March 18, 2011 2:29:05pm WSPC/188-JIKM 00279 ISSN: 0219-6492

FA1

Journal of Information & Knowledge Management, Vol. 10, No. 1 (2011) 11
21
.c World Scienti¯c Publishing Co.
#
DOI: 10.1142/S0219649211002791

An Empirical Study of the Impact of Intellectual

Capital on Business Performance

Samuel Kai Wah Chu*,z, Kin Hang Chany,x, Ka Yin Yu*,{,

Hing Tai Ng*,jj and Wai Kwan Wong*,**
*Faculty of Education
University of Hong Kong, HKSAR
yInstitute for China Business
School of Professional and Continuing Education
University of Hong Kong, HKSAR
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zsamchu@hku.hk
by UNIVERSITY OF QUEENSLAND on 08/16/15. For personal use only.

x
hkukin@hku.hk
{
yukayin1212@yahoo.com.hk
jj
tai0119@hotmail.com
**kwan 118@hotmail.com

Abstract. This empirical study examines the intellectual 1. Introduction

capital (IC) performance of Hong Kong companies and its associ-
ation with business performance. Data were collected from con-
stituent companies of the Hang Seng Index listed on the Hong Kong
Stock Exchange (2005
2008). An IC measurement, Value Added
Intellectual Coe±cient (VAIC TM ), was utilised to evaluate the IC
investment of the companies.
Four accounting ratios: market-to-book value (MB), return
on assets (ROA), asset turnover (ATO) and return on equity
(ROE) were used as the indicators of business performance.
Regression analyses were conducted to test the ability of IC and
its components in order to explain the variance in business per-
formance measures.
No conclusive evidence was found to support the associations
between VAIC TM as an aggregate measure and the four ¯nancial
indicators. However, components of VAIC TM were found to
predict a substantial variance in business performance. Capital
Employed E±ciency (CEE) was found to be a key factor in
predicting business ¯nancial performance. Structural Capital
E±ciency (SCE) was found to have a signi¯cant e®ect on
businesses' market valuation, as measured by MB, and on prof-
itability, as measured by ROE. Negative correlations were found
between Human Capital E±ciency (HCE) and the ¯nancial
indicators. The ¯ndings indicate a gap between the traditional
accounting perspective and the value creation perspective, which
is central to the VAIC TM methodology in measuring IC.
It is believed that the ¯ndings of this research provide
insights for business stakeholders of Hong Kong companies in
utilising IC, particularly the noted impact of structural capital.
While our ¯ndings indicate the importance of IC for corpor-
ations, as shown by the signi¯cant e®ect of SCE on ROE,
physical and ¯nancial assets may still be considered as the key
resources in delivering business success.
Keywords: Intellectual capital; VAIC TM ; ¯nancial performance;
value creation; Hang Seng Index.
\Knowledge-based economy" is a term which has been
used widely to describe today`s global economy. Knowl-
edge-based resources have been described as the main
sources in sustaining the competitive advantage of a
company (Ting and Lean, 2009). Placing the emphasis on
knowledge production rather than on the production of
physical goods has been suggested to make up value cre-
ation (Pulic, 2008). This transformation of values has
created a new perspective in viewing the resources of a
company. In recent years, intellectual capital (IC) has
been viewed as a factor that has an impact on business
performance and critical in the value creation process in a
knowledge-based economy (Sveiby, 1997; Lynn, 1998;
Pulic, 1998). IC has also been viewed as the roots of a
company's value (Edvinsson and Malone, 1997). As a result
of the increasing recognition of the role of IC in business,
researchers have become keen on assessing its impact on the
business performance of companies.
The more traditional and commonly used measures of
business performance include the assessment of pro-
ductivity, pro¯tability and market evaluation (Firer and
Williams, 2003). Productivity measures the output con-
version of input, while pro¯tability refers to the degree to
which the revenue of a business exceeds its costs. Finally,
market evaluation describes the degree to which the
market value of a business surpasses its book value.
While a growing body of research has shown the posi-
tive association of IC with the business performance of a
company (Ting and Lean, 2009), this link needs to be

