Measuring Business Excellence

The effect of intellectual capital on firm performance: an investigation of Iran insurance companies
Mohammad Alipour
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Mohammad Alipour, (2012),"The effect of intellectual capital on firm performance: an investigation of Iran insurance companies", Measuring
Business Excellence, Vol. 16 Iss 1 pp. 53 - 66
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 The effect of intellectual capital on firm
performance: an investigation of Iran
insurance companies
Mohammad Alipour
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Mohammad Alipour is an
Academic Member of the
Faculty of Accounting
& Finance, Islamic Azad
University Khalkhal Branch,
Khalkhal, Iran.
The author is indebted to two
anonymous referees for their
comments and would also like
to express appreciation to the
editor of MBE – Professor
Giovanni Schiuma, Center for
Value Management, DAPIT
University of Basilicata, Italy –
for his helpful comments, and to
Dr Antonio Lerro, Center for
Value Management, DAPIT,
University of Basilicata,
Potenza, Italy, and Dr Jos van
Iwaarden, RSM Erasmus
University, The Netherlands –
for their help. Nonetheless, the
responsibility for the contents of
this paper remains entirely that
of the author.
DOI 10.1108/13683041211204671
Summary
Purpose – The purpose of this paper is to analyze the role of intellectual capital (IC) and its relationship
with financial performance of Iran insurance companies during the period 2005-2007.
Design/methodology/approach – In total, 39 insurance companies were selected as the sample.
Regression model (partial least squares) has been applied to examine the relationship between IC and
companies’ return on assets ratio (ROA).
Findings – The results of the research revealed that value added intellectual capital and its components
have a significant positive relationship with companies’ profitability.
Practical implications – The VAICe method could be an important means for many decision makers to
integrate IC in their decision-making process, which allows insurance companies to benchmark
themselves according to the IC efficiencies and develop strategies to enhance their company’s
performance.
Originality/value – This is the first research, which has used the data on value added recently
calculated and published by Iran insurance firms in the ‘‘Value Added Scoreboard’’.
Keywords Iran, Insurance companies, Value added, Intellectual capital, Financial performance,
Benchmarking
Paper type Research paper
1. Introduction
During the last few decades, there have been fundamental changes in the resource
structure of organizations (Moeller, 2009).The main resources of companies not only include
tangible resources, but also intangible ones which are rare, priceless, irreplaceable and
unending. Moreover, two substantial factors that have led to improvement of firm
performance in comparison with the last two decades are globalization and technical
advancements. Under these conditions, intangible assets and intellectual capitals are two
key factors in the success of firms. These days, intellectual capital (IC), along with financial
capital, is considered the main factor of firms’ profitability. Besides, new economy basically
relies on knowledge and information, which has led to an increased attention toward
intellectual capital (Anghel, 2008). Before economy, steered toward knowledge-based
economy, tangible assets were the chief economic resources; yet in knowledge-based
economy, there are plenty of intangible assets which create value for firms. According to
Carson et al. (2004), the literature of intellectual capital dominates the areas of accounting
and management. Generally, the significance of intellectual capital for creating value in
knowledge-based economy cannot be disregarded (Marr, 2004). Research studies have
revealed that 50 to 90 percent of the value created for firms in New Economy is due to
intellectual capital rather than production and sale (Ehrhardt, 2007). Monetary industry is a
knowledge intensive industry where its activity more using intellectual capital compared to
physical asset in manufacturing business. One of the monetary industries is the insurance
companies (Anshori and Iswati, 2007). Thus, in the present research, by measuring
VOL. 16 NO. 1 2012, pp. 53-66, Q Emerald Group Publishing Limited, ISSN 1368-3047 j MEASURING BUSINESS EXCELLENCE j PAGE 53
 intellectual capital and its components using Value Added Intellectual Coefficient (VAICTM),
the relationship between intellectual capital and profitability of Iran insurance companies
was studied. VAICTM is one of the most important methods for measuring intellectual capital,
for it reflects the value created in a business entity and has been used as the intellectual
ability index of business entities and generally, in firms where this coefficient is higher, it
indicates that these firms have better managed the value creating potentials (Pulic, 2000a).
The present study includes the following three sections:
1. Assessing and measuring the intellectual capital of Iran insurance companies using Value
Added Intellectual Coefficient (VAICTM).
2. Calculating companies’ profitability ratio (as a means for measuring their performance)
using return on assets (ROA).
3. Investigating the relationship between the measured intellectual capital and the
performance of these companies.
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2. Definition of intellectual capital

