the company. Edvinsson and Malone (1997.11) have categorized IC into two
broad sections. It comprises human capital (HC) and structural capital (SC). They defined
HC as “the combination of knowledge, skill, innovativeness and ability of individual
employees to meet the task at hand, company’s values, culture, and philosophy.”
Structural Capital is defined as “the hardware, software, databases, organizational
structure, patents, trademarks, and everything else of organizational capability that
supports employees’ productivity.
This study is expected to provide a clearer evidence of the moderating effect of
managerial ownership on the relationship between ICP and market value. This paper is
organized into four sections. The next section is a review of the related literature, followed
by hypotheses development and research methodology. The last section provides the
discussion and conclusions.
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
2. Literature Review and Hypotheses Development
According to resource-based view, intellectual capital as a strategic resource with
specifics characteristics such as valuable, rare, inimitable, and non-substitutable can
contribute towards achieving competitive advantage resulting in increased market value.
Intellectual capital plays an essential role in creating value via increased efficiency. For
example a firm with highly skilled workers may help reduce production time which in turn
helps reduce cost. This enables the firm to offer its products at lower costs or increase its
profit margins thus resulting in higher earnings and market value for the firm (El-Bannany
2008). Numerous studies have been conducted to examine the effect of intellectual
capital in creating competitive advantages such as more market capitalization. Chen et
al.(2005)measured ICP based on VAIC raises a firm’s profitability and market value of
companies in Taiwan Stock Exchange during 1992 to 2002. This is supported by Latif et
al. (2012) in a comparative study between Islamic and conventional banks in Pakistan.
Mousavi Shiri et al. (2012) found VAIC and all its component have a positive effect on
market value added of Iranian companies. Furthermore, Riahi-Belkaoui (2003) believed
that the companies with high level of investment in intellectual capital, in efficient markets
will be assessed higher by investors as intellectual capital is regarded as a major factor
that is needed by companies amid fierce competition, which would lead to an increase in
market value and financial performance.
In line with agency theory, Singh and Davidson (2003) found that managerial ownership
reduces the conflict between shareholders and managers. Conflict arises because firm’s
management focus more on short term benefits of protecting their position while
shareholders place more importance on long term benefits of firm value maximization.
Managerial ownership aligns the interest of managers and shareholders towards
increasing long term value of the firm. This is supported by Zhang (2011) found that
managerial ownership has a positive influence on intangible asset. Past studies have
shown that managerial ownership is positively associated to ICP (Ahmed 2009) and firm
value (Ahmed, 2009; Mueller and Spitz, 2002). However Warfield et al. (1995) argued that
the positive impact of managerial ownership might invert at such time as it exceeds a
certain threshold for example 25% as reported in their study. They believed that in line
with the entrenchment hypothesis, managerial ownership above a certain threshold may
cause the managers to focus on their self-interest and ignore the interests of minority
shareholders. Generally, it can be concluded that the ICP has a significant effect on
market value and managerial ownership has a significant effect on ICP, thus managerial
ownership is expected to moderate the relationship between ICP and market value of the
firm. The following hypotheses were developed to test the relationship:
H1: VAIC has positive relationship to market value of a firm.
H2: Managerial ownership has a positive moderating effect on the relationship
between VAIC and market value of a firm.
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
3. Research Methodology
Sample selection and data collection
The preliminary sample consisted of 110 companies from 2009 to 2012. 11 companies
were excluded from the sample as data on market value were not available, 47
companies were omitted because of negative book value (Firer and Williams, 2003) and
negative VAIC (Chu et al. 2011) and 6 companies were excluded due to multivariate
outliers (Tabachnik and Fidell, 2007). The final sample consisted of 46 companies over a
period of 4 years, resulting in a total of 184 firm years. The data were extracted from Data
Stream as well as annual reports obtained from the Bursa Malaysia website.
Operationalization of variables:
Dependent variable: The dependent variable is the market value measured based on
the market-to-book value equity (MBE) ratio in line with (Soedaryono et al., 2012; Zéghal
and Maaloul, 2010).