11
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12 S. K. W. Chu et al.
con¯rmed in di®erent geographic settings and industries
(Cabrita and Bontis, 2008). Earlier studies on IC in Hong
Kong have been focused on voluntary reporting (Guthrie,
et al., 2006; Petty and Cuganesan, 2005) and IC per-
formance (Young et al., 2009). A preliminary study on the
impact of IC on organisational performance in Hong Kong
has shown a lack of association between IC and ¯nancial
performance indicators, which is contrary to the evidence
in other parts of the world (Chan, 2009b). This present
research builds on the studies that have been done so far in
Hong Kong. The study investigates the association
between IC and business performance among constituent
companies of the Hang Seng Index (HSI) listed on the
Hong Kong Stock Exchange from 2005
2008. Speci¯cally,
multiple regression was used to examine the association of
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IC, measured by the Value Added Intellectual Coe±cient
by UNIVERSITY OF QUEENSLAND on 08/16/15. For personal use only.
(VAIC TM ), with traditional business performance indi-
cators. The ¯ndings of this study expand on the current
knowledge base regarding the relevance of IC in corporate
performance. Furthermore, the ¯ndings o®er insights for
business entities in Hong Kong, which positions itself as a
knowledge-based economy.
1.1. Business performance indicators
In a resource-based view of business, bene¯ts that are
measured with consideration to both tangible and intangible
assets have gained acceptance (Canibano et al., 2000).
However, measures of ¯nancial performance remain the most
dominant model in examining business performance (Hofer,
1983). Financial indicators have been assumed to re°ect the
ful¯lment of economic goals of a business entity, and these
make up a component of business performance indicators
(Venkatraman and Ramanujam, 1986). A number of
accounting- and market-based measures have been utilised
as proxy measures to measure productivity, pro¯tability and
market evaluation. Earlier studies by Firer and colleagues
(Firer and Williams, 2003; Firer and Stainbank, 2003) on IC
and business performance have utilised three measures,
namely, return on assets (ROA), asset turnover (ATO), and
market to book value (MB). ROA was represented by the
ratio of the net income to the book value of total company
assets. ATO was the ratio of the total revenue to the
total book value of assets, while MB was the ratio of the
total market capitalisation to the book value of net assets.
Additionally, return on equity (ROE) has been commonly
used in ¯nancial reporting and refers to the ratio of net
income to the total shareholders' equity (Chan, 2009b).
1.2. Intellectual capital (IC)
Physical capital, which refers to \the traditional inputs of
land, labour and capital" (Goh, 2005, p. 386), has always
FA1
been a crucial indicator for valuing a company's business
in the past. However, although it has been regarded as
critical to a company's operations, it may not truly re°ect
the changes and conditions in today's businesses
(Mohiuddin et al., 2006). Conventional accounting indi-
cators may not have adequately considered IC elements,
resulting in an unexplained market premium (Edvinsson
and Sullivan, 1996), which was also noted by Pulic (2008).
The ¯rst time IC was discussed in the business context
was in the 1990s (Yalama and Coskun, 2007). As explained
by Stewart (1997), IC is the greatest source of value and
competitive advantage. This summation of knowledge is
value added for the company and is used in the business
creation process (Z
eghal and Maaloul, 2010). Salleh and
Selamat (2007) described IC as the aggregation of human
capital, structural capital and customer capital. IC has also
been viewed as the result of, or the intellectual property
generated from, the process of knowledge transformation
(Ting and Lean, 2009) As stated by Appuhami (2007,
p. 14), \the intellectual capital of a ¯rm plays a signi¯cant
role in the modern approach of value creation". To sum-
marise, IC may be referred to as the sum of knowledge
within an organisation, which involves value creation and
gives competitive advantage to business organisations. As
commented by Stewart (1997, p. 56), IC has become so
vital that it would be fair to say that an organisation that
is not managing knowledge is \not paying attention to
business".
In general, IC can be classi¯ed into two major cat-
egories: human capital and structural capital (Edvinsson,
1997; Edvinsson and Malone, 1997; Bontis, 2004). Human
capital \is in the heads of employees", while structural
capital is \what is left in the organisation when people go
home in the evening" (Roos and Roos, 1997, p. 415). The
examples that Ting and Lean (2009, p. 590) used to
identify human capital include \innovation capacity,
creativity, know-how and previous experience, teamwork
capacity, employee °exibility, tolerance for ambiguity,
motivation, satisfaction, learning capacity, loyalty, formal
training and education". For structural capital, Bontis
et al. (2000) gave examples such as databases, organis-
ational charts, process manuals, strategies and routines.
Properly managed IC has been regarded as the key driving
factor for sustainable corporate success (Yalama and
Coskun, 2007; Ting and Lean, 2009). However, although
IC has been regarded as the key factor in°uencing the
future value of a ¯rm (Yalama and Coskun, 2007), using
traditional ¯nancial indicators may not be su±cient to
illustrate the value of IC, as it may only re°ect the
accountant`s view towards the performance of the ¯rm
and may be misleading to stakeholders (Kamath, 2008).
VAIC TM may be a better indicator and method of
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Impact of Intellectual Capital 13

re°ecting the market value of businesses (Young et al., about the value creation e±ciency of tangible and intangi-
2009). ble assets within a company during operations" (Tan et al.,
2007, p. 91). The concept of \value added" is incorporated
1.3. Value added intellectual coe±cient in the formulation of VAIC TM . Value added per pro-
(VAIC TM ) fessional may be regarded as the purest measure to produce
economic value in a knowledge-based company (Sveiby,
Value Added Intellectual Coe±cient (VAIC TM ) is a
2001).
method developed by Ante Pulic to measure the value
The formulation of VAIC TM matches the de¯nition of
creation e±ciency of a company using accounting-based
IC. First of all, VAIC TM is obtained by adding Human
¯gures (Pulic, 2000). Companies with a higher VAIC TM
Capital E±ciency (HCE), Structural Capital E±ciency
indicate that they have a higher value creation in using all
(SCE) and Capital Employed E±ciency (CEE), thus
available resources, i.e. IC, human capital, structural
incorporating the concept of classifying IC into human
capital and physical capital.
capital and structural capital. Secondly, at present there
VAIC TM is considered as a \universal indicator showing
is more emphasis on the skills and knowledge of the
abilities of a company in value creation and representing a
employees than on the physical assets of a company.
measure for business e±ciency in a knowledge-based
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(Muhammad, 2009) Due to the active role of value cre-