Moving toward knowledge-based societies is an issue that has been very much discussed
these days. The emergence of information and communication technology and its pervasion
in all the aspects of human life has provided new paradigms and has led to a revolution in
human life. Companies are not an exception and they have experienced great change and
development. Moreover, the concept of competitive advantage has been established using
enterprise knowledge, new economic ideas, organizational ideas, and intellectual capital
(Despres and Chauvel, 1999).A number of theoretical and practical contributions, outlining
the centrality of knowledge and intangible resources for the improvement of companies’
performance, have been produced. Of course, today, intellectual capital is equated with
knowledge assets (Marr et al., 2004). In addition, Intellectual capital includes intangible
assets, which are not reported in financial statements of business entities (Fornell, 2000;
Schiuma et al., 2008) while 80 percent or even more than 80 percent of companies’ market
value depends on intellectual capital (Fornell, 2000). Using the term ‘‘intellectual capital’’ for
the first time is attributed to an economist called John Kenneth (Anghel, 2008). Stewart
defined intellectual capital as a collection of knowledge, information, intellectual property
rights, and experience of each individual in a business entity (Stewart, 1997). However, there
is another more comprehensive definition: intellectual capital refers to the sum of all
knowledge stocks firms utilize for competitive advantage (Subramaniam and Youndt, 2005).
A broader IC definition states that it is the difference between a company’s market value and
its book value to be used for its financial advantages (Schiuma et al., 2008; Schiuma and
Lerro, 2008). According to a new interpretation of Intellectual Capital, IC is defined as the
group of knowledge assets that are owned and/or controlled by an organization and most
significantly drive organization value creation mechanisms for targeted company key
stakeholders. Adoption of the concept of knowledge asset to explain IC components allow
for considering as knowledge resources not only the organizational intangible assets, but
also those tangible assets incorporating knowledge and knowledge assets at the basis of
organizational competences. In comparison to tangible resources of a firm, investments
related to intellectual capital and their efficiency cannot be determined and reported in
financial statements (Ordonez de Pablos, 2003). Thus by measuring intellectual capital, it
can be considered as a conceptualization that better answers to the managers’ need for
having an operative notion of a company’s cognitive and intangible resources (Schiuma
et al., 2008). In addition, it represents a critical knowledge factor to enhance and support
continuous performance improvement in an organization (Marr and Schiuma,
2001).Although there is not yet a consensus in literature on the dimensions of intellectual
capital, many authors consider there to be three dimensions, (Bontis, 1998; Roos et al.,
1997; Sveiby, 1997; Edvinsson and Malone, 1997; Vergauwen, 2007): human capital,
relational capital, and structural capital. Reed et al. (2006) and Subramaniam and
Youndt(2005) adopted a similar classification, proposing that IC consists of three basic
components: human, organizational, and social capital.

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PAGE 54 MEASURING BUSINESS EXCELLENCE VOL. 16 NO. 1 2012
 According to Schiuma et al. (2008), IC is broken down into five blocks:
1. human capital (HC);
2. structural capital (STC);
3. organizational capital (OC);
4. social capital (SC); and
5. stakeholder capital (STKC).

Human capital
Like any other asset, individuals working in a firm are considered as strategic competitive
resources and are invested on like tangible assets; human capital is the main body of
intellectual capital (Moon and Kym, 2006). Human capital includes knowledge, experience,
and special skills of the personnel of a business entity employed in order to create economic
value (Cohen and Kaimenakis, 2007). According to Schiuma et al.(2008) it can be
considered as knowledge, skills, intellect, relationship, attitude, talent, and behavior of
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employees. In accordance with this interpretation, HC is a holistic concept, which denotes

the organization resources and assets related to a firm’s people. Moreover, those resources
and assets define the value of the firm, from a static point of view, and as well represent the
key critical operative factors to support and drive value creation dynamics over the time.