Independent Variable: The independent variable is ICP measured based on VAIC™
model. Value added intellectual coefficient (VAIC) includes the sum of Human capital
efficiency (HCE), Structural capital efficiency (SCE) and capital employed efficiency
(CEE). The value added (VA) can be calculated as: VA = OP + EC + D + A, where
OP= Operating Profit, EC = Employee Cost, D= Depreciation and A= Amortization
Human capital efficiency (HCE) = VA / HC (Total salaries and wages for company)
Structural capital efficiency (SCE) = SC / VA
Structural capital (SC) = VA - HC
Capital employed efficiency (CEE) = VA / CE
Capital employed (CE) = book value of the net asset for a company
Moderating variable; The moderating variable is managerial ownership measured based
on the percentage of shares held by executive and non executive managers over total
shares outstanding (Elyasiani and jia, 2010; Norman Mohd saleh et al., 2009).
Control Variables; The three control variables are size measured based on log total
assets (Banimahd et al. 2012; Latif et al. 2012; Majmumdar 1997), leverage (LEV)
measured based on ratio of debt to total assets (Banimahd et al. 2012 ; Mousavi Shiri, et
al. 2012) and Return on asset (ROA) measured based on earnings before interest and tax
divided by total assets (Soedaryono et al. 2012; Bouden 2006 and Casta et al. 2007).
Research model
To test the research hypotheses, first, the effect of VAIC and its components on MBE is
tested based on Model1.Then the moderating effect of managerial ownership on the
relationship between VAIC and its components with MBE is tested. According to agency
theory, when the management’s share reaches a specific level, further increase in level of
ownership may offer managers with enough shares to follow their own benefit with no
concern for declining company value (Cho 1998; McConnell and Servaes, 1990; Morck,
Shleifer and Vishny, 1988). Consequently, it is hypothesized that managerial ownership
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
has nonlinear relationship with ICP and market value. According to Baron and Kenny
(1986) and Cohen and Cohen (1983) if the impact of independent variable (VAIC and its
component) on dependent variable (MBE) varies linearly or quadratically, with regards to
the moderating variable (MO), the following Model 2 should be used. The test of
moderation is indicated by the test of
which X is VAIC and its components and
is
squared managerial ownership (MO) in these new models.
Model1:
Model2:
Where;
t = time 1........n
= Market value Equity for the company i
=Value Added Intellectual Coefficient for company i, its components (ICE,
HCE, SCE)
= Managerial ownership for the company i
=Size for the company i
= Financial Leverage for the company i
= profitability for the company i
CEE,
4. Analysis and Discussion
Descriptive statistics
Table 1 provides the descriptive statistics for the variables. Based on Table 1 HCE
dominates the majority of intellectual capital efficiency, while CEE contributes minimally to
VAIC (i.e., only around 8%). The mean of 0.376for HCE suggests that about 80% (0.376/
0.467) of efficiency created by IC is related to the efficiency of human capital.
The value of skewness and kurtosis indicates whether data has normal distribution. When
the quantity of skewness range between −1 and 1, and kurtosis range between −1 and 1,
the distribution of data is normal (HO et al., 2007; Peters, Joseph, and Garety, 1999).
Therefore, considering the value of skewness and kurtosis in this research, the normal
distribution of all variables are not meet, as a result, data were transformed into their
logarithm. The result of correlation indicated the positive linear correlation between MO
and IC and its components and non-significant positive correlation between dependent
variable and independent variable. It does not mean MO and IC are correlated or
dependent variable and independent variable are not related. Correlations do not specify
causality and are not applied to make predictions, thus regression results should be
analysis. The results rejected the use of pooled model in for all models. Husman test was
used for selecting a suitable method between fixed and random effect model, According
to this result, null hypothesis indicating the usage of random effect model is rejected and
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Proceedings of 5th Asia-Pacific Business Research Conference
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Min
Table1. Descriptive statistics after transforming data
Max
Mean
Median Std.