economy" (Pulic, 1998, p. 9). Also, as stated in Kamath
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ation in the process (Pulic, 2000), employees' expenses are

(2007, p. 98), VAIC TM is a management and control tool
seen as an investment rather than as a cost in the calcu-
that is \designated to monitor and measure the IC per-
lation of VAIC TM .
formance and potential of the ¯rm". This indicator has
been widely applied in various research studies (see
Table 1) as a means of measuring IC (Z
eghal and Maaloul,
1.4. Prior studies using the VAIC TM
2010; Chan, 2009a; Kamath, 2008; Tan et al., 2007;
methodology
Yalama and Coskun, 2007; Mohiuddin et al., 2006; Shiu, A number of studies have used the VAIC TM methodology to
2006; Goh, 2005; Mavridis, 2005, 2004; Firer and Williams, examine IC, and its associations with other business per-
2003). This method is \designed to provide information formance measures have not been consistent. For instance,

Table 1. Examples of research studies adopting VAIC TM .

Author(s) Purpose of study

Z
eghal and Maaloul To analyse the role of value added as an indicator of IC and its impact on the ¯rm's
(2010) economic, ¯nancial and stock market performance in a sample of 300 UK companies.
Chan (2009a) To investigate if IC has an impact on the ¯nancial aspects of organisational performance
and to identify whether IC components may be the drivers for the leading ¯nancial
indicators of listed companies in Hong Kong.
Kamath (2008) To study the relationship between the IC components, namely human, structural and
physical capital, with the traditional measures of performance of company in the
Indian drug and pharmaceutical industry.
Tan, Plowman and To investigate, using the Pulic framework, the association between the IC of 150 public
Hancock (2007) listed companies on the Singapore Exchange and their ¯nancial performance.
Yalama and Coskun To test the e®ect of IC on the pro¯tability of quoted banks on the Istanbul Stock
(2007) Exchange Market (ISE) in Turkey using VAIC TM and DEA.
Mohiuddin, Najibullah To evaluate the IC performance of commercial banks in Bangladesh and to rank the
and Shahid (2006) banks with high level of human capital e±ciency (HCE), capital employed e±ciency
(CEE) and structural capital e±ciency (SCE).
Shiu (2006) To investigate the co-relation of VAIC TM and corporate performance in technological
¯rms in Taiwan.
Goh (2005) To measure the IC performance of commercial banks in Malaysia from 2001 to 2003.
Mavridis (2005) To study the intellectual performance of Greek listed companies on the Athens Stock
Exchange under the distinctive aspect of being a \globalised" or “localised” ¯rm.
Mavridis (2004) To analyse the IC of the Japanese banking sector and discuss the impact on the banks'
value-based performance.
Firer and Williams To study 75 South African publicly listed ¯rms and to examine the correlation between
(2003) the e±ciency of value added by the companies’ major components and the
pro¯tability, productivity and market valuation of the companies.
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14 S. K. W. Chu et al.

Z
eghal and Maaloul (2010) found a positive relationship Table 2. Sample distribution by sectors.
between IC and ¯nancial performance in high-technology
Sectors Frequency/company-year %
industries. Similarly, a study on Taiwan's companies found
that IC investment had a positive impact on a ¯rm's market Commerce and industry 85 56.3
value and ¯nancial performance (Chen et al., 2005). How- Finance 32 21.2
ever, Firer and Williams (2003) found that physical capital Properties 22 14.6
Utilities 12 7.9
was the most signi¯cant underlying resource of corporate
Total 151* 100
performance in South Africa, and Chan (2009b) found no
conclusive evidence to support a de¯nitive association Notes:  Company-year after removing three sets of
between IC and ¯nancial performance among Hong Kong problematic data.
companies.
Other studies (Chen et al., 2005; Kujansivu, 2005; practical procedures of calculating VAIC TM is demon-
Shiu, 2006b) have found both human and physical capital strated in this paper. First of all, the value added (VA) of
to be positively associated with ¯nancial performance. the company had to be extracted.
More speci¯cally, structural capital has been found to be a VA ¼ OP þ EC þ D þ A
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critical link that enabled IC to be measured at the organ-

