Article

Acquisitions reveal the hidden intellectual capital of pharmaceutical companies

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Abstract

Purpose This paper aims to assess to what extent intellectual capital is revealed once a company is acquired. Design/methodology/approach The research question was approached by analyzing official accounts of companies, like annual reports and documents provided to stock exchange authorities before and after the acquisition. In its purchase price allocation the acquiring company is providing insight in the total value of the company acquired. Findings The mean total value of the companies studied increases approximately six fold on acquisition. This increase is mainly due to the increase in intangible assets (including goodwill), which substantially overlap with intellectual capital. The intangible assets specified are mostly connected to rights‐related and technology‐related items, while goodwill shows more “bias” to expertise and customer‐related items. Thus it is hypothesized that a substantial part of the intellectual capital of the company acquired is revealed in the official accounts of the acquiring company. Research limitations/implications This study is limited to companies primarily in the pharmaceutical sector. The situation with respect to intangible assets may deviate from the situation in other industrial sectors. Another limitation is the restriction to public companies with respect to the acquiring party because of the information requirements imposed by the authorities. Further, this study was restricted in time to the last seven years in order to have a group of acquisition situations for which similar recent accounting guidelines apply. Practical implications This line of research could have practical implications for future valuation policies in acquisition situations and for intellectual capital valuation strategies. Originality/value The paper is a quantitative evaluation of intellectual capital in mergers and acquisitions based on formal accounting records.

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... Lev (2001) and Bhatia & Aggarwal (2018) refer to intangible assets as intellectual capital and knowledge assets. Boekestein (2009) also considers that intangible assets (including goodwill) overlap substantially with intellectual capital. Bollen et al. (2005) point out that intellectual capital plays a significant role within intangible assets. ...
... Although intangible assets contribute to an efficient value-creation process and have a positive impact on the company's market value and financial performance, the value of the intangible assets is not fully reflected in the corporate balance sheet (Boekestein, 2009). One part of intangible assets, the so-called invisible intangible assets, is not disclosed in financial statements. ...
... One part of intangible assets, the so-called invisible intangible assets, is not disclosed in financial statements. For these reasons, the way accountants treat intangible assets is a frequently contested and unresolved issue (Haji & Ghazali, 2018) which contradicts the knowledge economy idea that knowledge, i.e. intangible assets, is most relevant to the activities of knowledge-based companies (Boekestein, 2009). Unclear accounting treatment and inability to value intangible assets results in a distortion of profitability indicators (ROA; ROE) and market indicators (MB, P/E) in relation to actual values (Ferdaous & Rahman, 2019). ...
Conference Paper
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The dominance of the knowledge-based economy has led to the intangible assets being seen as a key factor in the development of hotel companies whose efficient use results in competitive advantage and superior performance. The paper considers visible intangible assets which are one part of intangible assets shown in the hotel's balance sheet. The aim of the paper is to examine the impact of visible intangible assets on the business performance of hotel companies in the Republic of Serbia. This paper analyzes ROA, ROE and RevPAR business performance indicators. The research hypotheses are tested using regression analysis and non-parametric test-to-test differences between groups. Research results do not support the impact of visible intangible assets of hotel companies on business performance indicators observed. Furthermore, the results point to a difference in the value of visible intangible assets between 3-, 4-and 5-star hotels.
... Intellectual assets increase productivity and efficiency, which influence positively on the market. However, we could rarely observe IC on firms' balance sheets and this is in serious conflict with knowledge economy where the basis of knowledge of established on knowledge (Boekestein, 2009). Therefore, firms are able to reach competitive advantage through maintaining intellectual assets and we need to find out on how to assess IC and the impact of IC on other financial figures. ...
... In other words, IA is normally an exclusive part of a business unit. This could normally include various items such as good will, reputation, brand, etc. (Huggins, 2007;Boekestein, 2009). According to Isaac and Herremans (2009), IC is an exclusive intellectual property, which allows firms have continuous improvement proportion to changes on the environment. ...
... Tan et al. (2007) also specified that IC is one of the most important components for having successful organizations. According to Boekestein (2009) acquisitions reveal the intellectual capital of pharmaceutical companies. Huang (2010) studied contingency factors influencing the availability of internal intellectual capital information. ...
... Business units could increase their efficiencies as well as productivities by effectively using their IC. It is normally difficult to measure the exact value of IC in many business units and this is in serious conflict with knowledge economy where the basis of knowledge of established on knowledge (Boekestein, 2009). Therefore, firms are able to reach competitive advantage through maintaining intellectual assets and we need to find out on how to assess IC and the impact of IC on other measures such as productivity and value added. ...
... Intellectual properties are among knowledge-based items, which could substantially contribute to business models. In other words, IC is an exclusive part of a business unit, which could include various items such as good will, reputation, brand, etc. (Huggins, 2007;Boekestein, 2009). According to Isaac and Herremans (2009), IC is an intellectual property, which allows firms have continuous improvement proportion to changes on the environment. ...
... Tan et al. (2007) also specified that IC is one of the most important components for having successful organizations. According to Boekestein (2009) acquisitions reveal the intellectual capital of pharmaceutical companies. Huang (2010) studied contingency factors influencing the availability of internal intellectual capital information. ...
Article
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There is no doubt that conventional accounting does not provide actual value of a firm since they only take into account the tangible assets. Intellectual capital provides a new concept for considering actual value of the assets, which helps calculate intangible values of the firm. In this paper, we use value added intellectual coefficient (VAIC) to measure the performance of a firm. The study investigates the relationship between intellectual capital and return on assets and value added for three consecutive years between 2008 and 2010. The results indicate that there is no meaningful relationship between intellectual capital and return on assets for fiscal years of 2008 and 2009 but there is a meaningful relationship between these two items for the fiscal year of 2010 when . Our findings also indicate that there is no meaningful relationship between intellectual capital and value added for the years of 2008 and 2010 but there is a meaningful relationship between the items for the fiscal year of 2009. The results somewhat confirm the recently published results in the literature, which argues the use of VAIC for assessing the direct impact of IC on other financial factors.
