EXPLORING VALUE CREATION THROUGH INTANGIBLES : MANAGERS ' DECISIONS VS INVESTORS '
EXPECTATION
Elena Shakina, Associate Professor at NRU HSE-Perm
Maria Molodchik, Associate Professor at NRU HSE-Perm
Angel Barajas, Associate Professor at University of Vigo
The relationship between the value creation process and intangible resources is highly
discussed topic in many conceptual and empirical studies. Some of scholars like Yang and
Chen (2010) or Huan and Wang (2008) have found that management decisions towards
intangible capital affect market value of the company. Other researchers like Colak (2010) or
Pal and Soriya (2012) failed in their attempt to reveal a critical impact of companies’
intangibles on performance on the stock exchange. The intangibles in companies, according
to Stewart (1999), Bontis (2001) and Marr and Schiuma (2003), are the sole resources that
might contribute to competitiveness in contemporary economy. We seek to shed some light
on one of the principal causes of discrepancies met in relevant empirical investigations.
This paper explores the process of value creation in listed companies and draws a line
between intangible factors associated with sustainable competitive advantages and those
related to companies’ investment attractiveness.
Our study refers to the Economic Value Added (EVA©) as an indicator of economic profit,
which reflects that company is better off compared with industry benchmark. Thus, intangible
factors, which contribute to companies’ competitive advantages, affect EVA indicator.
The attractiveness of a particular company for its investors result in an increase of market
above book value of this firm. This spread is measured in our paper by market value added
(MVA). Intangible drivers, which are recognized by investors and make the company
attractive for them, are called in our research “value drivers”. Apparently, EVA appears to be
itself one of the most considerable value drivers since introduces the overall capability of the
company success. This idea is considered in a number of studies, like those by Chen and Lin
(2006) or Kyriazis and Anastassis (2007).
Thereby a sophisticated relation between company’s companies’ intangibles, EVA and MVA
exists. Despite a widespread discussed issue about the transformation of intangibles in
companies’ performance, it is yet underestimated in the literature.
The objective of our study is to discover intangibles’ factors, which drive EVA and MVA.
We believe that factors of EVA are directly influenced by managers’ decisions;
meanwhile MVA is strongly associated with the expectations of the investors.
Our paper contributes primarily to the field of corporate finance. It demonstrates the
comprehensive approach to value creation analysis and introduces empirical results by
applying structural equation modeling (SEM) to the designed model. The empirical evidences
are established on a longitudinal database (from 2004 till 2011) of about 1700 listed
companies that operate in five European countries (UK, Germany, France, Italy and Spain).
In this research we emphasize a particular importance of the awareness of policy makers,
namely top-managers, about the outcomes of their decisions. Decision-making in public
companies should be as much deliberated as possible in considering all potential effects they
might bring. We affirm that management decision towards intangibles have not only direct
impact on outperforming of the company but also provide certain signals for strategic
investors.
Turning to the research carried out in the field of value-based view to companies’ intangibles,
we meet a rich body of the literature devoted to establishing the relationship between
intangible resources and corporate performance. Like in many emerging areas, strong
theoretic foundation does not yet exist. Academic scholars and analysts diverge in their
studies into several frameworks. Three of them are explored in this research. Recent years
have seen the developments in the transformation of companies’ intangibles into economic
value added (EVA) or market value added (MVA) and q-Tobin’s as well. This kind of research
designs are met in the studies by İşeri and Kayakutlu (2007), Nogueira et al (2010), Pal and
Soriya (2012). Despite of a clear causality explored in these papers many contradictions still
remain. The main discrepancy that has to be studied refers to the distinction of companies’
fundamental and market indicators. In the frame of value-based management, EVA reflects
fundamental performance and indicates that a particular company outperforms in the rival
environment (Stern, 2001; Zaratiegui, 2002; Gjerde et al., 2010). Market indicators like MVA
and q-Tobin’s signify the attractiveness of investment in companies since they introduce the
market estimation of the assets over its book value (Stewart III, 1991). If both fundamental
and market indicators reflect companies’ performance, they have to provide consistent results
in terms of the role of companies’ intangibles. Nevertheless, many studies like those by Tseng
and Goo (2005), İşeri et al. (2007) or Pal and Soriya (2012)1 discovered that intangibles
influence differently on EVA and MVA. Thus, we hypothesize that this distinction can be
explained by specific origins of the factors associate with competitiveness of a particular
company and its attractiveness for investors. We trow, that this phenomenon is
underestimated in empirical studies by validating the model specification.
The second set of papers related to the topic under study addresses the link between
economic and market value added. According to the value-based view, MVA can be explained
by the ability of the company to create abnormal profit expressed in EVA (Stewart III, 1991).