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isational level, which means that, for example, if a company
has good systems and procedures, then IC e±ciency is likely
to be high (Bontis et al., 2000).
2. Research Methods
2.1. Samples and data collection
The Hang Seng Index (HSI) is one of the stock market
indexes in Hong Kong which indicates the overall market
performance of the Hong Kong Stock Exchange (HKSE).
HSI is commonly regarded as the representative of the
state of the Hong Kong economy and represents
approximately 67.3% of the total market capitalisation in
Hong Kong between 2005 and 2008 (Hang Seng Indexes,
2008). On a year-to-year basis, the number of HSI con-
stituent companies varies. The study sample included
all HSI constituent companies over a 4-year period
(2005 n ¼ 33, 2006 n ¼ 36, 2007 n ¼ 43, 2008 n ¼ 42).
Data were collected from 154 published annual reports
and are referred to in this study as company-year cases.
Three cases, which obtained either a negative book value
or a negative VAIC TM , were considered as problematic
and removed from the ¯nal sample size (N ¼ 151) to avoid
the e®ect of outliers. Table 2 summarises the distribution
of company-year cases according to business sectors.
2.2. Independent variables
VAIC TM and its components (HCE, SCE, CEE) were
used separately as independent variables. This is to
di®erentiate the classi¯cation of IC into human capital
and structural capital (Muhammad, 2009). Calculation of
VAIC TM using accounting-based ¯gures involves ¯ve
steps (Pulic, 2000; Chan, 2009a), which has been illus-
trated in detail by other researchers (Z
eghal and Maaloul,
2010; Chan, 2009a; Kamath, 2008). For simplicity, the
where OP ¼ operating pro¯ts; EC ¼ total employee
expenses, which is viewed as investment; D ¼ depreciation;
A ¼ amortisation. Secondly, the Human Capital E±ciency
(HCE) and Structural Capital E±ciency (SCE) were
calculated.
HCE ¼ VA=HC
SCE ¼ ðVA
HCÞ=VA
where HC ¼ human capital, measured by total employee
expenses. Since IC can only be operable with the support of
¯nancial and physical capital, Capital Employed E±ciency
(CEE) was added to the formula.
CEE ¼ VA=CE
VAIC ¼ HCE þ SCE þ CEE
where CE ¼ capital employed, which is the book value of
tangible assets. Finally, VAIC TM , which acted as an inde-
pendent variable a®ecting the traditional ¯nancial per-
formance of companies, was obtained by summing up HCE,
SCE and CEE.
2.3. Dependent variables
Four traditional ¯nancial indicators were used as depen-
dent variables and served as proxy measures of pro-
ductivity, pro¯tability and market valuation. These include
market-to-book value (MB), return on assets (ROA), asset
turnover (ATO) and return on equity (ROE), which have
been used in earlier studies (Firer and Williams, 2003;
Chan, 2009a).
2.4. Data analysis
Regression analysis was conducted to investigate the
association between IC performance and business per-
formance, where VAIC TM and its components served as
March 18, 2011 2:29:09pm WSPC/188-JIKM 00279 ISSN: 0219-6492
independent variables, while the MB, ROA, ATO, and
ROE were dependent variables. The formulas and rules for
extracting ¯gures from ¯nancial reports used in this
research are detailed in the Appendices. Firm size (FSIZE)
and ¯rm leverage (DEBT) were added to the models as two
control variables (Firer and Williams, 2003; Chan, 2009a),
which helped reduce the e®ect of unknown variables
(Shuttleworth, 2008).
2.5. Research hypotheses
The overarching research question asks: What is the
impact of IC on corporate ¯nancial performance, in
relation to productivity, pro¯tability and market valuation,
of major companies in Hong Kong? Considering that
earlier studies have generated inconclusive answers to this
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by UNIVERSITY OF QUEENSLAND on 08/16/15. For personal use only.
research question (see Section 1.4), a number of hypoth-
eses were generated to clarify the evidence.
2.5.1. Association of an aggregate VAIC TM measure
with ¯nancial performance indicators
The aggregate measure based on the components of
VAIC TM represents a total measure of IC. In the following
hypotheses, the association of this aggregate measure with
each ¯nancial indicator is examined.
H1a. VAIC TM is positively associated with market
valuation as measured by MB.
H1b. VAIC TM is positively associated with pro¯t-
ability as measured by ROA.
H1c. VAIC TM is positively associated with pro-
ductivity as measured by ATO.
H1d. VAIC TM is positively associated with return on
equity as measured by ROE.
2.5.2. Association of VAIC TM components
with ¯nancial performance indicators
The three components of VAIC TM re°ect the classi¯cation
of IC into physical, human and structural capital. Earlier
studies have shown that the associations of these com-
ponents with ¯nancial performance indicators are not
uniform (Chan, 2009b; Chen et al., 2005). Thus, the fol-
lowing hypotheses were generated:
H2a. HCE is positively associated with market valua-
tion as measured by MB.
H2b. HCE is positively associated with pro¯tability as
measured by ROA.
H2c. HCE is positively associated with productivity as
measured by ATO.
H2d. HCE is positively associated with return on
equity as measured by ROE.
FA1
Impact of Intellectual Capital 15
H3a. SCE is positively associated with market valua-
tion as measured by MB.
H3b. SCE is positively associated with pro¯tability as
measured by ROA.
H3c. SCE is positively associated with productivity as
measured by ATO.
H3d. SCE is positively associated with return on
equity as measured by ROE.
H4a. CEE is positively associated with market valua-
tion as measured by MB.
H4b. CEE is positively associated with pro¯tability as
measured by ROA.
H4c. CEE is positively associated with productivity as
measured by ATO.
H4d. CEE is positively associated with return on
equity as measured by ROE.
2.6. Regression models
Eight regression models were used where the ¯rst four
models investigated the association between the aggregate
VAIC TM measure and the four dependent variables. The
last four models were used to analyse each of the three
components of VAIC TM and the dependent variables.
These models are illustrated in the regression equations in
Table 3.
3. Findings
Tables 4 to 11 reveal the correlations between the depen-
dent and independent variables obtained by conducting
the Pearson product-moment correlation analysis. Stat-
istical values such as standardised coe±cients (
) and
coe±cient of determinations (R-square) are used in the
following discussion to illustrate the predictive capability
and explanatory power of the models.
Table 3. Regression models.
Model Regression equation
1 MBi ¼
1VAIC TM þ
2FSIZE þ
3DEBT
2 ROAi ¼
1VAIC TM þ
2FSIZE þ
3DEBT
3 ATOi ¼
1VAIC TM þ
2FSIZE þ
3DEBT
4 ROEi ¼
1VAIC TM þ
2FSIZE þ
3DEBT
5 MBi ¼
1HCE þ
2SCE þ
3CEE þ
4FSIZE
þ
5DEBT
6 ROAi ¼
1HCE þ
2SCE þ
3CEE þ
4FSIZE
þ
5DEBT
7 ATOi ¼
1HCE þ
2SCE þ
3CEE þ
4FSIZE þ