... The paper presents a classification of KM publications into six areas: knowledge sharing and technology transfer, Intellectual Property Protection (IPP), knowledge measurement and Intellectual capital (IC) reporting, innovation and knowledge creation (KC), organisational knowledge culture and structure as well as Pharmaceutical firm performance ( Figure 3). The rest of articles falls in miscellaneous category that includes other themes such as: organisational learning, knowledge management maturity, data mining, etc. (Wakefield, 2005); (Styhre et al., 2008); (Qureshi & Evans, 2015); (Akhavan et al., 2015); (Pedroso & Nakano, 2009); (Mets, 2006); (Lilleoere & Hansen, 2011); (Lawson & Potter, 2012); (Hemmert, 2004); (Gray et al., 2011); (Dooley & Kirk, 2007); (Delaney, 1999); (Criscuolo, 2005); (Coradi et al., 2015); (Chávez & Víquez, 2015); (Brachos et al. 2007); (Bourouni et al., 2015); (Azan and Huber Sutter 2010); (Allen et al., 2016); (Santos, 2003); (Mohan, Jain, and Ramesh 2007); (Malik, 2012); (Iwasa and Odagiri 2004);(Filieri et al. 2014); (Chang, Yeh, and Yeh 2007); (Buchel et al. 2013); (Bourouni et al., 2015) Pharmaceutical Firm Performance (Mehralian et al. 2012); (Malik, 2012); (Kim et al., 2014); (Vishnu & Gupta, 2014); (SubbaNarasimha et al., 2003); (Sharabati et al., 2010); (Pal & Soriya, 2012); (Kamath, 2008); (Garcia Morales et al., 2008); (Bollen et al., 2005) Research, Innovation and Knowledge Creation (Terziovski and Morgan 2006); ; (Sternitzke, 2010); (Standing and Kiniti 2011); (Sharma and Goswami 2009); (Roth, 2003); (Parisi and Hockerts 2008) (Bollen et al., 2005); (Boekestein, 2006); (Boekestein, 2009); (Abhayawansa & Azim, 2014); (Sydler et al., 2014); (Russell, 2016); (Rossi et al., 2015); (Nito, 2005); (Mehralian et al. 2012); (Mehralian et al. 2014); (Huang et al., 2011) ...
... In the pharmaceutical industry, Merger and Acquisition (M&A) is used as a cost-effective way to gain access to new product platforms, technologies and patents; traditional pharmaceutical companies with dried-out research pipelines but sufficient cash acquire innovative biotech firm as a source of new products (Rossi et al., 2015). M&A can be seen as an opportunity to overcome the underestimation of intangible assets under current accounting systems in pharma companies (Boekestein, 2009). ...
Article
The pharmaceutical sector is one of the pillars of the world’s economy. A significant proportion of its value lies in intellectual assets generated through continuous innovation and lengthy development cycles within a strictly regulated environment. The purpose of this paper is to address the gap between knowledge management (KM) as an expanding academic discipline in the pharmaceutical industry and at the same time a growing regulatory expectation. A systematic review of 137 refereed KM articles revealed six empirical research themes in the pharmaceutical industry. In a subsequent step, the discovered themes and subthemes were compared with the extant regulatory expectations as explained in 128 regulatory guidelines. Findings shed the light on the gap between academic KM research and the current thinking of regulatory bodies. Some regulated knowledge processes were underrepresented in academic literature. The paper offers also novel insights and recommendations for future developments in academic research, regulations, and/or industry.
... With respect to conclusions of studies carried out on factors of companies' success, they are moving from tangible to intangible factors due to the realization of the high potential of intangible resources (Hand, 2001, Zigan andZeglat, 2010). The shift towards consideration of power of IAs and their contribution to companies' economic growth is attracting attention of researchers (García and Ayuso, 2003, Vodák, 2011, Volkov and Garanina, 2007, Jerman et al., 2010, Hussi and Ahonen, 2002, Gerpott et al., 2008, Boekenstein, 2009. ...
... The importance of this special item of intangibles became apparent in mergers and acquisitions. Acquisitions reveal the hidden value of IAs (Boekenstein, 2009, Sedláček et al., 2014, that did not meet the criterion for their recognition previously. The results of Boekenstein's study (carried out for pharmaceutical sector) revealed that in mergers and acquisitions the total value of the acquired company increases approximately six times. ...
Article
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The cost structure of business entities has been changing in the span of time. Costs associated with intangible assets such as software, patents, licenses, copyrights and goodwill became an important item of costs in the recent days. The paper is focused on the evaluation of the share of intangible assets in total assets and the costs associated with intangible assets in business companies operating in the chemical and pharmaceutical industry in the Czech Republic. The analyzed sample of companies represents two groups of business entities: entities preparing financial statements in accordance with IFRS and the entities preparing financial statement according to the Czech Accounting legislation (CAL). The sample covers period after the mandatory implementation of IFRS for listed companies-starting in 2005 and ending in 2015. The aim of this paper is to evaluate the impact of intangible assets reporting methodology using criteria as the share of this category in assets of companies, its structure and its changes over time and to identify possible reasons for this situation. The analysis revealed that there is an increasing tendency in volume of IAs in companies listed in Prague Stock Exchange. © 2008 Mendel University of Agriculture and Forestry Brno. All rights reserved.
... Intellectual assets can increase productivity and efficiency, which impact positively on the market. However, it is rarely observed IC on firms' balance sheets, which is in a serious conflict with knowledge economy where the basis of knowledge of established on (Boekestein, 2009). Therefore, firms are capable of reaching competitive advantage through keeping IC and we require to find out on how to assess IC and the impact of IC on other financial figures. ...
... Intellectual properties are among knowledgebased items, which could contribute to business models, significantly. In other words, IA is an exclusive part of a business unit and this could normally incorporate different items such as good will, reputation, brand, etc. (Huggins, 2007;Boekestein, 2009). According to Isaac and Herremans (2009), IC is an exclusive intellectual property, which permits firms to have continuous improvement proportion to changes on the environment. ...
Article
Full-text available
The primary aim of this survey is to study the relationship between intellectual capital, earning per share and income growth for a case study of Tehran Stock Exchange in Iran. There are 120 companies listed in Tehran Stock Exchange and, using a simple sampling technique, we choose 50 firms, randomly. The results of this survey indicate that the components of intellectual capital including human capital, customer capital, and structural capital have significantly positive relationship with the earning per share of the companies over the period of 2005- 2010. The results also indicate that the components of intellectual capital including human capital, customer capital, and structural capital are positively associated with the income growth of the companies for the period from 2005 to 2010.