Relational capital
Relational capital reflects the value related to a business entity, which is created through the
relations between an organization and its constituencies, as well as relations with potential
suppliers, shareholders, and other individuals; generally, it consists of relations between
organizations and the society (Grasenick and Low, 2004). The quality of the relationships
and the ability to create new customers are key factors for the success of a company
(Montequin et al., 2006). Moreover, relational capital includes relationships with customers
and the government and refers to development and maintenance of important relationships
such as those with customers and suppliers of goods and services, as well as the degree of
partner satisfaction and customer loyalty (Chu et al., 2006).

Organizational capital
Roos and Roos (1997) classify organizational capital as important assets which include
production or other processes, specialization, and flow of information. On the other hand, it
is the set of intangibles (explicit and implicit, formal and informal) characterized as social or
collective knowledge (Bueno et al., 2006). In addition, these structure and develop the
effective and efficient activity of the organization (Canizares et al., 2007). Organizational
capital tends to not only establish patterns of behavior and interpretation systems that guide
knowledge acquisition (Crossan et al., 1999; Kim, 1993), but it also provides a pivotal
mechanism for integrating and combining that knowledge into organizational knowledge
(Grant, 1996).

Structural capital
Structural capital was divided into technological and organizational capital and it is
sometimes referred to as organizational capital (Mouritsen et al., 2001).Structural capital
includes all the non-human storehouses of knowledge in organizations. It is related to the
processes or infra structures which are owned by the organization and support Human
Capital (Watson and Stanworth, 2006). Structural capital is defined as a general system and
procedures for solving problems and innovation (Chu et al., 2006). Further, structural capital
indicates an organizational composition and structure that lead to creation of knowledge and
development as well as propagation of the created knowledge; structural capital consists of
skills and capabilities of individuals employed in an organizational structure (Ordonez de
Pablos, 2005). In addition, those resources describe the knowledge that has been captured
and institutionalized within the structure, process, and culture of an organization – a subset
of its explicit knowledge.

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VOL. 16 NO. 1 2012 MEASURING BUSINESS EXCELLENCE PAGE 55
 Social capital
Social capital recognizes the importance of social relationships and is understood as
‘‘networks together with shared norms, values, and understanding that facilitate cooperation
within or among groups’’ (OECD, 2001, p. 41). It is an ‘‘invisible force’’ embedded in
relationships of individuals, organizations, communities or economic actors which supports
growth (Schiuma et al., 2008) and provides a conduit for knowledge exchange and
combination within the organization(Kang and Snell, 2009). SC, as a set of assets, plays a
fundamental role in defining and creating the value of any organizational system (Schiuma
et al., 2008). Manning (2010) argues that social capital is significant for KM purposes and
can be understood as being complementary to and parallel with other intangible
capitalizations such as human capital and structural capital.

Stakeholder capital
IC has been decomposed into subsidiary concepts like structural capital, human capital,
relational capital, stakeholder capital, and knowledge capital for the purposes of
measurement and reporting for management. The role of structural capital in value
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creation is mainly related to the fact that this specific form of structural capital is a primary
means through which organizations import external knowledge into the firm (Schiuma et al.,
2008). Also; stakeholder capital is subset of structural capital. It is about some forms of
structural capital that, due to their importance for a firm’s success, have been addressed
separately from the broader concept of structural capital (Schiuma et al., 2008).
Moreover, there are a number of classifications and measures of IC. For the purposes of this
paper, the Pulic model was used. In this model, the Value Added Intellectual Coefficient
(VAICe) is used to measure the IC of companies. This method is designed to provide
information about the value creation efficiency of tangible and intangible assets within a
company during operations. In this model, the value added intellectual coefficient (VAICe)
is the sum of three other coefficients:
1. physical capital coefficient (VACA);
2. the human capital coefficient (VAHU); and
3. the structural capital coefficient (STVA).

