Contemporary Global Accounting Topics Paper

M@n@gement 2019, vol. 22(2): 216-249

Intellectual Capital and Financial Performance:
 A Meta-Analysis and Research Agenda

Elisabeth Albertini ! Fabienne Berger-Remy

Accepted by co-editor in chief Thomas Roulet

Abstract. In the post-industrial economy, intellectual capital (IC) in the form of human, structural or relational capital is becoming a crucial factor for a firm’s long-term performance, as it constitutes a competitive advantage from the resource-based theory perspective. Previous research led to a fragmented view of IC, as the relationship between IC and corporate financial performance has been mostly studied mobilizing human, structural or relational capital components in isolation. Furthermore, most studies conclude that even though the relationship is positive, it remains at best unclear. Another unsolved issue lies in value capture—namely, who, among various stakeholders, benefits most from the value created by IC. Using a statistical meta-analysis of 75 empirical studies from 1992 to 2017, this research shows that human capital (HC), structural capital (SC) and relational capital (RC) do not influence corporate financial performance to the same extent. This can be explained by the characteristics of IC components in term of ownership, tradability and timespan, and the beneficiary of the value created, being the company, the investor or the customer. This work, then, contributes to an extended view of resource-based theory, mostly by highlighting that some IC components are interrelated in their association with financial performance. Lastly, this research opens new avenues for research in four directions: (1) identification and classification of IC components; (2) understanding of the combination and orchestration of intangible assets; (3) improvement of indicators and measurement systems of IC; and (4) enhancement of the understanding of value creation through narrative means, namely extra-financial disclosure and corporate communication. Keywords: intellectual capital, resource-based theory, financial performance, relational capital, structural capital, human capital, brand equity

INTRODUCTION

Our contemporary economy is witnessing a historic shift in which value creation no longer comes from the mastery of production but rather from intellectual capital (IC) (Dean & Kretschmer, 2007; Murthy & Mouritsen, 2011). This shift is regularly featured in the headlines of the economic press, which praises new business models such as Airbnb and Uber (Pfeffer 2014), which operate with almost no physical capital. Apple, exemplary in the way the company creates value with IC such as design, innovation and brand, may be the most valued brand ever and yet owns 1 few manufacturing facilities. Paradoxically, intangible assets that have not

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Elisabeth Albertini Sorbonne Business School

University of Paris 1 Pantheon- Sorbonne

France [email protected]

Fabienne Berger-Remy Sorbonne Business School

University of Paris 1 Pantheon- Sorbonne

France [email protected]

 

 

 

M@n@gement, vol. 22(2): 216-249 Elisabeth Albertini & Fabienne Berger-Remy

been bought are not reported in a company’s financial statements, leading to situations where the book value of brands, such as Apple or Hermès, is equal to zero. This insufficiency in the accounting framework keeps IC invisible to managers, making it difficult to adequately allocate financial resources to a specific intangible good (Gowthorpe, 2009).

In this context, IC is becoming a crucial factor for a firm’s long-term profit and performance (Crook, Ketchen, Combs & Todd, 2008; Dean & Kretschmer, 2007; Mouritsen, 2006). IC is defined as a set of intangible resources and capabilities possessed or controlled by a firm—such as knowledge, culture, brands, reputation, relational network, processes—that create value in the form of competitive advantage. It is an important part of resource-based theory (RBT) and contributes to performance from this theoretical perspective (Barney, Ketchen & Wright, 2011; Bollen, Vergauwen & Schnieders, 2005). The value of IC also lies in its intangible nature, which makes it rare and difficult to imitate, in contrast with tangible assets that are easier to buy or to copy (Martin de Castro, Delgado-Verde, Lopez-Saez & Navas-Lopez, 2011; Ray, Barney & Muhanna, 2004). Moreover, IC is hard to exchange since it is deeply embedded in the company which controls it (Molloy, Chadwick, Ployhart & Golden, 2011). Lastly, even if competitors attempt to imitate IC, a high degree of uncertainty remains about the return on investment both in magnitude and in time lag (Juma & Payne, 2004). In short, there is a relationship between IC and firm performance, but it is at best unclear (Crook, Ketchen, Combs & Todd, 2008).

Hence, value creation generated by IC presents significant challenges for both researchers and practitioners. According to the academic literature, IC is divided into three main components: human capital (HC) (knowledge, skills, training or innovation), structural capital (SC) (efforts in R&D, technological infrastructure, organizational culture and values) and relational capital (RC) (relationships with customers, other stakeholders and society as a whole, as well as consumer-brand relationships) (Bontis, 1998; Edvinsson & Malone, 1997; Martin de Castro et al., 2011). Hence, these components, very different by nature, are interrelated with one another within the company, which in turn provide competitive advantages in line with RBT (Barney et al., 2011; Bollen et al., 2005; Yuqian & Dayuan, 2015). Then, a significant amount of research has been conducted to demonstrate in isolation the influence of a specific IC component on a firm’s corporate financial performance (CFP), measured either by accounting-based or stock market value indicators, or more rarely by both types of ratio. The question may legitimately be asked whether the different IC components contribute equally to a firm’s CFP and whether the created value is captured by shareholders through the increase of the stock price or by the managers of the firm through accounting performance.

