The intellectual capital as "other information variable" in the Ohlson model: an empirical analysis

Purpose – The purpose of the paper is to investigate the value relevance of intellectual capital of Italian listed firms.Design/methodology/approach – The paper uses the Ohlson model (1995), has an Italian focus, and draws on 524 firm-year observations of the publicly listed companies on the Italian Stock Exchange between the years 2006 and 2008. It is an empirical study using Panel Data Least Squares for the data analysis. The paper identifies the IC variables as the “other information variable” of the Ohlson model.Findings – The findings show that the fundamental variables of the Ohlson model (Book value and Earning) are positively related to the market value. On the contrary, the IC variables, which reflect Human Capital, Innovation Capital, Process Capital and Relation Capital, do not have a meaningful relation with the market value, except for the last one. In conclusion, our results imply that investors do not seem to be able to detect and incorporate the information on intellectual capital as represented in the IC proxies chosen for the research into their business valuation process. Research limitations/implications - The reasons for the inconsistent results for the IC proxies could be linked of many possible factors:1) the inadequacy of the accounting proxies selected to identify the IC subcategories;2) the imperfect functioning of the Italian market;3) the low degree of awareness of investors who are not able to “read” the accounting information in a IC perspective. In future, the model could be tested by using different and more effective proxies for IC, in order to be sure to isolate the effect of the imperfect functioning of the reference financial market. Moreover, the research could be extended to other countries and to be enlarged to a longer period of time, considering the impact of IAS/IFRS in the accounting data prior to the year 2006. Originality/value - The major interest of the paper is that it represents one of the few studies that has explicitly examined the value relevance of intellectual capital in investors’ business valuation. Nevertheless, the results could be even more interesting if in the future the accounting normative required the disclosure of intellectual capital and its components in financial statements. This would give rise to a unique data set and allow researchers to examine more effectively whether and how the stock market prices intellectual components.