3. Literature review
Measuring intellectual capital has been the objective of many research studies prior to 1990.
In these studies, researchers have tried to evaluate and measure intellectual capital using
simple procedures and to report the results in financial statements. From the accounting
viewpoint, intellectual capital must be reported in financial statements along with other
resources of a business entity (Roslender et al., 2006). By measuring and reporting the
intellectual capital of an organization, we can present a new image for observing the hidden
value of an organization (Chu et al., 2006).Moreover, all the aspects of a firm must be taken into
account in order to present a thorough image of a firm’s performance and organizational
value. Thus, not only should intellectual capital be measured correctly, but the information
yielded has to be used effectively (Roos, 2003). Research studies that involve measuring
intellectual capital and studying its relationship with firm performance are outlined as follows:
B Riahi-Belkaoui (2003) investigated the effect of intellectual capital on multinational firms in
the US. The sample of this research included 84 firms. The results revealed that there is a
significant positive relationship between intellectual capital and firm performance. In
South Africa, Firer and Williams (2003) investigated the relationship between intellectual
capital and performance of 75 companies accepted in Johannesburg Stock Exchange
and using the measures of profitability, productivity, and market value, they concluded
that there is no significant relationship between Value Added Intellectual Coefficient
(VAICe) and firm performance. According to the results of this study, it appears that in
comparison with European countries, companies in South Africa are less dependent on
intellectual capital and in such countries physical resources are considered as the chief

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PAGE 56 MEASURING BUSINESS EXCELLENCE VOL. 16 NO. 1 2012
 resources for creating value. Bozbura (2004) selected a sample of companies in Turkey to
study the relationship between the components of intellectual capital and market-to-book
value ratio, concluding that human capital and relational capital which, were evaluated
using their relative measures and component have significant positive relationship with
the foresaid ratio. Najibullah (2005) suggested that banks’ market value is positively
associated with corporate intellectual capital and its three components, i.e. Human
Capital, Capital Employed Efficiency, and Structural Capital Value Added in Bangladesh.
B Tseng and Goo (2005) studied the relationship between intellectual capital and the firm
market value and financial performance in Taiwan. In this study, the relationship between
human capital, structural capital, innovation capital, and relational capital and the
profitability of 500 Taiwanese firms was investigated. The results of this research showed
that there is a significant positive relationship between intellectual capital and firms’
market value. Also Chen et al. (2005) investigated the relationship between Value Added
Intellectual Coefficient, as a method for measuring the intellectual capital of a firm, and the
market-to-book value ratio of these firms and concluded that there is a significant positive
relationship between intellectual capital and firms’ market value. They suggested
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investors to consider the information about the components of intellectual capital in their
decision-making. Do Rosario Cabrita and Landeiro Vaz (2006) studied the relationship
between intellectual capital and value creation in the banks of Portugal. The sample of this
research consisted of 35 banks of this country. In this research, a significant positive
relationship was observed between intellectual capital and firm performance which was
consistent with the results of previous research studies.
B Anshori and Iswati (2007) selected ten insurance companies that were accepted in
Indonesia’s Stock Exchange and studied the relationship between intellectual capital and
the performance of these companies. They used the ‘‘market-to-book value’’ method to
measure, evaluate the intellectual capital of companies, and studied its relationship with
profitability of these companies. The results of this research revealed that there is a
significant positive relationship between intellectual capital and firm profitability. Tan et al.
(2007) carried out a research on the relationship between intellectual capital and firm
financial performance in Singapore, concluding that Value Added Intellectual Coefficient
and its components have a positive significant relationship with return on equity (ROE),
earning per share (EPS), and annual stock return (ASR). Cohen and Kaimenakis (2007)
demonstrated that there is a significant positive relationship between some of the
components of intellectual capital and firm performance in small to medium-sized
enterprises (SMEs) of Greece. It was observed that the interaction of some of the intellectual
assets which were measured using questionnaires was different in some aspects from the
methods and models of researches carried out on large companies. Ghosh and Mondal
(2009) analyzed the relationship between intellectual capital and the performance of
pharmaceutical and software companies in India. Choosing 80 of these companies, they
concluded that there is a significant positive relationship between intellectual capital and
profitability and market value – two of the measures for evaluating the performance of these
companies – and that it has no significant relationship with productivity.
B F– Jardón and Martos (2009) too studied the relationship between intellectual capital and
profitability of 113 wood manufacturing in Argentina. The results of their research showed
that there is a significant positive relationship only between one of the components of
intellectual capital (i.e. structural capital) and profitability. Ting and Lean (2009) studied
the relationship between intellectual capital and the performance of financial institutions
in Malaysia. They applied the Value Added Intellectual Coefficient method in order to
measure intellectual capital and analyzed its relationship with return on assets (ROA). The
results of this study showed that there is a 76 percent significant positive relationship
between the three components of intellectual capital and the profitability of these
institutions. Zeghal and Maaloul (2010) studied the role of value added – as an index for
measuring intellectual capital – and its relationship with financial performance and
market value of commercial and industrial companies in UK. The results of their research
show that there is a significant positive relationship between intellectual capital and the
financial and economic performance of these companies.