... According to the International Accounting Standards Board (IASB), goodwill is any excess of the costs of the acquisition over the acquirer's interests in the fair value of the identifiable assets and liabilities (Bloom, 2008). Brännström et al. (2009) claim goodwill arising from a business combination is like a black box containing a bundle of intangible assets and that a significant part of goodwill contains IC (Boekestein, 2009). ...
... A study conducted by Boekestein (2009) concludes that in the event where justification is provided on the purchase prices allocated to goodwill, IC categories such as human capital, internal capital, and to a lesser extend external capital have been frequently mentioned as the related reasons. In most cases, however, there has been no justification provided on the amount of goodwill presented. ...
Article
Purpose The purpose of this paper is to provide an analysis of intellectual capital (IC) disclosures in annual reports (mandatory and voluntary) and draw attention to the specific issues related to the methodology used i.e. content analysis. The focus is to incorporate all forms of IC disclosure – narratives, numbers, and visual images – into the analysis as well as highlight the need to study both quantity (extent) and quality of disclosure. Design/methodology/approach Using content analysis, this paper analyzes 30 of Malaysia's largest public‐listed companies from the IC disclosure of 2008 annual reports. The results are used to discuss specific methodological issues such as the usage of an IC index, choice of unit of analysis, quantity versus quality, presence/absence versus multiple disclosures, and the usage of narratives, numbers, and visual images. Findings This paper proposes that themes are the most appropriate recording and counting unit to analyze IC information combining narratives, numbers, and visual images. The discussion finds, among others, that while quantity and quality are highly related, quality of disclosure provides the most insights into the disclosure behavior adopted by companies. Practical implications This paper provides methodological guidelines to future IC researchers interested in analyzing the quantity and quality of IC disclosure. Originality/value To the best of the authors' knowledge, so far there are no studies published that provide a detailed discussion on ways to capture the quantity and quality of IC information disclosed in annual reports using all three forms of disclosure – narratives, numbers, and visual images.
... Karwal (2009) llama la atención sobre un fenómeno nuevo relativo a la emergencia de grandes empresas de medicamentos genéricos, aunado al renovado interés de las grandes farmacéuticas por este mercado altamente fraccionado en pequeñas firmas. Por otro lado, Boekestein (2009) indaga por el capital oculto de las firmas sometidas a procesos de M&A, presente en activos intangibles que se solapan con el capital intelectual de las compañías y que aumentan su valor. ...
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Este artículo describe las transformaciones y reestructuraciones globales ocurridas en la industria farmacéutica relacionadas con fusiones y adquisiciones, política de patentes e I&D en el marco de la emergencia mundial del COVID-19 y de la búsqueda de una vacuna para su curación. Se llevó a cabo un análisis documental de casos y una revisión de la literatura. Como hallazgos principales, parece revelarse una crisis de creatividad y de productividad del sector respecto al descubrimiento de nuevos principios curativos y del lanzamiento de nuevos medicamentos. Situación que se combina con el creciente vencimiento de las patentes y la competencia de las compañías fabricantes de medicamentos genéricos. La emergencia del coronavirus y el muy rápido desarrollo de vacunas para su curación o mitigación parecen haber brindado una nueva oportunidad a esta rama de la industria basada en la ciencia.
... To carry out this function, it needs considerable investment which can be achieved through trainee programs and continuous learning to make employees abreast of innovative ideas, knowledge, skills, and proficiency-the need of the hour. Boekestein (2009) stated that the firm should focus on IC to create value for the stakeholders. Rehman, Ilyas, and Rehman, Ilyas, and Rehman (2016) also referred to the skills and knowledge as value-added HCE of employees. ...
Article
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The paper aims to address the long‐term and short‐term effects of intellectual capital efficiency (ICE) on Pakistan's bank stability together with the banking system's inherent factors. The ICE is measured through the VAIC™ model and consists of human, rational, and structural capitals. The auto‐regressive distributed lag estimation technique results underwrite that an increase in ICE leads to better bank stability and endorses the resource‐based theory. Apart from that, findings show the long‐term role of ICE in bank stability, although statistics depict no short‐term role in this regard. The efficiency ratios, risk‐based capital, leverage, and bank size shows a positive impact in the short run. In the long run, the risk‐based capital and leverage show a decisively positive influence, while the bank size and efficiency ratio show a negative effect. Findings can be used to increase intangible investments to build a sustainable competitive advantage based on the resource‐based approach. The upcoming review is expected to consider the Fintech effect.
... Increasing global dependence on emerging economies poses strong need to emphasize the development of IC in different socio-economic environments. Boekestein (2009) argues that firms should make better use of their non-physical assets such as IC to create value for the stakeholders. However, IC is still not widely explored especially in emerging economies in general (Pedrini, 2007) and in BRICS in particular -as we can only find one study (Bayburina and Golovko, 2009) exploring IC and that too misses South Africa. ...
Article
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Purpose The aim of the current study is to measure the dynamic relationship between intellectual capital and firm performance in BRICS economies. Design/methodology/approach The current study applies dynamic panel system generalized method of moments (GMM) estimator to investigate the dynamic relationship between intellectual capital and firm performance of 6045 publically listed firms in BRICS economies for the period of 2005-2014. Findings The results revealed that intellectual capital efficiency is significantly associated with ROA and ROE. Furthermore, human, structural and physical capital have a positive and significant impact on firm performance. The results, while endorsing resource-based, resource-dependency and learning organisation theories, emphasize the importance of intellectual capital for firm performance. Practical implications The current study does not only provide new direction for future research to analyse dynamic nature of intellectual capital and firm performance relationship but also emphasizes the importance of intangibles because of their contribution towards value added. The current study does provide cross-country comparison of top five emerging economies which is useful for the policy makers to evaluate investments in intangibles. Originality/value The current study is the first study to use dynamic OLS and Wooldridge strict exogeneity test to test the dynamic nature of the relationship between intellectual capital and firm performance. Moreover, unlike previous studies which ignore South Africa, this study cover all BRICS economies.
