Journal of Information & Knowledge Management, Vol. 10, No. 1 (2011) 1121 c World Scientic 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

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for China Business School of Professional and Continuing Education University of Hong Kong, HKSAR zsamchu@hku.hk x hkukin@hku.hk { yukayin1212@yahoo.com.hk jj tai0119@hotmail.com **kwan 118@hotmail.com Abstract. This empirical study examines the intellectual capital (IC) performance of Hong Kong companies and its association with business performance. Data were collected from constituent companies of the Hang Seng Index listed on the Hong Kong Stock Exchange (20052008). An IC measurement, Value Added Intellectual Coecient (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 performance 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 Eciency (CEE) was found to be a key factor in predicting business nancial performance. Structural Capital Eciency (SCE) was found to have a signicant eect on businesses' market valuation, as measured by MB, and on profitability, as measured by ROE. Negative correlations were found between Human Capital Eciency (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 corporations, as shown by the signicant eect 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. 11

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1. Introduction
\Knowledge-based economy" is a term which has been used widely to describe today`s global economy. Knowledge-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 creation (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 productivity, protability and market evaluation (Firer and Williams, 2003). Productivity measures the output conversion of input, while protability 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 positive association of IC with the business performance of a company (Ting and Lean, 2009), this link needs to be

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S. K. W. Chu et al.

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conrmed in dierent 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 performance (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 20052008. Specically, multiple regression was used to examine the association of IC, measured by the Value Added Intellectual Coecient (VAIC TM ), with traditional business performance indicators. The ndings of this study expand on the current knowledge base regarding the relevance of IC in corporate performance. Furthermore, the ndings oer 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, benets 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 reect the fullment 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, protability 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

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 reect the changes and conditions in today's businesses (Mohiuddin et al., 2006). Conventional accounting indicators 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 signicant role in the modern approach of value creation". To summarise, 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 classied into two major categories: 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, organisational 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 inuencing the future value of a rm (Yalama and Coskun, 2007), using traditional nancial indicators may not be sucient to illustrate the value of IC, as it may only reect 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

Impact of Intellectual Capital

13

reecting the market value of businesses (Young et al., 2009).

1.3. Value added intellectual coecient (VAIC TM )

Value Added Intellectual Coecient (VAIC TM ) is a method developed by Ante Pulic to measure the value creation eciency of a company using accounting-based gures (Pulic, 2000). Companies with a higher VAIC TM indicate that they have a higher value creation in using all available resources, i.e. IC, human capital, structural capital and physical capital. VAIC TM is considered as a \universal indicator showing abilities of a company in value creation and representing a measure for business eciency in a knowledge-based economy" (Pulic, 1998, p. 9). Also, as stated in Kamath (2007, p. 98), VAIC TM is a management and control tool that is \designated to monitor and measure the IC performance 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, 2010; Chan, 2009a; Kamath, 2008; Tan et al., 2007; Yalama and Coskun, 2007; Mohiuddin et al., 2006; Shiu, 2006; Goh, 2005; Mavridis, 2005, 2004; Firer and Williams, 2003). This method is \designed to provide information
Table 1. Author(s) Z eghal and Maaloul (2010) Chan (2009a) Examples of research studies adopting VAIC TM . Purpose of study

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about the value creation eciency of tangible and intangible assets within a company during operations" (Tan et al., 2007, p. 91). The concept of \value added" is incorporated in the formulation of VAIC TM . Value added per professional may be regarded as the purest measure to produce economic value in a knowledge-based company (Sveiby, 2001). The formulation of VAIC TM matches the denition of IC. First of all, VAIC TM is obtained by adding Human Capital Eciency (HCE), Structural Capital Eciency (SCE) and Capital Employed Eciency (CEE), thus incorporating the concept of classifying IC into human capital and structural capital. Secondly, at present there is more emphasis on the skills and knowledge of the employees than on the physical assets of a company. (Muhammad, 2009) Due to the active role of value creation in the process (Pulic, 2000), employees' expenses are seen as an investment rather than as a cost in the calculation of VAIC TM .