To sum up, two important issues have not yet been fully covered. The first is related to the typology of IC commonly acknowledged in the literature, where IC components are usually placed on an equal footing. However, it is very likely that, because of their distinct characteristics, they can be compared with regard to their contribution to financial performance. The second issue is linked closely with value appropriation. In the classical view of RBT, possession of IC automatically leads to superior performance for the firm, based on the premise that value creation is harmoniously distributed throughout the different stakeholders. However, empirical research shows that not all value created necessarily flows to the company; for instance, a platform business may fail if value is not equally distributed between consumers, producers and the platform (Van Alstyne,

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1. Interbrand. Best global brands ranking 2015. Retrieved from www.interbrand.com

 

 

Intellectual Capital and Financial Performance:
 A Meta-Analysis and Research Agenda M@n@gement, vol. 22(2): 216-249

Parker & Choudary, 2016). Hence, it is of critical importance for the RBT to question the issue of value appropriation by the company (Crook et al., 2008).

Thus, the objective of this research is to fill those gaps and to determine (1) to what extent each and every IC component contributes to the financial performance of the firm and (2) whether the contribution is captured by managers of the firm, shareholders or customers through accounting-based performance, stock market value or customer performance. In other words, does IC create value for the organization or for the investors and/or the customers? A close examination of empirical findings is therefore critical for furthering knowledge in this area and provides a detailed research agenda.

To answer these questions, we opted for a statistical synthesis (meta-analysis) of 75 studies conducted from 1992 to 2017. Meta-analysis is a statistical technique that aggregates empirical findings to discern whether associations exist and, more importantly, provides estimates of their size (Damanpour, 1991; Grinstein, 2008; Scheer, Miao & Palmatier, 2015). By statistically aggregating results across individual studies and correcting statistical artifacts, such as sampling and measurement error, meta-analysis allows for much greater precision than other forms of research review (Hunter, Schmidt & Jackson, 1982). Moreover, meta- analysis can estimate the extent to which the economic value created is revealed differentially in performance measures (Crook et al., 2008). Several meta-analyses have studied in isolation the relationship between business performance and forms of RC such as advertising (Conchar, Crask & Zinkhan, 2005; Eisend, 2009), customer relationship (Edeling & Fischer, 2016; Palmatier, Dant, Grewal & Evans, 2006), customer satisfaction (Orsingher, Valentini & de Angelis, 2010; Szymanski & Henard, 2001) and product innovativeness (Szymanski, Kroff & Troy, 2007). However, to our knowledge, no research has taken a more holistic view of IC.

From a theoretical point of view, this research aims at shedding light on the nature of IC and its links to financial performance by answering a research call about the potential superiority of certain strategic resources (Crook et al., 2008). This meta-analysis highlights that, unexpectedly, the different IC components—human capital (HC), structural capital (SC) and relational capital (RC)—do not influence CFP in the same proportion, demonstrating the complex nature of IC. This review opens new avenues for research and enhances managers’ understanding of which IC components to focus on.

The remainder of this article is organized as follows. In the next section we review the background literature on the overall relationship between IC and CFP, present the hypotheses of this research and outline the influence of possible moderators. Next, we describe the meta-analysis technique and procedures used in this paper, and the results of the meta- analytic investigation. Finally, we discuss the theoretical and managerial implications of the findings and some limitations, and make recommendations for future research.

LITERATURE REVIEW

Although fairly young in their development, IC and related topics have recently increased in popularity, in both academic and practitioner circles (Table 1). Indeed recognition of the importance of IC has increased as more and more firms are creating value based on knowledge and other intangible assets rather than tangible assets such as buildings, equipment

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M@n@gement, vol. 22(2): 216-249 Elisabeth Albertini & Fabienne Berger-Remy

and real estate (Villalonga, 2004). The subject has gained popularity in several academic fields in management, namely in strategic management, marketing, human resources, accounting and finance. As shown below, this has led to a relatively fragmented view, as each discipline has seen IC from its own angle, mostly emphasizing one or other of the IC components, thus compromising overall view and comparison.

From the strategic management perspective, RBT posits that sustained competitive advantage is derived from the rare, valuable, imperfectly imitable and not substitutable resources and capabilities a firm controls (Barney, 1991; Barney et al., 2011; Barney, Wright & Ketchen, 2001). These resources and capabilities can be viewed as bundles of tangible and intangible assets, including a firm’s management skills, its organizational processes and the information and knowledge it controls (Barney et al., 2001). The specific features of IC can explain its significant role in the performance of the firm (Molloy et al., 2011). While tangible assets deteriorate with use, several components of IC, such as employees’ skills, may improve with use. Hence, IC is expected to provide benefits for an undefined timeframe as opposed to tangible assets which have expected depreciation (Cohen, 2011). Moreover, IC is a non-rivalrous good, that is, multiple managers can use it simultaneously. Yet, intangible assets are immaterial, which makes them difficult to imitate or to exchange since they often cannot be separated from their owner (Marr & Moustaghfir, 2005). Indeed, to acquire an IC such as a brand, firms must often acquire the whole organization (Barney, 1999). Moreover, their immateriality leads to inefficient markets (Cohen, 2011). Hence, companies develop IC within the firm through complex social and organizational processes (Winter, 2003), typically making these intangible assets tacit, hard to codify and difficult to imitate, contributing to the firm’s superior and sustainable performance (Villalonga, 200