... Yet, given the definition itself of goodwill as "future economic benefits arising from assets that are not capable of being individually identified and separately recognized" (IFRS 3), we think that it can be identified with the skill, the know-how, the technical and organisational expertise of the workforce. This is consistent with most of the definitions of goodwill found in the annual reports of companies, as well as with contributions claiming that goodwill arising from a business combination can be considered as a black box containing a bundle of intangible assets (Brännström et al., 2009), and that a significant part of goodwill contains intellectual capital (Boekestein, 2009). In order to understand how pervasive OI is within the business of a company, all the aforementioned items have to be compared to the total business of firms by adopting homogeneous measures: total R&D and IP costs for OI costs, total revenues for OI revenues and total intangibles for additions and disposals. ...
Article
Purpose – The purpose of this paper is to explore the relationships between the openness of firms and their innovation and financial performances. Design/methodology/approach – In order to investigate such relationships, data on inbound and outbound open innovation (OI) processes and performances of 110 worldwide top research and development (R&D) spending bio-pharmaceutical companies are collected via the consolidated annual reports and the PATSTAT database. The time period of the analysis is 2008-2012. Findings – Regarding innovation performances, R&D productivity and revenues to patents ratio decrease with openness, whilst patents growth is not influenced by OI adoption. As to financial performances, sales growth exhibits a positive trend with openness, while operating profit and turnover decrease with OI adoption. Particularly, an inverted U-relationship with inbound and a U-shape one with outbound are observed as of operating profit. Research limitations/implications – The study adds to the knowledge about the effect of openness on firms’ performances, a topic of increasing interest to academics, managers and policy makers. Both inbound and outbound facets of the phenomenon are taken into account. Practical implications – Understanding how openness affects performances enables more informed decision making by managers, leading to a more effective use of OI activities. Originality/value – The work provides new insights as to what “being open” means for a company, gauging both inbound and outbound transactions after a pecuniary perspective. Employing objective and continuous measures, the relevance of OI for the whole business of firms can be identified.
... Actually, when a separate acquisition occurs, a focalised interest on an intangible (e.g., a specific patent) can be outlined, whilst within BCMAs, the acquiring company can be interested not only on the recognised intangibles, but also in the knowledge and the expertise of people working in the acquired firm. Such a distinction makes it important to consider the goodwill arising from BCMAs as a proxy for intellectual capital, consistently with literature (Boekestein, 2009;Brännström et al., 2009). Clearly, not all the increases and decreases of intangibles can be regarded as open, since we have capitalisation of development costs or internally developed IP rights, amortisation, impairment charges, reclassifications and currency translations, which are all linked to internal accounting operations and adjustments, rather than to exchanges with third parties. ...
Article
Full-text available
The purpose of this study is to examine the composition of companies’ intangibles portfolio and relate it to the degree of openness of their innovation processes, assessed after an accounting perspective. The analysis is performed on a sample of 234 world top research and development (R&D) spending firms in the bio-pharmaceutical and technology hardware and equipment industries for the period 2010–2012, for a total of 702 consolidated annual reports examined. Results show that the intangibles portfolio of open companies contains mainly R&D and patents. Conversely, firms registering a significant amount of goodwill on balance sheet are less open in their innovation processes.
... Given the definition itself of goodwill as "future economic benefits arising from assets that are not capable of being individually identified and separately recognized" (IFRS 3) we think that it can be identified with the skill, the know-how, the technical and organizational expertise of the workforce. This is consistent with most of the definitions of goodwill found in the annual reports of companies, as well as with Brännström et al., (2009), claiming that goodwill, arising from a business combination, can be considered as a black box containing a bundle of intangible assets, and that a significant part of goodwill contains IC (Boekestein, 2009). ...
Article
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The purpose of this paper is to investigate the new investments and divestments of intangibles companies perform in the context of open innovation. Indeed, the open innovation process exploits knowledge dissemination and considers the external access to intangible resources as a strategic activity. The framework is tested on a sample of 271 firms operating in two R&D intense industries, bio-pharmaceutical and technology hardware & equipment, for the three-year period 2010-2012. The analysis reveals that intangibles transactions are not relevant in the bio-pharmaceutical industry, since open innovation is far more oriented to revenues and costs. Conversely, for technology hardware & equipment companies the acquisition of intangibles is very widespread, particularly within business combinations. The paper contributes to the current debate on open innovation outlining the role of knowledge and intangible assets in the strategies companies pursue for opening up their processes.
... Given the definition itself of goodwill as "future economic benefits arising from assets that are not capable of being individually identified and separately recognized" (IFRS 3), we think that it can be identified with the skill, the know-how, the technical and organizational expertize of the workforce. This is consistent with most of the definitions of goodwill found in the annual reports of companies, as well as with contributions claiming that goodwill can be regarded as a black box containing a bundle of intangible assets [49], and that a significant part of it comprises intellectual capital [50]. ...
Article
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This paper aims at investigating the relationships between the adoption of open innovation by companies and their context features, internal R&D, and financial performances. Two proxies for openness—variety and intensity—are defined, and six hypotheses are formulated and tested on a sample of 68 worldwide top R&D spending pharmaceutical companies. The period of 2008-2012 was analyzed for a total of 340 statistical units. Our results suggest that open innovation is a very pervasive behavior among smaller and younger companies, for which internal R&D is complementary to openness; still being in the development phase, they derive most of their revenues from open innovation itself and show negative financial performances. Yet, a wider range of open transactions are performed by larger and longer established firms, exhibiting good financial performances and adopting open innovation as a substitution to internal R&D efforts. Through an in-depth review of the literature, this paper contributes to the research on open innovation by providing an accounting measurement system, testing six hypotheses among open innovation and some firm-level variables, and positioning the obtained results within the current debate.
... On the contrary, within BCMAs, the acquiring company can be interested not only on the recognised intangibles, but also in the knowledge and the expertise of people working in the acquired firm. Such a distinction makes it important to consider the goodwill arising from BCMAs as a proxy for intellectual capital, consistently with literature (Boekestein, 2009;Brännström et al., 2009). ...