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VOL. 16 NO. 1 2012 MEASURING BUSINESS EXCELLENCE PAGE 57
 4. Research methodology
If intellectual capital is a resource for creating competitive advantage, then it can have a
relationship with the concepts of value creation and profitability of firms and as a result,
intellectual capital can play an important role in increasing the value and improving the
financial performance of firms. In the present research, we have studied the effect of
intellectual capital on profitability of insurance companies in Iran. In order to analyze the
relationship between the independent variables (VAICe and its components)and the
dependent variable (profitability), we have applied multiple regression analysis (partial least
squares method).The required data have been collected from the financial statements of
these companies; then, we classified and measured the related variables in order to perform
the analysis. Figure 1 presents the theoretical framework of the research in order to form
research hypotheses.
First, we define the variables and present a method for calculating them; then, we present
research hypotheses and regression models used to test these hypotheses.
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Research variables
Dependent variable. In the present research, we calculate firm performance and the
measure of value creation of firms as follows:
Return On Assets (ROA): it is calculated by dividing the net profit of insurance activities by
total assets. Since insurance companies gain much of their earnings through resources they
have previously invested on, these profits affect their performance; thus, in this research, we
have used the gross profit of insurance activities so that it would not affect the results. In fact,
using this ratio, we can evaluate firm performance and it reflects the degree of efficiency in
employing assets to obtain profit (Firer and Williams, 2003; Chen et al. 2005).
Independent variables. This research incorporates several independent variables:
B Value Added Capital Coefficient (VACA).
B Value Added Human Capital (VAHU).
B Structural Capital Value Added (STVA).
B Value Added Intellectual Coefficient (VAICe).
In fact, these variables were introduced by Ante Pulic in 2000, in order to measure the
intellectual capital of firms using which; one could evaluate intellectual ability of firms. This
method calculates value creation efficiency of tangible and intangible assets; Chan (2009)
described the advantages of this method as follows:
B This coefficient is easily calculated – it does not need any subjective classification and
can be measured objectively and straightforwardly.

Figure 1 The conceptual framework of the research

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PAGE 58 MEASURING BUSINESS EXCELLENCE VOL. 16 NO. 1 2012
 B It is an appropriate measure – This coefficient contains useful information for
shareholders; everybody, including shareholders, can use this coefficient to evaluate
firm performance.
B We can use this coefficient as a financial measure.
B It is easy to calculate and apply – analyzing and understanding this coefficient is easy for
managers and personnel of a business entity who are familiar with traditional accounting
information.
B This coefficient is a standard basis of measure – it can be used to compare firms and
industries at the national level.
B Financial data are used to calculate this coefficient – This is an evidence for the reliability
of this method and the usefulness of the obtained information.
B This method is consistent with the viewpoint of shareholders, as well as the
resource-oriented perspective which uses added value approach.
B This index has been applied in most research studies on intellectual capital in various
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countries.
In order to calculate the Value Added Intellectual Coefficient (VAICe), we have to take the
following five steps (Pulic, 2000b):
1. First step involves calculating corporate value added as:
VA ¼ OUTPUT 2 INPUT
Where VA is corporate’ value added which is generally obtained from the two factors of
human capital (HC) and structural capital (SC); OUTPUT is the total earnings; and INPUT is
the cost of materials and services provided. In this model, wage is not considered as a cost
since these types of costs play a chief and essential role in value creation and they are
regarded as capital; thus we can calculate value added using the following expression:
VA ¼ OP þ EC þ D þ A
Where (OP) is operational profit; (EC) is employee cost; (D) is deprecation; and (A) is
amortization.
2. Second step involves calculating the efficiency of the capital employed (VACA). Because
in this model Pulic assumes that a unit of capital employed yields more output than other
elements, it is therefore better to calculate this capital first and use this coefficient to
calculate the value added of financial capital:
VACA ¼ VA=CA
Where VACA is the value added of the capital employed and CA is the capital employed
which equals the book value of total assets minus intangible assets.
3. Third step involves calculation of the efficiency of human capital (VAHU) which indicates
the added value of each dollar paid as employees’ wage.
VAHU ¼ VA=HU
Where, VAHU is value added human capital and HU is the total employee cost regarded
as human capital.
4. In this step, the efficiency of structural capital is calculated. In this model, structural
capital equals value added minus human capital:
SC ¼ VA 2 HC
Where, SC is structural capital.
SCVA ¼ SC=VA
5. Finally, we can calculate the value added intellectual coefficient (VAICTM) as:
6. VAICe ¼ VACA þ VAHU þ SCVA