5DEBT
8 ROEi ¼
1HCE þ
2SCE þ
3CEE þ
4FSIZE þ

5DEBT
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FA1

16 S. K. W. Chu et al.

Table 4. Multiple regression results of Model 1: MB i = Table 8. Multiple regression results of Model 5: MB i ¼

1VAIC TM þ
2FSIZE þ
3DEBT.
1HCE þ
2SCE þ
3CEE þ
4FSIZE þ
5DEBT.

Standardised t-value p VIF Standardised t-value p VIF

coe±cients (
) coe±cients (
)

VAIC TM −0.026 −0.305 0.760 1.112 HCE
0:303
3:665 0.000  1.777
Firm size 0.162 1.952 0.053 1.057 SCE 0.272 3.193 0.002  1.889
Debt 0.110 1.289 0.200 1.121 CEE 0.716 10.154 0.000  1.294
R 2 = 0.045 Firm size 0.092 1.398 0.164 1.121
Debt 0.336 4.772 0.000  1.293
Notes: H1a. VAIC TM is positively associated with market R 2 ¼ 0:443
valuation as measured by market-to-book value.
Notes: H2a. HCE; H3a. SCE; H4a. CEE is positively
associated with market valuation as measured by MB.
 Statistically signi¯cant at p < 0:01;  statistically sig-

Table 5. Multiple regression results of Model 2: ROAi = ni¯cant at p < 0:001.

1VAIC TM þ
2FSIZE þ
3DEBT.
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Standardised t-value p VIF Table 9. Multiple regression results of Model 6: ROA i ¼

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coe±cients (
)
1HCE þ
2SCE þ
3CEE þ
4FSIZE þ
5DEBT.

VAIC TM 0.192 2.355 0:020  1.112 Standardised t-value p VIF
Firm size 0.092 1.161 0.248 1.057 coe±cients (
)
Debt
0:232
2:837 0:005  1.121
R 2 ¼ 0:121 HCE
0:038
0:443 0.658 1.777
SCE 0.225 2.527 0:013  1.889
Notes: H1b. VAIC TM is positively associated with pro¯t- CEE 0.597 8.110 0:000  1.294
ability as measured by return on assets.  Statistically sig- Firm size 0.035 0.515 0.608 1.121
ni¯cant at p < 0:05;  statistically signi¯cant at p < 0:01. Debt
0:046
0:622 0.535 1.293
R 2 = 0.393

Notes: H2b. HCE; H3b. SCE; H4b. CEE is positively

Table 6. Multiple regression results of Model 3: ATOi ¼ associated with pro¯tability as measured by ROA.
 Statistically signi¯cant at p < 0:05;  statistically sig-

1VAIC TM þ
2FSIZE þ
3DEBT.
ni¯cant at p < 0:001.
Standardised t-value p VIF
coe±cients (
)
Table 10. Multiple regression results of Model 7: ATO i ¼
VAIC TM −0.173 −2.035 0.044  1.112
1HCE þ
2SCE
3CEE þ
4FSIZE þ
5DEBT.
Firm size −0.028 −0.342 0.733 1.057
Debt −0.151 −1.772 0.079 1.121 Standardised t-value p VIF
R 2 = 0.042 coe±cients (
)