Article
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The paper suggests an accounting-based framework for defining open innovation adoption modalities through the analysis of annual reports. Five models are described, depending on the costs, revenues, new investments and divestments in intangibles and knowledge assets related to open innovation. The framework is applied to a sample of 271 world top research and development (R&D) spending companies in the bio-pharmaceutical and the technology hardware and equipment industries. Annual reports data are examined for the period 2010–2012, with 813 statistical units analysed after a cross-section perspective. Results show that bio-pharmaceutical companies are twice open than technology hardware and equipment firms; the former mainly adopt a collaborative model for open innovation, by jointly developing research programmes with external parties, the latter prefer to incorporate other companies through the use of spin-ins. The paper contributes to the existing research by suggesting a pecuniary approach to evaluate open innovation adoption modalities. The framework can be used by companies for both monitoring their own open innovation positioning and benchmarking it with those of competitors.
... On the contrary, within business combinations, mergers and acquisitions (BCMAs), the acquiring company can be interested not only on the recognized intangibles, but also in the skills of human resources working in the acquired firm. Such a distinction makes it important to consider the goodwill arising from BCMAs as a proxy for intellectual capital, consistently with literature (Boekestein, 2009;Brännström et al., 2009). Thus, five business models for OI can be defined: collaboration, outsourcing, licensing, trading and incorporation ( Table 1). ...
Article
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The paper describes five open innovation business models - collaboration, outsourcing, licensing, trading and incorporation - defined on the basis of open revenues and costs, new investments and divestments in intangibles. A sample of 271 companies from biopharmaceutical and technology hardware & equipment industries is investigated, and their annual reports for the three years period 2010-2012 are analysed. Results show that for biotech companies open innovation represents a characteristic activity, with most of them having high values of revenues deriving from joint development projects. On the other side, for pharmaceutical firms open innovation is somehow ancillary: even if most open innovation activities are widespread, their values are not really significant if compared to the total business volume. As to the technology hardware & equipment industry, the use of spin-ins as a mean for incorporating external knowledge is the most frequent open strategy. This work contributes to the research on open innovation by defining the business models that R&D intense companies may adopt to foster open innovation. From a managerial point of view, the framework can be used by companies for assessing the status of their own open strategies, also allowing the benchmarking with competitors.
... Furthermore, two considerations have to be done as to goodwill. First, as mentioned above, within a BCMA, we think that goodwill can be identified with the human capital of the acquired company and this assumption is consistent with most of the definitions found in the annual reports of companies 1 , as well as with some literature contributions (Boekestein, 2009;Brännström et al., 2009) claiming that goodwill can be considered as a black box containing a bundle of intangible assets, including IC. Second, when a specific reference was made to an acquisition which, rather than being related to innovation, copes with the purchase of distribution and commercial channels, we did not include the value of goodwill in the measure of OI. ...
Article
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The paper suggests a methodology for measuring companies' openness degree through accounting data and providing a relation between open innovation activities and intellectual capital components. Four openness dimensions are defined and a synthetic measure of openness is suggested. The model is applied to a sample of 126 world top R&D spending companies in the bio-pharmaceutical industry for the period 2008–2012. Results show a negative correlation of openness with firm age, dimension and efficiency and a positive correlation with R&D intensity, with biotech companies being more open than pharmaceutical ones. Further, the most relevant component of openness is represented by the revenues deriving from joint development projects, out-licensing and R&D outsourcing. The paper contributes to the existing research by suggesting inbound and outbound metrics for open innovation and by underlining the role of intellectual capital. The framework can be used for monitoring and benchmarking the openness degree of companies with competitors.
... Edvinsson and Malone [9] argue that the worth of a company lies not in bricks and mortar, but in intangible kind of asset, that is IC, which is hidden behind the company's book values. Currently, companies are reporting on their IC in a qualitative or semi-quantitative manner in addition to the traditional and formally required financial reporting [10]. This can partly be traced to the increased demand by stakeholders for relevant information, prompted by the many frauds and scandals of the last decade which has demonstrated the need for there to be better rules and practices for financial information disclosure to improve trust in accounting [11]. ...
... On the contrary, within BCMAs, the acquiring company can be interested not only on the recognized intangibles, but also in the knowledge and the expertise of people working in the acquired firm. Such a distinction makes it important to consider the goodwill arising from BCMAs as a proxy for intellectual capital, consistently with literature [15], [16]. Thus, five adoption models for OI can be defined: collaboration, outsourcing, licensing, trading and incorporation ( Table I). ...
Conference Paper
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The paper suggests an accounting-based methodology for defining open innovation adoption modalities, based on economic and financial transactions in inbound and outbound processes. The framework is applied to a sample of 274 top research and development spending companies operating in bio-pharmaceutical and technology hardware and equipment industries. For biotechnological companies open innovation represents a core activity, with most of them having high values of revenues deriving from joint development projects and licensing. On the other side, for pharmaceutical companies open innovation is somehow ancillary: even if most open innovation activities are widespread, their values are not really significant if compared to the total business volume. For companies in the technology hardware and equipment industry the use of spin-ins as a mean for incorporating external knowledge is a characteristic activity and also the acquisition and selling of innovation-related intangibles is quite pervasive. Further, a limited number of semiconductors companies have remarkable values of licensing revenues.
... Edvinsson and Malone [9] argue that the worth of a company lies not in bricks and mortar, but in intangible kind of asset, that is IC, which is hidden behind the company's book values. Currently, companies are reporting on their IC in a qualitative or semi-quantitative manner in addition to the traditional and formally required financial reporting [10]. This can partly be traced to the increased demand by stakeholders for relevant information, prompted by the many frauds and scandals of the last decade which has demonstrated the need for there to be better rules and practices for financial information disclosure to improve trust in accounting [11]. ...
Article
Mergers and acquisitions (M&As) are one of the most practised inorganic strategies to multiply economic profits, acquire new product capabilities, expand markets, diversify risk and bring synergistic gains. The purpose of the study is to review the literature related to companies’ financial analysis, pre and post-M&A after the Patents (Amendment) Act, 2005. The study follows a systematic literature review (SLR) process where 128 research publications from 2005–2020 are examined after applying the required review protocols. SLR found a deficient practical contribution of the limited literature on the three perspectives, namely, from accounting, productivity and managerial perspectives at the international level. Furthermore, there is also a dearth of studies from the three perspectives for the Indian Pharmaceutical Industry (IPI) post the Patents (Amendment) Act, 2005. This review finds that there is a need for a unified approach for evaluating the success of M&A in IPI. Future studies can encourage research that ties these three perspectives to a common thread and furnishes a holistic approach for analysis. It will further bolster the research to provide practical insights to companies’ rooting for a robust financial analysis.