1.4. Prior studies using the VAIC TM methodology

A number of studies have used the VAIC TM methodology to examine IC, and its associations with other business performance measures have not been consistent. For instance,

Kamath (2008)

Tan, Plowman and Hancock (2007) Yalama and Coskun (2007) Mohiuddin, Najibullah and Shahid (2006) Shiu (2006) Goh (2005) Mavridis (2005) Mavridis (2004) Firer and Williams (2003)

To analyse the role of value added as an indicator of IC and its impact on the rm's economic, nancial and stock market performance in a sample of 300 UK companies. 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. 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. To investigate, using the Pulic framework, the association between the IC of 150 public listed companies on the Singapore Exchange and their nancial performance. To test the eect of IC on the protability of quoted banks on the Istanbul Stock Exchange Market (ISE) in Turkey using VAIC TM and DEA. To evaluate the IC performance of commercial banks in Bangladesh and to rank the banks with high level of human capital eciency (HCE), capital employed eciency (CEE) and structural capital eciency (SCE). To investigate the co-relation of VAIC TM and corporate performance in technological rms in Taiwan. To measure the IC performance of commercial banks in Malaysia from 2001 to 2003. 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. To analyse the IC of the Japanese banking sector and discuss the impact on the banks' value-based performance. To study 75 South African publicly listed rms and to examine the correlation between the eciency of value added by the companies major components and the protability, productivity and market valuation of the companies.

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S. K. W. Chu et al. Table 2. Sectors Commerce and industry Finance Properties Utilities Total Sample distribution by sectors. Frequency/company-year 85 32 22 12 151* % 56.3 21.2 14.6 7.9 100

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Z eghal and Maaloul (2010) found a positive relationship between IC and nancial performance in high-technology industries. Similarly, a study on Taiwan's companies found that IC investment had a positive impact on a rm's market value and nancial performance (Chen et al., 2005). However, Firer and Williams (2003) found that physical capital was the most signicant underlying resource of corporate performance in South Africa, and Chan (2009b) found no conclusive evidence to support a denitive association between IC and nancial performance among Hong Kong companies. Other studies (Chen et al., 2005; Kujansivu, 2005; Shiu, 2006b) have found both human and physical capital to be positively associated with nancial performance. More specically, structural capital has been found to be a critical link that enabled IC to be measured at the organisational level, which means that, for example, if a company has good systems and procedures, then IC eciency is likely to be high (Bontis et al., 2000).

Notes: Company-year after removing three sets of problematic data.

practical procedures of calculating VAIC TM is demonstrated in this paper. First of all, the value added (VA) of the company had to be extracted. VA OP EC D A where OP operating prots; EC total employee expenses, which is viewed as investment; D depreciation; A amortisation. Secondly, the Human Capital Eciency (HCE) and Structural Capital Eciency (SCE) were calculated. HCE VA=HC SCE VA HC =VA where HC human capital, measured by total employee expenses. Since IC can only be operable with the support of nancial and physical capital, Capital Employed Eciency (CEE) was added to the formula. CEE VA=CE VAIC HCE SCE CEE where CE capital employed, which is the book value of tangible assets. Finally, VAIC TM , which acted as an independent variable aecting the traditional nancial performance of companies, was obtained by summing up HCE, SCE and CEE.

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 constituent companies varies. The study sample included all HSI constituent companies over a 4-year period (2005 n 33, 2006 n 36, 2007 n 43, 2008 n 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 151) to avoid the eect of outliers. Table 2 summarises the distribution of company-year cases according to business sectors.

2.3. Dependent variables

Four traditional nancial indicators were used as dependent variables and served as proxy measures of productivity, protability 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).

2.2. Independent variables

VAIC TM and its components (HCE, SCE, CEE) were used separately as independent variables. This is to dierentiate the classication 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 illustrated in detail by other researchers (Z eghal and Maaloul, 2010; Chan, 2009a; Kamath, 2008). For simplicity, the

2.4. Data analysis

Regression analysis was conducted to investigate the association between IC performance and business performance, where VAIC TM and its components served as

Impact of Intellectual Capital

15

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 eect of unknown variables (Shuttleworth, 2008).

H3a. SCE is positively associated with market valuation as measured by MB. H3b. SCE is positively associated with protability 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 valuation as measured by MB. H4b. CEE is positively associated with protability 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.

2.5. Research hypotheses

The overarching research question asks: What is the impact of IC on corporate nancial performance, in relation to productivity, protability and market valuation, of major companies in Hong Kong? Considering that earlier studies have generated inconclusive answers to this research question (see Section 1.4), a number of hypotheses were generated to clarify the evidence. 2.5.1. Association of an aggregate VAIC TM measure with nancial performance indicators

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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.