Most of the results in recent studies point out that MVA either has a weak statistical
relationship with the EVA generated in the past or even have no relationship with it. This
evidence is introduced in papers by Biddle et al. (1999), Fernandez (2002). This phenomenon
is likely to be explained by the low predictable power of the historic EVA. It is believed that
the shareholders’ awareness about past of a company is not sufficient when deciding to
invest. Investors have to be assured in the future growth of a company.
The third class of studies challenges the issue of the disclosure of companies’ intangibles.
Orens et al. (2009) and Vergauwen et al. (2007) support the idea that a company provides
investors with essential and valuable information when voluntarily report about its
intangibles. The disclosure likely to be important for establishing transparent relationships
between managers and shareholders.
Our research attempt addresses a sort of combination of the approaches introduced above by
employing the strong points of each of them. Finally, the research framework enables to
reveal value drivers of the company linking them with the indicators of competitive
performance and investment attractiveness.
To be conceived what is the value creation process it might be worthy to look insight the
decision making of those who are interested in companies’ value.
Corporate value is the key benefit that is brought to companies’ strategic investors. Taking
that for granted it is assumed that investors are looking for underestimated shares, which are
issued by the high efficient companies. Companies’ top-management meanwhile in trying to
attract the capital into a firm has to meet investor requirements and anticipate their
expectations. It simultaneously challenges the following: creating its competitive advantages
and assuring shareholders and potential investors that the company is likely to succeed.
The principal advantage of the framework suggested in our study is related to the selfsufficiency and consistency of the economic profit concept approached to companies
intangibles and value-based view to companies’ activity.
One of most arguable issues, which have to be challenged when conducting the analysis of
intangibles in the company, is the identification of these intangibles resources. According to
the analysis carried out in our research five elements of intangibles were validated by
1 İşeri M. et al. Economic Value Added by Intellectual Retailers in a Developing Country / M. İşeri, G. Kayakutlu // Review of Social, Economic
& Business Studies/ Volume 3. Number 4. 2007. Р. 83-98.
structural equation modeling. As stated there each construct of companies’ intangible
resources are described by a number of variables, which separately reflect different features
of companies’ intangibles. This approach takes an advantage of employing data generally
available in companies’ annual reports, their web sites, information bureaus, rating agencies.
By combining these variables in latent intangible constructs we seek to reveal elements,
which likely to introduce companies’ value drivers. Following the above-mentioned model we
allocate core intangibles of a company into 5 elements:
 Human Resource Capability (HC)
 Customer Loyalty and Reputation (CL)
 Networking Capability (NC)
 Innovation Capability (InnC)
 Business Process Capability (BPC)
It is important for our research to highlight external conditions, in which companies operate.
Accomplishing this purpose we suggest specific intangibles, which not exclusively belong to a
particular company, but are generally accessible for every firm in a particular location.
Hypotheses of our research are as follows:
• Investments associated with Human capital makes a company both competitive and
investment attractive
• Customer loyalty provides a company with sustainable advantages on markets and is
recognized by its investors
• Innovative behavior is one of the key value drivers and should be disclosed for investors
• Internal processes of a company is highly important for creating its competitive
advantages but are not pivot for value creation on the financial market
• Networks of a company enable stable growth both on real and financial markets
Sig. positive
Sig. negative
Not sig
Figure 1 Relationship of EVA, MVA and intangibles
Table 1 Results of structural equation modelling
Endogenous variable
Market Value Added
Economic Value Added
Innovation Capabilities
Internal Process
Capabilities
Customer Loyalty
Human Resources
Stand.coef.
Std.Err.
0.172***
0.035**
0.088***
0.012
0.018
0.011
0.539***
0.137***
0.018
0.028
Capabilities
Networking Capabilities
2008 year
2009 year
0.488***
-0.405***
-0.007
0.023
0.010
0.010
-0.080***
0.025**
0.020
0.015
-0.011
0.097***
0.020
0.029
-0.120***
0.018
0.005
-0.059***
0.028
0.015
0.012
0.012
Economic Value Added
Innovation Capabilities
Internal Process
Capabilities
Customer Loyalty
Human Resources
Capabilities
Networking Capabilities
Opportunities
2008 year
2009 year
Number of observation 5938
RMSEA = 0.087
R-squared = 0.83
Results of our analysis is introdusced in the Table 1 and on the figure 1.
Answering the question addressed in our study and testing the hypotheses put forward we
would like to emphasize the following:
The evidence for the different drivers of MVA and EVA is established on the sample of
companies in developed European markets. We specially highlight the positive impact of all
intangibles, examined in our study, on market value creation. Nevertheless we have found out
the contradictory result in exploring networking capital as a factor of companies’
competitiveness and attractiveness for investors. We have moreover failed to support the
hypothesis that client loyalty is a critical factor for companies’ outperforming. The same
evidence is associated with the factors of the external opportunities in a firm’s disposal.