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Recent growth of the service sector and of the information technology- related business, along with the dramatic increase in the number and size of mergers and acquisitions, has made accounting for intangible assets very significant, especially in the field of reporting of goodwill. Comparative analysis is focused on the differences between IFRS, US GAAP accounting procedures and Czech accounting legislation. Main areas of analysis and synthesis are the identification of methods for goodwill recognition and reporting. The result is to recommend more broadly voluntary disclosure in the reported financial statements of companies.
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According to the growing importance of intangible assets, the research aims to investigate the significance of intangibles for Croatian, Slovenian, Czech, German and US publicly traded companies. The analysis is focused on intangibles that meet the criteria for the recognition in financial accounts. The results of the analysis prove that in the period 2004-2008 intangibles constitute an important asset for traditional market economies, which does not result for post-transition and transition economies, despite the fact that many analyses underline their growing significance in today's business environment. Independent t-test was used to test a difference between selected companies. A future research approach should analyze the proportion of intangibles that do not meet the criteria for their recognition and found out if transition economies actually possess a significantly lower proportion of intangibles.
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Given that a high number of companies return value to investors via acquisition rather than a public offering the development of intangible assets is the bait that sets up the acquisition. This paper discusses how companies can fast track to high valuation by strategic growth of certain intangible assets such as customer tribes, brands, and intellectual property, comparing those strategies to larger companies. It further describes a strategic planning methodology using four asset categories (Market, Infrastructure, Human Centred and Intellectual property) to describe the enterprise as it would be if it had achieved its strategic goals. This state is referred to as the "Dream". The Dream is characterised by a set of affirmations describing the "health" of the enterprise's assets. This is called a "Dream Ticket".
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The purpose of this paper is to highlight some of the major work done in the field of Intellectual Capital (IC) and its valuation methodology. The literature reviews discuss some of the prevailing methodology associated with identifying and measuring IC in a firm. The paper also looks into the various studies done to examine, identify and explain the relationship between intellectual capital of a firm and its market price or the difference between its market value (that of a listed firm) and its book value (Sveilby, 1997). In this attempt, the paper also highlights the work and the challenged faced by the gamut of valuation methods used today to calculate and manage intangible assets and some of their advantages and shortcomings. The focus is however on the VAICTM (Ante Pulic 2004) methodology and on the pharmaceutical sector, in India and how it evaluates its IC and R&D investments.
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The purpose of this paper is to highlight some of the major work done in the field of Intellectual Capital (IC) and its valuation methodology. The literature reviews discuss some of the prevailing methodology associated with identifying and measuring IC in a firm. The paper also looks into the various studies done to examine, identify and explain the relationship between intellectual capital of a firm and its market price or the difference between its market value (that of a listed firm) and its book value (Sveilby, 1997). In this attempt, the paper also highlights the work and the challenged faced by the gamut of valuation methods used today to calculate and manage intangible assets and some of their advantages and shortcomings. The focus is however on the VAICTM (Ante Pulic 2004) methodology and on the pharmaceutical sector, in India and how it evaluates its IC and R&D investments.
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An approach for intellectual capital development in an organisation is given. It is based on a new conception of knowledge and knowledge dynamics and raises the notion of knowledge conversions to the level of intellectual capital domains. Intellectual capital development can be modelled with this approach by means of general transformations between domains and between appropriate parts of these domains, which themselves are refined and modelled with general knowledge conversions. To attain this approach, a new conception of knowledge and knowledge dynamics is introduced. The knowledge conception is represented by a knowledge cube, a three-dimensional model of knowledge with types, kinds and qualities. The type dimension addresses the internal-external aspect of knowledge, seen from the perspective of the human being. The kind dimension distinguishes various knowledge kinds like propositional or procedural knowledge. Finally, in the quality dimension, several quality measures of knowledge are given. Built on this conception, knowledge dynamics is modelled with the help of general knowledge conversions between knowledge assets. A set of basic knowledge conversions is given in a way, such that more complex general conversions may be easily gained by building on this set. Through this conception, we gain a sound basis for knowledge management and development in an enterprise. Raising this knowledge development approach to the more strategic and resource-oriented intellectual capital level in an organisation, general transformations between the three main intellectual capital domains (individual competence, internal and external structure) and between parts of them can be described. With their help a model for intellectual capital development is gained: In a top-down approach, general transformations of intellectual capital are broken down to the notion of general knowledge conversions. This leads to development of the intellectual capital, i.e. to value creation in a company. To indicate the applicability of our approach, an example for the development of customer relations capital is given.
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Intangible Assets are becoming increasingly important in the global perspective as we are in the middle of the information age. Global investors are anxious to invest in firms which demonstrate abilities to grow rapidly and reward investors with high returns in form of meaningful capital gains and acceptable dividend payout. Consequently, there is ever an increase in demand for mergers and acquisitions as means of accelerated growth and diversification. Acquirers are being prompted to pay high consideration in exchange for control of activities in acquirees. Substantial goodwill assets have been recorded in recent times with mixed reactions on the achievement of acquisition objectives. Possession of physical assets such as land, plant and equipment is no longer gateway to growth of entities. Businesses are continuously being challenged to develop intangible assets as means of surviving, grow and gaining competitive advantage in the turbulent and dynamic global economic environment. The study under review demonstrates that no listed company in Malawi recognises and accounts for goodwill in the statement of financial position despite business combinations in the economy. The intangible assets are none existent in most listed companies in Malawi. Worse still, they account for less than 1 percent of the total assets of the few companies recognising intangible assets. The current scenario calls for urgent review of the accounting principles used by listed companies in Malawi and verify whether there are consistent with International Financial Reporting Standards which they claim to follow. Meagre intangible assets indicate lack of innovation and development of human capital in public companies in Malawi. Drastic measures are required to improve novelty and best practice methods in the commercial environment in Malawi as means of increasing its capabilities to compete at a global level.
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Measurement of intellectual capital is important, but not only for descriptive purposes. It is important because it enables intervention. If intervention and measurement are coupled, then measurement is an input rather than an output, and then measurement is not to be evaluated on its reflection of reality but rather on its ability to help actors transform their reality. This is particularly true for intellectual capital, which is widely accepted as part of an agenda for transformation and growth – it is a strategic/political agenda. To arrive at this conclusion, the paper discusses relationships between measurement and intervention comparing conventional financial statements with intellectual capital statements.