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 protability as measured by ROA. H1c. VAIC TM is positively associated with productivity 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

3. Findings
Tables 4 to 11 reveal the correlations between the dependent and independent variables obtained by conducting the Pearson product-moment correlation analysis. Statistical values such as standardised coecients () and coecient of determinations (R-square) are used in the following discussion to illustrate the predictive capability and explanatory power of the models.

The three components of VAIC TM reect the classication of IC into physical, human and structural capital. Earlier studies have shown that the associations of these components with nancial performance indicators are not uniform (Chan, 2009b; Chen et al., 2005). Thus, the following hypotheses were generated: H2a. HCE is positively associated with market valuation as measured by MB. H2b. HCE is positively associated with protability 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.

Table 3. Model 1 2 3 4 5 6 7 8

Regression models. Regression equation MBi  1VAIC TM  2FSIZE  3DEBT ROAi  1VAIC TM  2FSIZE  3DEBT ATOi  1VAIC TM 2FSIZE 3DEBT ROEi  1VAIC TM  2FSIZE  3DEBT MBi  1HCE  2SCE 3CEE 4FSIZE  5DEBT ROAi  1HCE  2SCE  3CEE  4FSIZE  5DEBT ATOi  1HCE 2SCE  3CEE  4FSIZE  5DEBT ROEi  1HCE 2SCE  3CEE  4FSIZE  5DEBT

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S. K. W. Chu et al. Table 8. Multiple regression results of Model 5: MB i  1HCE 2SCE  3CEE  4FSIZE  5DEBT. Standardised coecients ( ) HCE SCE CEE Firm size Debt R 2 0:443 0:303 0.272 0.716 0.092 0.336 t-value 3:665 3.193 10.154 1.398 4.772 p 0.000 0.002 0.000 0.164 0.000 VIF

Table 4. Multiple regression results of Model 1: MB i =  1VAIC TM  2FSIZE 3DEBT. Standardised coecients ( ) VAIC TM Firm size Debt R 2 = 0.045 0.026 0.162 0.110 t-value 0.305 1.952 1.289 p VIF

0.760 0.053 0.200

1.112 1.057 1.121

Notes: H1a. VAIC TM is positively associated with market valuation as measured by market-to-book value.

1.777 1.889 1.294 1.121 1.293

Table 5. Multiple regression results of Model 2: ROAi =  1VAIC TM  2FSIZE 3DEBT.

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Notes: H2a. HCE; H3a. SCE; H4a. CEE is positively associated with market valuation as measured by MB. Statistically signicant at p < 0:01; statistically signicant at p < 0:001. Table 9. Multiple regression results of Model 6: ROA i  1HCE 2SCE  3CEE  4FSIZE  5DEBT. Standardised coecients ( ) HCE SCE CEE Firm size Debt R 2 = 0.393 0:038 0.225 0.597 0.035 0:046 t-value 0:443 2.527 8.110 0.515 0:622 p VIF

Standardised coecients ( ) VAIC TM Firm size Debt R 2 0:121 0.192 0.092 0:232 VAIC TM

t-value

p 0:020 0.248 0:005

VIF

2.355 1.161 2:837

1.112 1.057 1.121

is positively associated with protNotes: H1b. ability as measured by return on assets. Statistically signicant at p < 0:05; statistically signicant at p < 0:01.

0.658 0:013 0:000 0.608 0.535

1.777 1.889 1.294 1.121 1.293

Table 6. Multiple regression results of Model 3: ATOi  1VAIC TM  2FSIZE 3DEBT. Standardised coecients ( ) VAIC TM Firm size Debt R 2 = 0.042 0.173 0.028 0.151 t-value 2.035 0.342 1.772 p 0.044 0.733 0.079 VIF

Notes: H2b. HCE; H3b. SCE; H4b. CEE is positively associated with protability as measured by ROA. Statistically signicant at p < 0:05; statistically signicant at p < 0:001. Table 10. Multiple regression results of Model 7: ATO i  1HCE  2SCE  3CEE  4FSIZE  5DEBT. Standardised coecients () HCE SCE CEE Firm size Debt R 2 = 0.563 0:159 0:248 0.671 0:007 0:014 t-value 2:179 3:286 10.739 0:129 0:220 p 0:031 0:001 0:000 0.898 0.826 VIF

1.112 1.057 1.121

Notes: H1c. VAIC TM is positively associated with productivity as measured by asset turnover. Statistically signicant at p < 0:05.