Notes: H1c. VAIC TM is positively associated with pro- HCE
0:159
2:179 0:031  1.777
ductivity as measured by asset turnover.  Statistically SCE
0:248
3:286 0:001  1.889
signi¯cant at p < 0:05. CEE 0.671 10.739 0:000  1.294
Firm size
0:007
0:129 0.898 1.121
Debt
0:014
0:220 0.826 1.293
Table 7. Multiple regression results of Model 4: ROE i ¼ R 2 = 0.563

1VAIC TM þ
2FSIZE þ
3DEBT. Notes: H2c. HCE; H3c. SCE; H4c. CEE is positively
associated with productivity as measured by ATO.
Standardised t-value p VIF  Statistically signi¯cant at p < 0:05;  statistically signi¯-
coe±cients (
)
cant at p < 0:01;  statistically signi¯cant at p < 0:001.
VAIC TM 0.155 1.862 0.065 1.112
Firm size
0:269
3:316 0:001  1.057
Debt 0.143 1.714 0.089 1.121
3.1. The associations between VAIC TM
R 2 ¼ 0:083 and the ¯nancial indicators
Notes: H1d. VAIC TM is positively associated with pro¯t- The coe±cients of determination (R 2 ) of hypotheses H1a
ability as measured by return on equity.  Statistically to H1d indicated limited explanatory power for the var-
signi¯cant at p < 0.01. iances in the dependent variables. Even Model 2 (Table 5),
March 18, 2011 2:29:15pm WSPC/188-JIKM 00279 ISSN: 0219-6492
FA1

Impact of Intellectual Capital 17

Table 11. Multiple regression results of Model 8: ROEi ¼ in Tables 6 to 10, showing higher amounts of explained

1HCE þ
2SCE þ
3CEE þ
4FSIZE þ
5DEBT. variances.
Standardised t-value p VIF
Results showed that HCE was a statistically signi¯cant
coe±cients (
) moderate predictor for MB with negative association
(Model 5;
¼
0:303; p ¼ 0:000  ). MB may be viewed
HCE
0:237
2:593 0:010  1.777 as an indicator to show how investors value the sample
SCE 0.575 6.112 0:000  1.889
companies. It seems that investors have long perceived the
CEE 0.439 5.641 0:000  1.294
Firm Size
0:382 −5.272 0:000  1.121 expenses spent on employees as a cost, rather than as an
Debt 0.342 4.396 0:000  1.293 investment. This is consistent with the implication stated
R 2 ¼ 0:320 by Chan (2009b) that expenditures on human resources
has been consistently perceived as an expense rather than
Notes: H2d. HCE; H3d. SCE; H4d. CEE is positively
associated with pro¯tability as measured by ROE. as an investment. The results reveal the phenomenon that
 Statistically signi¯cant at p < 0:05;  statistically signi¯- the higher the employee expenses, the lower the market
cant at p < 0:001. valuation of the company.
As seen in Model 7, HCE was a statistically signi¯cant
J. Info. Know. Mgmt. 2011.10:11-21. Downloaded from www.worldscientific.com

predictor for ATO with small, negative association

by UNIVERSITY OF QUEENSLAND on 08/16/15. For personal use only.