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VOL. 16 NO. 1 2012 MEASURING BUSINESS EXCELLENCE PAGE 59
 Control variables. In order to perform statistical analyses using multiple linear regression
method (partial least squares), we have incorporated the following control variables:
B Firm size (FSIZE): calculated using the natural logarithm of book value of firm’s total
assets, included in order to control firms’ size in order to create value and wealth
(Riahi-Belkaoui, 2003; Abidin et al. 2009).
B Financial leverage (LEV): calculated through dividing total liabilities by book value of total
assets, included in order to control the effect of liabilities on firms’ performance (Lev and
Sougiannis, 1996; Abidin et al. 2009).
B Return on equity (ROE): calculated by dividing net profit of insurance activities by total
assets (Firer and Williams, 2003).
Table I presents a summary of the variables used in the research.

Period, population, and hypotheses

This research was carried out over the period 2005-2007. The statistical population of the
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research includes governmental and non-governmental insurance companies in Iran; the

sample includes active insurance companies within the foresaid period and the required
data have been collected from their financial statements as well as the information provided
by Iran Central Insurance Company. According to Pulic’s measurement model, we can
consider the following hypotheses for the present research:
H1. There is a significant positive relationship between the components of Value Added
Intellectual Coefficient (human capital, employed capital and structural capital)
and firm profitability.
H2. There is a significant positive relationship between Value Added Intellectual
Coefficient (VAICe) and firm profitability.

We have used the following equations in order to test the foresaid hypotheses and
investigate the relationship between intellectual capital and firm profitability:
First Equation: To test H1:
ROA ¼ a þ b1ðVAHUÞ þ b2ðVACAÞ þ b3ðSTVAÞ þ b4ðFSIZEÞ þ b5ðLEVÞ þ b6ðROEÞ þ 1
Second Equation: To test H2:

ROA ¼ a þ b1ðVAICTM Þ þ b2ðFSIZEÞ þ b3ðLEVÞ þ b4ðROEÞ þ 1

Where, ROA is firm profitability calculated using return on assets; VACA is value added of
capital employed calculated through dividing value added by measured financial capital;
VAHU is value added of human capital calculated through dividing value added by
measured human capital; STVA is value added of structural capital calculated through
dividing structural capital by value added; SIZE is firm size calculated using the natural
logarithm of book value of assets; LEV is Leverage or corporate risks calculated through

Table I A summary of the variables used in the research

Variables Calculation Measure Type

ROA Gross operating profit divided by total assets Profitability Dependent

VACA Value added divided by capital employed Value Added of Capital Employed Independent
VAHU Value added divided by human capital Value Added Human Capital Independent
STVA Structural capital divided by value added Value Added Structural Capital Independent
VAICe Value Added of Capital Employed þ Value Value Added Intellectual Coefficient Independent
Added Human Capital þ Value Added Structural
Capital
FSIZE log(book value of assets) Firm size Control
LEV Total liabilities divided by total assets Leverage Control
ROE Gross operating profit divided by book value of Return on equity Control
equity

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 dividing total liabilities by total assets; ROE is return on equity; b1, . . . ,b6 are the coefficients
of the regression model; and represents error of the regression model.

5. Results and data analysis

Regression analysis is presented after reporting Descriptive statistics in Table II Table III
displays multiple linear regression analysis using partial least squares method. This method
is appropriate when sample size is small (less than 100) and there is linearity between
variables and when models are not correctly specified (Smith, 2003). The software used for
statistical analysis of this research is STATISTICA 7.