1.777 1.889 1.294 1.121 1.293

Table 7. Multiple regression results of Model 4: ROE i  1VAIC TM  2FSIZE  3DEBT. Standardised coecients () VAIC TM Firm size Debt R 2 0:083 0.155 0:269 0.143 t-value p VIF

Notes: H2c. HCE; H3c. SCE; H4c. CEE is positively associated with productivity as measured by ATO. Statistically signicant at p < 0:05; statistically signicant at p < 0:01; statistically signicant at p < 0:001.

1.862 3:316 1.714

0.065 0:001 0.089

1.112 1.057 1.121

3.1. The associations between VAIC TM and the nancial indicators

The coecients of determination (R 2 ) of hypotheses H1a to H1d indicated limited explanatory power for the variances in the dependent variables. Even Model 2 (Table 5),

Notes: H1d. VAIC TM is positively associated with protability as measured by return on equity. Statistically signicant at p < 0.01.

Impact of Intellectual Capital Table 11. Multiple regression results of Model 8: ROEi  1HCE 2SCE  3CEE  4FSIZE 5DEBT. Standardised coecients ( ) HCE SCE CEE Firm Size Debt R 2 0:320 0:237 0.575 0.439 0:382 0.342 t-value 2:593 6.112 5.641 5.272 4.396 p 0:010 0:000 0:000 0:000 0:000 VIF

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1.777 1.889 1.294 1.121 1.293

Notes: H2d. HCE; H3d. SCE; H4d. CEE is positively associated with protability as measured by ROE. Statistically signicant at p < 0:05; statistically signicant at p < 0:001.
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which had the highest coecient of determination (R 2 0:121; 12% explained variance), was unable to meet the threshold of Cohen's minimum standard of 14% for large eect size (Grissom and Kim, 2005). Statistically, VAIC TM obtained the strongest signicance level on ROA and ATO (for ROA, Model 2, p 0:020 ; for ATO, Model 3, p 0:044 ). However, the coecients of determination were not adequate to support the ability of VAIC TM to predict the variance in ROA and ATO. Viewing R 2 in a reverse manner, that is the coecient of non-determination, there was a high amount of unexplained variance of the dependent variable by the independent variables in Model 2 (88%) and Model 3 (96%). As such, the explanatory powers of Models 2 and 3 were too weak to claim that associations existed, and it was of little practical eect and importance to the research. Hypotheses H1a, H1b, H1c and H1d were therefore not substantiated by the ndings. The limited association between VAIC TM and the conventional nancial indicators is consistent with the ndings of Chan (2009b) on the HSI constitutent companies from 2001 to 2005. This earlier study showed that there was no strong association between corporate intellectual ability and the traditional nancial performance measures. One possible explanation suggested by Chan (2009b) is that local companies, when enhancing protability, are placing more emphasis on other types of strategic assets than on IC. The ndings of this present study indicate that IC investment, as a means of enhancing business performance, persists to be weak in Hong Kong.

3.2. The associations between VAIC TM components and nancial indicators

HCE, SCE and CEE were found to be better predictors of the variance in the nancial indicators relative to the aggregate VAIC TM measure. The ndings are summarised

in Tables 6 to 10, showing higher amounts of explained variances. Results showed that HCE was a statistically signicant moderate predictor for MB with negative association (Model 5;  0:303; p 0:000 ). MB may be viewed as an indicator to show how investors value the sample companies. It seems that investors have long perceived the expenses spent on employees as a cost, rather than as an investment. This is consistent with the implication stated by Chan (2009b) that expenditures on human resources has been consistently perceived as an expense rather than as an investment. The results reveal the phenomenon that the higher the employee expenses, the lower the market valuation of the company. As seen in Model 7, HCE was a statistically signicant predictor for ATO with small, negative association (Model 7;  0:159; p 0:031 ), while CEE was a statistically signicant predictor for ATO with moderate, positive association (Model 7;  0:671; p 0:000 ). These show that when enhancing productivity, local companies may exhibit a tendency to employ physical and nancial assets rather than human assets. In the traditional view of productivity, given the same amount of input, a greater number of employees may result in decreasing marginal output. In contrast, from the value creation perspective, human capital may be looked upon as a depository of knowledge. The pool of knowledge contained in it, when used eectively, becomes IC for value creation (Pulic, 2008), contributing to the enhancement of a company's overall productivity. This contradiction reveals the gap between the traditional accounting perspective and the value creation perspective when assessing human capital. Apart from the ROA, HCE was also found to be able to predict MB, ATO and ROE at dierent signicance levels, although in negative correlations. Hence, the hypotheses H2a, H2b, H2c and H2d were not substantiated. The statistical associations between SCE and nancial indicators provided some interesting insights. The empirical results show that SCE exhibited an inuence on MB and ROE as indicated by the positive association with MB (Model 5;  0:272; p 0:002 ), although the strength of this association may not be as strong as the other predictor, physical capital, in the same model. It does, however, indicate that investors appeared to be considering structural capital an important factor when making investment decisions. This result is further supported by the nding that SCE was a moderate predictor with very high statistical signicance to ROE (Model 8;  0:575; p 0:000 ), as ROE acts as one of the important indicators for investors to measure the nancial conditions of businesses.