Variance
Deviation
Skewness
Kurtosis
LOGHCE
0.122
0.687
0.376
0.360
0.123
0.015
0.134
-0.584
LOGSCE
-0.611
-0.100
-0.261
-0.248
0.105
0.011
-1.053
0.950
LOGCEE
-0.913
-0.057
-0.419
-0.434
0.184
0.034
-0.077
-0.401
LOGICE
0.196
0.752
0.467
0.455
0.119
0.014
-0.033
-0.513
LOGVAIC
0.287
0.779
. 0528
0.517
0.096
0.009
0.244
-0.489
LOGROA
-2.000
-0.556
-1.159
-1.178
0.286
0.082
-0.173
-0.239
LOGLEVE
-3.155
-0.888
-1.556
-1.554
0.389
0.152
-0.984
2.131
SIZE
3.919
5.230
4.621
4.604
0.255
0.065
-0.038
0.312
LOGMBE
-0.951
0.429
-0.027
-0.023
0.218
0.047
-0.281
1.023
MO
0.110
0.733
0.425
0.420
0.157
0.025
0.003
-0.586
Valid
N
(listwise)
184
fixed effect model is suggested for all models. Centered method is used for solving
multicollinearity problem in Model 2 in line with Afshartous and Preston (2011), DurbinWatson (DW) statistic indicates lack of Auto-correlation in residuals for all models. Period
weights (PCSE) method used for all models for capturing heteroskedasticity (Beck and
Katz, 1995). Jarque-Bera test and histogram of the residuals indicated normal distribution
of residuals in all models. Tables.2 and 3 provide a summary of regression result related
to the effect of ICP on MBE and moderating effect of MO on relationship between ICP
and its components with MBE.
Based on Table.2, VAIC and its components (except CEE) have a significant positive
effect on market value of firms at 5% level. LOGCEE is positive but non-significantly
related to LOGMBE with coefficient value 0.042 and t-value 0.284. Which maybe
explained by the very low level of the CEE component reported. From the above results, it
can be concluded that generally intellectual capital (IC) is very effective in improving
MBE. Table.3 shows the result of regression of moderating effect of MO on relationship
between IC and MBE. The result shows that MO has non-significant effect on the
relationship between IC and MBE (CMO2*CIV). The non-significant moderating effect of
MO on the relationship between ICP and MBE means that managerial ownership dose
not effect on ICP that contributes to MBE. These results do not support research
hypotheses. The explanatory power of the above models (the adjusted ) is relatively
high and general significance of the regressors is supported for all estimations in all
models by F-statistic. Since, Prob (F-statistic) is zero for all models; it shows the models
explain any variation in the dependent variable.
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Proceedings of 5th Asia-Pacific Business Research Conference
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5. Summary and Conclusions
This study investigated the moderating effect of managerial ownership on the association
between intellectual capital performance (ICP) and its elements with market value of the
companies listed on the ACE market of Bursa Malaysia for the period 2009 to 2012. The
findings indicates a non-significant moderating effect of managerial ownership on the
relationship between ICP and market value and rejects the conditions of moderation as
suggested by Baron and Kenny (1986). The insignificant effect maybe is due to risk
aversion and managerial myopia which may influence managerial decision on intellectual
capital investments. This study has focused on ACE market companies; future studies
can investigate the study topic on main market companies in Malaysia. Future research
can applied another index of corporate governance to examine each component of
corporate governance could be beneficial to comprehensively identify the value of each
CG attributes impacting on ICP and relationship between ICP and MBE.