Testing the first hypothesis

Considering Figure 1, (conceptual framework of the research) and the first hypothesis, the
components of intellectual capital (human capital, employed capital and structural capital)
were contrasted with firms’ financial performance. All research tests are performed at 95
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percent confidence interval. The results of testing the first hypothesis are presented in
Table III. Considering this table and the results obtained from partial least squares
regression method, since the value of coefficients is less the 0.05 (p , 0:05) and partial least
squares regression coefficients of the variables of Human capital, (VAHU ¼ 0:000791),
Employed capital (VACA ¼ 0:022137), and Structural capital (STVA ¼ 0:000519) are
positive, we can conclude that there is a significant positive relationship between human
capital efficiency (VAHU), employed capital efficiency (VACA), structural capital efficiency
(STVA) and profitability (ROA). Moreover, as shown in Table III the value of (R2) for Human

Table II Descriptive statistics of variables

Descriptive statistics
Variables n Mean Median Medium Maximum Standard deviation

VAHU 39 5.665945 28.09000 1.00000 2.43000 4.65667

VACA 39 0.148454 1.00000 0.02000 0.09000 0.12333
STVA 39 0.837472 5.59000 0.14000 0.64000 0.71923
VAICTM 39 5.795287 29.19000 1.39000 3.56000 5.46795
LEV 39 0.208156 0.86246 0.11761 0.65677 0.59722
FSIZE 39 1.825283 16.79473 10.24690 13.70290 13.52118
ROE 39 0.183338 0.63916 0.00367 0.14737 0.21831
ROA 39 0.035459 0.15426 0.00071 0.05673 0.06434

Notes: VAHU: Value Added Human Capital; VACA: Value Added of Employed Capital; STVA: Structural Capital Value Added; VAICTM:
Value Added Intellectual Capital; LEV: Leverage; FSIZE: Firm size; ROE: Return on equity; ROA: Return on assets

Table III Regression results of the first hypothesis

Dependent variable: ROA (Partial least squares regression)
R2 Regression coefficients p-value

Independent variables
Constant – 0.109956 0.0000
VAHU 0.459 0.000791 0.0181
VACA 0.599 0.022137 0.0000
STVA 0.649 0.000519 0.0000

Control variables
FSIZE 0.652 20.004983 0.0000
LEV 0.655 20.052932 0.0000
ROE 0.655 0.186065 0.0000
N 39 39 39

Notes: H1: The components of intellectual capital are positively associated with firm profitability;
ROA ¼ a þ b1 ðVAHUÞ þ b2 ðVACAÞ þ b3 ðSTVAÞ þ b4 ðFSIZEÞ þ b5 ðLEVÞ þ b6 ðROEÞ þ ?

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VOL. 16 NO. 1 2012 MEASURING BUSINESS EXCELLENCE PAGE 61
 capital, Employed capital and Structural capital is (0.459), (0.599) and (0.649) respectively,
indicating how much these variables account for changes in firms’ profitability.

Testing the second hypothesis

Considering Figure 1 (conceptual framework of the research) and the first hypothesis,
intellectual capital (VAICTM) was contrasted with firms’ financial performance. The results of
this test are presented in Table IV. Considering this table and the results obtained from partial
least squares regression method, since the value of coefficients is less the 0.05 (p , 0:05)
and regression coefficients of the intellectual capital is positive(0.000739), we can conclude
that there is a significant positive relationship between intellectual capital (VAICTM) and firm
profitability. As displayed in Table IV, the value of (R2) for intellectual capital is (0.426),
indicating how much intellectual capital account for changes in firms’ profitability. Moreover,
the results obtained from testing the two hypotheses which were presented in Tables III and
IV suggest that the size of these firms and their financial Leverage have inverse relationship
with profitability.
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6. Conclusion
In the traditional economic paradigm, physical and financial capital were the center of
attention, while in New Economy, knowledge and intellectual capital are much more
emphasized. Although one of the basic drawbacks of traditional accounting systems is their
incompetence and inability in measuring and accounting for intellectual capital values in
firms’ financial statements (Chu et al., 2006), measuring the intellectual capital of a firm is of
utmost importance; for intellectual capital is considered as one of the chief factors of value
creation for a business entity (Martinez-Torres, 2006). Generally, measuring intellectual
capital has been annually taken into account in order to compare market values of firms and
to control their development (Montequin et al., 2006).
The results obtained from partial least squares regression analysis reveal that there is a
significant positive relationship between human capital efficiency (VAHU) and profitability of
Iran insurance companies. These relationships indicate to firms that employees are
extremely valuable assets that should not be neglected, so as to enhance firm performance
and remain competitive in the market place. In addition, managers can make decisions
about more resource allocation for employee training and development.
Here, the relationship between structural capital (STVA) and business performance (ROA) is
supported. This implies that internal organizational systems designed to capture, store and
disseminate organizational information and knowledge appear to impact directly on the
organizational performance of Iranian insurance firms.