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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 prots 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 prot generation and hence, shareholders' equity, for companies in Hong Kong when compared with other VAIC TM components. It also illustrates that the `management' of the sample companies have been very much guided by the deployment of structural capital in achieving protability, more so than physical capital. This nding contrasts with that of a prior and similar study, where physical capital eciency (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 signicant, eect on ROA. As SCE had a positive and signicant eect 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 evaluating 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 signicant predictor for ROE (Model 8; p 0:000 ), while rm leverage is a highly signicant predicator for MB (Model 5; p 0:000 ) and ROE (Model 8; p 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 dierent 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

statistical signicance in only isolated cases. It is also inconsistent with the ndings of Kamath (2008) that there was no signicant association between the size and leverage of rms with their market valuation. Moreover, the positive correlation between rm leverage and ROE shows that companies with high gearing ratio tend to have higher protability. As suggested by Chan (2009b), such a nding may imply that Hong Kong listed companies are maintaining a high level of investment, 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 practitioners and business stakeholders into the utilisation of IC by businesses in Hong Kong. The statistical associations 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 surveyed in Hong Kong. The utilisation and eective deployment of structural capital is becoming an important tool for the managers of these companies to achieve protability. Some interesting research questions follow: \What is the major structural capital in local companies that can aect corporate protability the most?"; \Would it be technologies or routines and procedures?" It also remains to be claried 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 dierences in structural capital utilisation between dierent industries or sectors, which may be inuenced 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 ndings 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 eort into IC in Hong Kong may help answer at least some of these questions.

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Impact of Intellectual Capital

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Appendix 1
VAIC TM calculation VA OP EC D A HCE VA/HC SCE (VAHC)/VA CEE VA/CE VAIC HCE SCE CEE Notes: CE Total assets Intangible assets.

Financial Indicators Calculation

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MB Market capitalization/shareholders' equity ROA Operating prot/total assets ATO Total revenue/total assets ROE Net income/shareholders' equity FSIZE log (market capitalization) DEBT 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: RMB against HKD: 1 USD 7:8 HKD Year Average exchange rate 2008 2007 2006 2005 0:88RMB 1HKD 0:94RMB 1HKD 1RMB 1HKD 1:04RMB 1 HKD

Source: People's bank of China.

Rules of extracting gures from nancial reports Operating Prot (OP)

.

Obtained from \Consolidated Income Statement" or \Consolidated P & L" . Extracted from the eld of \Operating Prot" . If OP is not clearly specied in the income statement, then used \prot 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 benets and other related expenses.

Depreciation and Amortization (D and A)

.

Sum of the \deprecation" or \amortization" of assets.

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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
.

\Prot attributable to shareholders" in the \Consolidated Income Statement".

Total revenue
.

\Turnover" or \Revenue" specied in the \Consolidated Income Statement".

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Intangible assets
. .

Figure of Intangible Assets extracted based on the \Hong Kong Accounting Standard 38" 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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This article has been cited by: 1. Kin Hang Chan kinchan168hk@yahoo.com Samuel Kai Wah Chu samchu@hku.hk Wendy W. Y. Wu wendywu@hku.hk. 2012. Exploring the Correlation Between Knowledge Management Maturity and Intellectual Capital Efficiency in Mainland Chinese Listed Companies. Journal of Information & Knowledge Management 11:03. . [Abstract] [References] [PDF] [PDF Plus]

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