The Pricing of Intellectual Capital in the IT Industry

Abstract:     
This study adopts Ohlson's (1995) valuation model and Dechow et al.'s (1999) framework to examine the value relevance of intellectual capital (IC) disclosed by Taiwan's information technology (IT) companies. Following prior studies, we focus on four IC components: human, innovation, process, and relation. Several important findings are documented. First, Taiwan's IT companies are more likely to focus on human and process capital than on innovation and relation capital. Second, there is a positive association between IT companies' abnormal accounting rates of return and the persistence of abnormal earnings. A possible reason underlying this result is that these companies have substantial increase in sales over years. Third, IC disclosure is value relevant to IT companies' business valuation. More importantly, IC captures a large portion of the unexpected earnings. Finally, the use of a constant discount rate may be inappropriate in estimating the Ohlson model because it generates biased abnormal earnings that masks or dilutes the value relevance of IC during the business valuation process. Management and policy implications are discussed.

Number of Pages in PDF File: 42

Keywords: Information technology, Intellectual capital, Human capital, Innovation capital, Process capital, Relation capital, Rate of return on equity

JEL Classification: G14, L63, M41, M45, M47

working papers series