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Intangibles are becoming increasingly important to the scientific community as well as the business world. This is mainly due to a highly competitive business environment combined with exceptionally limited resources and the growing importance of knowledge as a commodity. The fluctuating differences between market and book values of companies indicate the extent of the intangibles' rising importance. By focusing on major publications since 1997, this paper critically analyzes current trends and differing views in this field. The publications are analyzed according to their content and methodologies. Review of the literature clearly shows that most publications in this area still lack a theoretical foundation. A large number of differing terms and definitions are present. Much of the literature analyzed here also fails to provide detailed suggestions for the management of intangibles, be they theory-based or empirically-derived. Discussion of these issues generally remains on a very abstract level. Research on intangibles is characterized by a large variety of views and interpretations – dominant schools of thought have yet to develop. This situation offers much opportunity for further research in this important field of management.
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When it comes to increasing shareholder value, the management team faces difficult issues in executing growth strategies. The authors explore the three most important shareholder value management factors: managing not only for current operations but for future growth; accounting for and managing intangible assets, one of the key drivers of value in today’s economy; and deciding where to invest resources given the inability of current tools to provide a reliable link between investments and the creation of shareholder value.
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Purpose – The purpose of this article is to review current literature on intellectual capital and its second‐tier sub‐components with a view to developing an improved research framework and a foundation for measures. Design/methodology/approach – Refereed journal articles were selected from social sciences citations index (SSCI) and business source premier with a time limit of ten years. Findings – Clear definitions are developed for each sub‐component of intellectual capital. This was done after identifying, for each sub‐component, the dimensions along which current definitions and research differ. A research framework is developed, which emphasizes the interaction between sub‐components of intellectual capital. Originality/value – The paper provides a clear integrated framework and measures of forms of intellectual capital to guide and inform future research.
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Purpose – This paper aims to provide a new approach to evaluate intellectual property (IP) and uses a cautious view of how volatility impacts the economic value of IPs. Design/methodology/approach – Real option is a useful tool for valuing investments under uncertainty and if it is applied to the valuation of IP with some modifications, it is also widely accepted. However, it is still debatable whether there is a constant rate‐of‐return. This paper incorporates a sensitivity variable to account for the volatility of the expected rate of return. Thus, rate‐of‐return can be a constant or increase with volatility. Findings – First, it was found in the simple model that Vega may be negative when the option is deep in the money. Second, in the general model, the option can be seen as a sequence of options and under the constant rate‐of‐return shortfall setting, it resembles traditional financial options with positive Vega. Originality/value – The scenario set‐up allows the authors to explain why uncertainties of future cash flows drive firms to invest now instead of later.
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The intellectual capital (IC) community has entered a phase of consolidation. This article contributes to this consolidation process by clarifying existing motives (why) and proposed methods (how) for valuing or measuring IC. In general, the field of IC performance measurement has paid little attention to organizational diagnosis and the “why” question. It is often unclear what the organizational problem is the methods intent to solve. Many methods for the valuation or measurement of Intellectual Capital can be characterized as “solutions in search of a cause”. Another area that requires clarification is the “how” question. There seems to be confusion about the distinction between valuation and measurement. The distinction is fundamental yet not recognized in the field. Based on a literature review this article presents a classification of motives and solutions and plots ten existing methods in a “why” by “how” matrix.
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Purpose – The purpose of the present paper is to discuss the Guideline for Intellectual Property Information Disclosure (GIPID) in relation to the ambitious aspirations behind the guideline and in that way develop a future research agenda aiming at addressing the main challenges regarding the construction of guidelines for future IC reporting. Design/methodology/approach – The purpose will be achieved by comparing the GIPID with two other IC guideline proposals, namely MERITUM and the Danish Guideline for Intellectual Capital Statements, respectively, from a capital market communication perspective and from a management control perspective. References are made to 12 Japanese companies that have published IP reports. The sample companies operate in a wide range of nine industries covering, for example, security, manufacturing, transportation, and chemistry, and comprise large as well as small firms. Findings – The study identifies four major challenges for intellectual capital guidelines and reporting. These challenges regard market communication, management control, uniqueness versus comparability, and confidentiality versus accountability. The paper concludes with a number of questions of vital importance for future research within the research area. Originality/value – This is one of the first papers that discuss the Japanese Guideline for Intellectual Property Information Disclosure as well as to compare it with similar European guidelines.
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The acquisition of knowledge and other intangible resources often underlies merger and acquisition strategies. Past streams of research regarding the effect intangible resources have on merger and acquisition performance have been fragmented and remained mutually exclusive of each other. Introduces, in an attempt to integrate these streams of research, the intellectual capital perspective and argues that core intellectual capital has to be at the root of high value synergies. With the help of a case study presents a framework that can be used to identify core intellectual capital. Then discusses the conditions surrounding the trade of intellectual capital and their effect on value creation prospects. Proposes that the value creation potential of synergies involving core intellectual capital is a function of the conditions for trading and leveraging intellectual capital and the transformation inertia associated with the trade.
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It is now generally believed, within the current literature, that an academic and practitioner focus on intellectual capital (IC) is important and that the measurement of a company's intangibles provides real business benefits. However, it is essential for researchers in the field of IC to be able to justify these newly formed theoretical assumptions through rigorous empirical testing. This paper reports on the results of a systematic investigation into the theoretical underpinnings of why firms measure their IC and existing empirical evidence that helps to prove that the measurement of IC is really worthwhile. The paper then critically reviews the state of research evidence in the field. The major finding of this paper is that the majority of research within the IC measurement field is at the theory building stage, and that very little of the proposed measurement theory has yet been fully tested. This paper outlines possible avenues scholars might pursue in order to further the development of the IC measurement field.
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Purpose – The elements that constitute the organizational capital or capital of the firm, namely its culture, structure, organizational learning, can be a source of competitive advantage. This paper is an attempt to assess organizational capital from the resource‐based view. Design/methodology/approach – From an extensive literature review, an assessment framework for intellectual capital is developed. Findings – By means of this framework organizational capital can be depicted as a set of: valuable assets; difficult to imitate; to replace; to transfer; with a prolonged life expectancy; and with a feasible rent appropriation. Originality/value – Building of such an evaluation framework allows further research about other components of the intellectual capital of the firm, bridging the literatures focused on the resource‐based view and on intangible assets or intellectual capital.
