Direct and indirect effects of human capital on firm value: evidence from Italian companies

Purpose – The purpose of this paper is to examine whether information on intellectual capital (IC) is value relevant for investors and the role played by the single components of IC (human capital, organizational capital, relational capital) in creating firm value. Design/methodology/approach – The 1995 Ohlson model has been employed to investigate the relationship between the current accounting measures (book value and earnings) and future measures of profitability, proxied by IC. The Value Added Intellectual Coefficient (VAIC™) approach is used to determine the firm's efficiency in using IC resources. The sample analysis analyzed is constituted of financial sector companies listed on the Italian Stock Exchange for the period 2006-2008. Findings – The findings fully confirm the existence of a positive relationship between accounting values and market value on the one hand and IC components as measured by VAIC™ and market value on the other. Results show that investors attach more value relevance to human capital efficiency (HCE) than to structural capital efficiency (SCE) and that HCE plays an indirect role in the relation between IC and market value. Research limitations/implications – The paper is focused on one sector (financial) and one country (Italy). The focus on the entire financial sector allows the authors to validate results from an Italian perspective and to extend them for similar banking structures in other countries, and to favor comparisons with other similar studies. Practical implications – The main implications for financial company managers are that, when developing a strategy aimed at strengthening IC, they should consider that human capital plays an indirect part with regard to the other components and that each investment in one of the IC subcategories should not be evaluated in isolation but in relation to its interactions. Originality/value – The paper realizes a fusion between value relevance and IC literature. To the best of the authors' knowledge, this is the first paper that examines the relationship between VAIC™ and the market value of the Italian financial sector, using an Ohlson model modified to include IC information, comprehensive of the human capital indirect effect.