Whats the Real Value of Intellectual Capital

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Whats the Real Value of Intellectual Capital?

• David F. Larcker
• The Wharton School
• University of Pennsylvania
• Wharton Research Program on
• Valuation Creation in Organizations

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Intellectual Capital (IC)

• Lots of discussion and interest
• Potentially interesting frameworks
• Really confusing terminology and definitions
• Mostly loose talk, and not much science
• Ultimately, we need to show whether IC (and
  related measures) really affect stock price

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Innovation Capital ...
Median Annual Portfolio Return in the Subsequent
Year
13.6
6.6
11.0
9.9
Source Deng, Lev, and Narin, Financial Analysts
Journal, 1999
4
Human Capital ...
Cumulative Stock Returns (1994 - 1999)
103
88
53
Low HCI (0 - 25)
Medium HCI (26 - 75)
High HCI (76 - 100)
Source Watson Wyatt, The Human Capital Index
Linking Human Capital and Shareholder Value, 1999
5
Customer Capital ...
Estimated impact of a one-unit change in the ACSI
on the market value of equity (in millions of
dollars)
Source Ittner and Larcker, Journal of Accounting
Research, 1998
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Combining IC Components ...
Source Wharton and Ernst Young joint research
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Results for the Manufacturing Sector ...
Change in Market Value (in millions) with a 10
Change in the VCI
3,860
2,157
Mean market value 25,277 (22,039) million for
non-durable (durable)
Source Wharton and Ernst Young joint research
8
Component Rank
Source Wharton and Ernst Young joint research
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Causal Model Linking IC Components ...
Source Wharton and Watson Wyatt joint research
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Next Steps

• Lets stop talking and start doing science
• Key questions
• What IC categories matter?
• When do IC categories matter?
• What IC measures predict value creation?
• Requirements
• Participation by leading companies
• Willingness to share executive time and internal
  data

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Appendix Intellectual Capital Indicators for
the VCI ...
Source Wharton and Ernst Young joint research