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Proceedings of 5th Asia-Pacific Business Research Conference
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Table 2 Summary regression results of model 1 to 1d
Model/IV
Model1/LOGVAIC
Model1a/LOGICE
Model1b/LOGHCE Model1c/LOGSCE
Model1d/LOGCEE
Variable
Coefficient t- Statistic Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic
IV
0.414**
2.430
0.378**
2.483
0.368**
2.519
0.426**
2.469
0.042
0.284
LOGLEVE
-0.109** --2.078
-0.110**
-2.107
-0.110**
-2.108
-0.110**
-2.120
-0.073
-1.417
LOGROA
0.035
0.648
0.039
0.737
0.038
0.705
0.050
0.964
0.082
1.524
SIZE
-0.385*** -3.560
-0.388***
-3.590
-0.393***
-3.619
-0.357***
-3.450
-0.283*** -2.708
Adjusted R0.647
0.648
0.648
0.648
0.631
squared
F-statistic
7.473
7.493
7.506
7.492
7.034
Prob(F-statistic)
0.000
0.000
0.000
0.000
0.000
Durbin-Watson
2.329
2.350
2.344
2.398
2.178
stat
*** Significant at the 0.01 level. ** Significant at the 0.05 level. * Significant at the 0.10 level. IV is independent variable.
Dependent Variable: LOGMBE. LOG is
of variable.
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Proceedings of 5th Asia-Pacific Business Research Conference
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Table 3: Summary Regression Result of Model 2 to 2d
Model/IV
Variable
CLLEVE
CLROA
CSIZE
CMO
CMO2
CIV
CMO*CIV
CMO2*CIV
Adjusted Rsquared
F-statistic
Prob(Fstatistic)
DurbinWatson stat
Model2/LOGVAIC
Coefficient
tStatistic
-0.105**
-2.064
0.047
0.885
-0.363***
-3.395
-0.373***
-2.838
-0.099
-0.132
0.511**
2.580
0.345
0.304
-2.786
-0.478
0.664
Model2a/LOGICE
Coefficient
t-Statistic
Model2b/LOGHCE
Coefficient
t-Statistic
Model2c/LOGSCE
Model2d/LOGCEE
Coefficient
t-Statistic Coefficient
t-Statistic
-0.105**
0.056
-0.361***
-0.353***
-0.373
0.481***
0.859
-4.451
0.666
-0.105**
0.054
-0.367***
-0.352***
-0.348
0.466***
0.801
-4.183
0.666
-0.097*
0.074
-0.312***
-0.363***
-0.428
0.453**
1.137
-4.824
0.662
7.464
0.000
7.543
0.000
7.544
0.000
7.407
0.000
7.535
0.000
2.452
2.494
2.485
2.500
2.303
-2.081
1.076
-3.424
-2.683
-0.502
2.825
0.861
-0.909
-2.080
1.036
-3.457
-2.685
-0.467
2.826
0.839
-0.881
-1.907
1.419
-3.059
-2.693
-0.585
2.463
0.925
-0.846
-0.075
0.089*
-0.218**
-0.334***
0.015
0.045
-1.894**
0.397
0.666
-1.552
1.728
-2.165
-2.650
0.024
0.331
-2.425
0.126
*** Significant at the 0.01 level. ** Significant at the 0.05 level. * Significant at the 0.10 level. IV is independent variable. CMO is centred MO and
computes by MO minus its average. CMO2 is centered MO2 and computes by MO2 minus its average. MO2 is MO*MO. CLOGVAIC is centred
LOGVAIC and computes by LOGVAIC minus its average. CLOGICE is centred LOGICE and computes by LOGICE minus its average. LOGICE is
logarithm of intellectual capital efficiency and computes by sum of LOGHCE and LOGSCE. CLOGHCE is centred LOGHCE and computes by
LOGHCE minus its average. CLOGSCE is centred LOGSCE and computes by LOGSCE minus its average. CLOGCCE is centred LOGCCE
and computes by LOGCCE minus its average. CMO* CLOGVAIC is multiply of CMO and CLOGVAIC. CMO *CLOGICE is multiply of CMO and
CLOGICE. CMO *CLOGHCE is multiply of CMO and CLOGHCE. CMO* CLOGSCE is multiply of CMO and CLOGSCE. CMO2*CLOGVAIC is
multiply of CMO2 and CLOGVAIC. CMO2*CLOGICE is multiply of CMO2 and CLOGICE.CMO2*CLOGHCE is multiply of CMO2 and CLOGHCE.
CMO2*CLOGSCE is multiply of CMO2.
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Proceedings of 5th Asia-Pacific Business Research Conference
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