which had the highest coe±cient of determination

(Model 7;
¼
0:159; p ¼ 0:031  ), while CEE was a
(R 2 ¼ 0:121; 12% explained variance), was unable to meet
statistically signi¯cant predictor for ATO with moderate,
the threshold of Cohen's minimum standard of 14% for
positive association (Model 7;
¼ 0:671; p ¼ 0:000  ).
large e®ect size (Grissom and Kim, 2005).
These show that when enhancing productivity, local
Statistically, VAIC TM obtained the strongest signi¯-
companies may exhibit a tendency to employ physical and
cance level on ROA and ATO (for ROA, Model 2,
¯nancial assets rather than human assets. In the tra-
p ¼ 0:020  ; for ATO, Model 3, p ¼ 0:044  ). However, the
ditional view of productivity, given the same amount of
coe±cients of determination were not adequate to support
input, a greater number of employees may result in
the ability of VAIC TM to predict the variance in ROA and
decreasing marginal output. In contrast, from the value
ATO. Viewing R 2 in a reverse manner, that is the coe±-
creation perspective, human capital may be looked upon
cient of non-determination, there was a high amount of
as a depository of knowledge. The pool of knowledge
unexplained variance of the dependent variable by the
contained in it, when used e®ectively, becomes IC for value
independent variables in Model 2 (88%) and Model 3
creation (Pulic, 2008), contributing to the enhancement
(96%). As such, the explanatory powers of Models 2 and 3
of a company's overall productivity. This contradiction
were too weak to claim that associations existed, and it
reveals the gap between the traditional accounting per-
was of little practical e®ect and importance to the
spective and the value creation perspective when assessing
research. Hypotheses H1a, H1b, H1c and H1d were
human capital. Apart from the ROA, HCE was also found
therefore not substantiated by the ¯ndings.
to be able to predict MB, ATO and ROE at di®erent
The limited association between VAIC TM and the
signi¯cance levels, although in negative correlations.
conventional ¯nancial indicators is consistent with the
Hence, the hypotheses H2a, H2b, H2c and H2d were not
¯ndings of Chan (2009b) on the HSI constitutent compa-
substantiated.
nies from 2001 to 2005. This earlier study showed that there
The statistical associations between SCE and ¯nancial
was no strong association between corporate intellectual
indicators provided some interesting insights. The
ability and the traditional ¯nancial performance measures.
empirical results show that SCE exhibited an in°uence on
One possible explanation suggested by Chan (2009b) is
MB and ROE as indicated by the positive association with
that local companies, when enhancing pro¯tability, are
MB (Model 5;
¼ 0:272; p ¼ 0:002  ), although the
placing more emphasis on other types of strategic assets
strength of this association may not be as strong as the
than on IC. The ¯ndings of this present study indicate that
other predictor, physical capital, in the same model. It
IC investment, as a means of enhancing business perform-
does, however, indicate that investors appeared to be
ance, persists to be weak in Hong Kong.
considering structural capital an important factor when
making investment decisions. This result is further sup-
3.2. The associations between VAIC TM ported by the ¯nding that SCE was a moderate predictor
components and ¯nancial indicators with very high statistical signi¯cance to ROE (Model 8;
HCE, SCE and CEE were found to be better predictors of
¼ 0:575; p ¼ 0:000  ), as ROE acts as one of the im-
the variance in the ¯nancial indicators relative to the portant indicators for investors to measure the ¯nancial
aggregate VAIC TM measure. The ¯ndings are summarised conditions of businesses.
 March 18, 2011 2:29:16pm WSPC/188-JIKM 00279 ISSN: 0219-6492
18 S. K. W. Chu et al.
The statistical association found between SCE and
ROE is a very interesting ¯nding in this research. Such a
¯nding may imply that the sample companies surveyed
were able to utilise their structural capital, i.e. strategy,
proprietary computer systems, routines and procedures, to
yield higher pro¯ts from the shareholders' equity. Among
the independent variables and control variables, SCE was
found to be the strongest predictor of ROE as evidenced
by the highest beta value in Model 8, more so than that of
physical capital (CEE).
The results in Model 8 provide the strongest evidence
yet to suggest that structural capital may be playing a
more important role in pro¯t generation and hence,
shareholders' equity, for companies in Hong Kong when
compared with other VAIC TM components. It also illus-
J. Info. Know. Mgmt. 2011.10:11-21. Downloaded from www.worldscientific.com
trates that the `management' of the sample companies
by UNIVERSITY OF QUEENSLAND on 08/16/15. For personal use only.
have been very much guided by the deployment of struc-
tural capital in achieving pro¯tability, more so than
physical capital. This ¯nding contrasts with that of a prior
and similar study, where physical capital e±ciency (CEE)
was found to be a better predictor for ROE (Chan, 2009b).
Also, it contrasts with ¯ndings in Ting and Lean (2009)
that SCE had a negative, though not signi¯cant, e®ect on
ROA. As SCE had a positive and signi¯cant e®ect on MB,
ROA and ROE, hypotheses H3a, H3c and H3d were
substantiated.
Overall, and apart from Model 8, CEE was found to be
the best predictor for the four ¯nancial measurements
when examining the associations of the three VAIC TM
components with MB, ROA, ATO and ROE. This ¯nding
is consistent with the traditional accounting point of view
that physical and ¯nancial assets are critical when eval-
uating business performance, and it also supports Ting
and Lean (2009) in that capital employed has been
importantly utilised in generating high value returns.
Hypotheses H4a, H4b, H4c andH4d were supported by the
regression results.
The control variables, i.e. ¯rm size and ¯rm leverage,
were found to be in association with business performance.
Firm size appears to be a signi¯cant predictor for ROE
(Model 8; p ¼ 0:000  ), while ¯rm leverage is a highly
signi¯cant predicator for MB (Model 5; p ¼ 0:000  ) and
ROE (Model 8; p ¼ 0:000  ). This is consistent with
earlier ¯ndings by Chan (2009b) which showed that there
is a positive association between ¯rm leverage and ROE.
However, this suggests a di®erent conclusion from that of
Firer and Williams (2003), who found that ¯rm size and
leverage contributed very little to the explanatory power
of the linear multiple regression results and were of
FA1
statistical signi¯cance in only isolated cases. It is also
inconsistent with the ¯ndings of Kamath (2008) that there
was no signi¯cant association between the size and lever-
age of ¯rms with their market valuation.
Moreover, the positive correlation between ¯rm lever-
age and ROE shows that companies with high gearing
ratio tend to have higher pro¯tability. As suggested by
Chan (2009b), such a ¯nding may imply that Hong Kong
listed companies are maintaining a high level of invest-
ment, possibly with the assistance of borrowing or leverage,
to enhance ROE for shareholders.
4. Conclusion and Further Studies
The research results provide new insights for IC prac-
titioners and business stakeholders into the utilisation of
IC by businesses in Hong Kong. The statistical associ-
ations found between structural capital and ¯nancial
indicators may be the clearest evidence yet to show that
structural capital, one of the key components of IC, has an
impact on business performance in the companies sur-
veyed in Hong Kong. The utilisation and e®ective
deployment of structural capital is becoming an important
tool for the managers of these companies to achieve
pro¯tability. Some interesting research questions follow:
\What is the major structural capital in local companies
that can a®ect corporate pro¯tability the most?"; \Would
it be technologies or routines and procedures?" It also
remains to be clari¯ed whether or not business companies
are aware of the importance of structural capital to their
¯nancial performance. Further studies may also examine
how local businesses may cultivate their structural capital
in order to ensure a higher return. There might be
potential di®erences in structural capital utilisation
between di®erent industries or sectors, which may be
in°uenced by company size or information technology.
Knowledge management practices may further improve
structural capital usage, but this is yet to be substantiated
by empirical ¯ndings. As this research focused on local
companies, questions such as: \Does the higher levels of
usage of structural capital apply only to Hong Kong?" and
\How does Hong Kong compare with her neighboring
countries?" are also worth investigating. We believe that
there remains a vast body of potential research, the ¯nd-
ings of which would be of utmost importance and interest
not only to scholars and IC practitioners, but also to
business management, investors and other stakeholders as
well. A coordinated research e®ort into IC in Hong Kong
may help answer at least some of these questions.
March 18, 2011 2:29:16pm WSPC/188-JIKM 00279 ISSN: 0219-6492
FA1