Table IV Regression results of the second hypothesis

Dependent Variable: ROA (Partial least squares regression)
R2 Regression coefficients p-value

Independent variables
Constant – 0.116767 0.0000
VAICTM 0.426 0.000739 0.0000

Control variables
FSIZE 0.615 20.048877 0.0000
LEV 0.645 20.005067 0.0000
ROE 0.648 0.188899 0.0000
N 39 39 39

Notes: H2: Value Added Intellectual Coefficient (VAICTM) is positively associated with firm profitability;
ROA ¼ a þ b1 ðVAICeÞ þ b2 ðFSIZEÞ þ b3 ðLEVÞ þ b4 ðROEÞ þ ?

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PAGE 62 MEASURING BUSINESS EXCELLENCE VOL. 16 NO. 1 2012
 On other hand, VACA positively impact the ROA values. As the value of VACA increases, so
is the value of ROA. In addition, a firm should strengthen its intangible assets as an
alternative to increase the VACA.
In addition, the result of this research indicates that we can significantly increase profitability
of these companies with proper management of intellectual capital. When companies invest
a lot on intangible assets, using traditional performance evaluation techniques can lead to
inapt decision-making of investors and shareholders (Firer and Williams, 2003). Based on
these results, it follows that the optimal procedure for insurance companies is to focus on all
the three components of IC in order to increase firm performance. Because, the results of the
study support the notion that companies which actively nurture and increase their IC are
likely to experience superior performance.

Intellectual capital is an area of interest to numerous parties, e.g. shareholders, managers,

policy makers, institutional investors. The results of this research have several practical
implications:
This study is important for managers who want to determine the possible required
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changes for the development of intellectual capital in their companies. Primarily, the
results of the research allow managers to apply the VAICe method to better harness and
manage their IC and to benchmark against the best competitors in their sectors.
Therefore, IC can be considered as revenue generation and a firm’s long-term
profitability. In addition, findings may serve as a useful input for managers to apply
knowledge management in their companies to maximize the stakeholder’s benefit.
B Although generally-accepted accounting standards restrain most intellectual capital from
being recognized in financial statements, investors still grasp the invisible value of
intellectual capital. Based on the results of the analysis, we can recommend companies to
use this model for a thorough and real preparation, and analysis of financial statements in
accounting systems and to disclosure information regarding intellectual capital.
Furthermore, they can make them available for users, so that investors and
shareholders can use it in their investment decision-making and true evaluation of
firms’ market value in order to earn more financial returns.
B By using data from Iranian insurance companies, our findings have important implications
for developing countries. Intellectual capital is being increasingly recognized as the major
driver of corporate and national growth. Moreover, to get the maximum benefits from the
concept of intellectual capital, it should be considered at all its four levels: individual,
group, organization, and country.
B Accountants can also adopt the VAICe method as a potential measure to report on IC.
B Governments can use the VAICe method to assess different companies and different
sectors in the economy in terms of VA of their IC.
B In general, measuring IC is considered essential to comparing different companies, to
estimating their real value, or even to controlling their improvement year-to-year.
Finally, we can say that, concept of intellectual capital is a newly emerging concept, and until
now, it is not fully understood by most organizations in Iran or Iran stock exchange. This
study represents a major foundation in elevating this concept within the Iranian business
community.

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About the author

Mohammad Alipour is an Academic Member of Islamic Azad University Khalkhal Branch
(Accounting), Iran, and a Lecturer in the Department of Accounting. His research interests
include intellectual capital and financial performance, working capital, capital structure and
financial management and others in Iran. He has published in the World Applied Science
Journal and in Accountant Journal (Iran) on the subject of accounting information systems.
Mohammad Alipour can be contacted at: uniclass.alipoor@gmail.com

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