Impact of Intellectual Capital 19

Appendix 1

VAIC TM calculation

VA ¼ OP þ EC þ D þ A
HCE ¼ VA/HC
SCE ¼ (VA
HC)/VA
CEE ¼ VA/CE
VAIC ¼ HCE þ SCE þ CEE

Notes: CE ¼ Total assets
Intangible

assets.

Financial Indicators Calculation

MB ¼ Market capitalization/shareholders' equity

J. Info. Know. Mgmt. 2011.10:11-21. Downloaded from www.worldscientific.com

ROA ¼ Operating pro¯t/total assets

by UNIVERSITY OF QUEENSLAND on 08/16/15. For personal use only.

ATO ¼ Total revenue/total assets

ROE ¼ Net income/shareholders' equity
FSIZE ¼ log (market capitalization)
DEBT ¼ Total debt/total assets

Notes: Shareholders' equity refers to total equity in B/S.

Market capitalisation = Market price # of shares.

Appendix 2

Currency conversion

USD against HKD: 1 USD ¼ 7:8 HKD

RMB against HKD: Year Average exchange rate
2008 0:88RMB ¼ 1HKD
2007 0:94RMB ¼ 1HKD
2006 1RMB ¼ 1HKD
2005 1:04RMB ¼ 1 HKD

Source: People's bank of China.

Rules of extracting ¯gures from ¯nancial reports

Operating Pro¯t (OP)
. Obtained from \Consolidated Income Statement" or \Consolidated P & L"
. Extracted from the ¯eld of \Operating Pro¯t"
. If OP is not clearly speci¯ed in the income statement, then used \pro¯t before tax and other interests" as the rule,
excluding ¯nance-related charges and income, share of P&L from jointly controlled companies and associated
companies and other non-operational income and charges.
Employee costs
. Total spending on employees
. Including salaries, directors' remuneration, retirement bene¯ts and other related expenses.
Depreciation and Amortization (D and A)
. Sum of the \deprecation" or \amortization" of assets.
 March 18, 2011 2:29:16pm WSPC/188-JIKM 00279 ISSN: 0219-6492
FA1

20 S. K. W. Chu et al.

Market price
. Closing price on the last trading day of the year
. Extracted from Yahoo! Finance.

Number of shares
. Number of shares which were issued and fully paid
. Extracted from the \Share Capital" under \notes to the accounts".

Net income
. \Pro¯t attributable to shareholders" in the \Consolidated Income Statement".
Total revenue
. \Turnover" or \Revenue" speci¯ed in the \Consolidated Income Statement".
Intangible assets
J. Info. Know. Mgmt. 2011.10:11-21. Downloaded from www.worldscientific.com

. Figure of Intangible Assets extracted based on the \Hong Kong Accounting Standard 38"
by UNIVERSITY OF QUEENSLAND on 08/16/15. For personal use only.

. Including license, goodwill, leasehold land and land use right, brand name and other rights
. http://app1.hkicpa.org.hk/ebook/HKSA Members Handbook Master/volumeII/hkas38.pdf.

Total equity
. \Total Equity" in \Consolidated Balance Sheet".
Current, non-current assets and liabilities
. All extracted from the \Consolidated Balance Sheet".

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