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Purpose – The purpose of this paper is to investigate the voluntary reporting of intellectual capital (IC) by listed companies in Australia and Hong Kong and to evaluate size, industry and time effects on IC disclosure levels. Design/methodology/approach – The study is an empirical one conducted in two stages. Stage one is an exploratory study of voluntary IC disclosure for the 20 largest listed Australian companies in 1998. Stage two, using 2002 data, examines voluntary disclosure of IC attributes for 50 listed entities in Australia and 100 in Hong Kong. Content analysis is used to collect data. Findings – Levels of voluntary IC disclosure are found to be low and in qualitative rather than quantitative form in both locations. Disclosure level is positively related to company size, a finding that is consistent with the previous literature on voluntary reporting. Research limitations/implications – External validity may be compromised somewhat by the relatively small sample size. Managers are not observed in the process of making decisions, so management intent is inferred. Practical implications – Documenting variations in types of reporting and in reporting frequency enables a greater understanding of why some companies voluntarily report whilst others do not. Such an understanding holds the potential to guide policy-makers, creditors and investors in giving prescriptions to firms over whom they have control or with whom they have dealings. Originality/value – This study is the first to comparatively examine the voluntary reporting of IC in a longitudinal setting using Australasian data.
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Purpose – The purpose of this article is to investigate empirically the relation between the value creation efficiency and firms’ market valuation and financial performance. Design/methodology/approach – Using data drawn from Taiwanese listed companies and Pulic's Value Added Intellectual Coefficient (VAIC™) as the efficiency measure of capital employed and intellectual capital, the authors construct regression models to examine the relationship between corporate value creation efficiency and firms’ market‐to‐book value ratios, and explore the relation between intellectual capital and firms’ current as well as future financial performance. Findings – The results support the hypothesis that firms’ intellectual capital has a positive impact on market value and financial performance, and may be an indicator for future financial performance. In addition, the authors found investors may place different value on the three components of value creation efficiency (physical capital, human capital, and structural capital). Finally, evidence is presented that R&D expenditure may capture additional information on structural capital and has a positive effect on firm value and profitability. Originality/value – The results extend the understanding of the role of intellectual capital in creating corporate value and building sustainable advantages for companies in emerging economies, where different technological advancements may bring different implications for valuation of intellectual capital.
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Biotechnology companies rely heavily on alliances with pharmaceutical companies to finance their research and development expenditures, and pharmaceutical firms rely heavily on alliances to supplement their internal research and development. Previous studies suggest that asymmetric information may lead to inefficient contracting. We examine the determinants of biotech-pharmaceutical deal prices to determine whether the market for deals between biotech and pharmaceutical companies functions as a well-informed market or whether it is characterized by asymmetric information. We find that inexperienced biotech companies receive substantially discounted payments when signing their first deal. Drugs that are jointly developed are more likely to advance in clinical trials than drugs that are developed by a single company, so the first-deal discount is not consistent with the post-deal performance of these drugs. We also find that biotech companies that sign deals receive substantially higher valuations from venture capitalists and from the public equity market, which implies that the discounts are rational; a biotechnology company that is developing its first product benefits from forming an alliance with a pharmaceutical company because it sends a positive signal to prospective investors.
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In the article, the authors develop a firm-specific measure of organization capital and estimate it for a sample of approximately 250 companies. They test the validity of the organization capital measure within a widely used investment valuation model and show that their organization capital estimate contributes significantly to the explanation of market values of firms, beyond assets in place and expected abnormal earnings (growth potential). The study examines whether capital markets are efficient with respect to organization capital, namely whether stock prices fully reflect the value of this resource. The study finds that while investors recognize the importance of organization capital, they do not fully factor its value into equity prices. The authors ascribe this fault or market inefficiency to poor disclosure of information about intangible capital.
Article
Purpose – The purpose of this paper is to investigate the voluntary reporting of intellectual capital (IC) by listed companies in Australia and Hong Kong and to evaluate size, industry and time effects on IC disclosure levels. Design/methodology/approach – The study is an empirical one conducted in two stages. Stage one is an exploratory study of voluntary IC disclosure for the 20 largest listed Australian companies in 1998. Stage two, using 2002 data, examines voluntary disclosure of IC attributes for 50 listed entities in Australia and 100 in Hong Kong. Content analysis is used to collect data. Findings – Levels of voluntary IC disclosure are found to be low and in qualitative rather than quantitative form in both locations. Disclosure level is positively related to company size, a finding that is consistent with the previous literature on voluntary reporting. Research limitations/implications – External validity may be compromised somewhat by the relatively small sample size. Managers are not observed in the process of making decisions, so management intent is inferred. Practical implications – Documenting variations in types of reporting and in reporting frequency enables a greater understanding of why some companies voluntarily report whilst others do not. Such an understanding holds the potential to guide policy‐makers, creditors and investors in giving prescriptions to firms over whom they have control or with whom they have dealings. Originality/value – This study is the first to comparatively examine the voluntary reporting of IC in a longitudinal setting using Australasian data.
Article
This chapter develops an economic approach to estimating the value of intangible assets that are not recorded on the firm's balance sheet. The authors demonstrate that their approach provides economically meaningful and useful estimates for the value of intangible assets. Their results indicate that investments in R&D, advertising, brands, and information technology are important drivers of intangible capital, and in turn corporate value. Their approach is shown to be useful to investors seeking information on future performance of intangible-intensive firms. They document evidence that the intangibles-based measures can effectively distinguish between overvalued and undervalued stocks. They believe the intangibles measures described here can add an essential, and hitherto missing, valuation tool for managers and investors concerned with intangible assets.
Article
All companies benefit from better understanding and managing their intangible assets. This is especially true for research-intensive enterprises dependent on non-physical resources and is why we have chosen to use the case of the R&D department of a pharmaceutical company to illustrate how to visualise the true value creating resources in an organisation. Using the resource-based view and the intellectual capital perspective, we discuss a powerful methodology for mapping both the tangible and the intangible resources of the firm and their interaction with one another. The methodology extends to assessing the effectiveness with which the resources are deployed as well as the robustness of the resources (according to criteria of adequacy, volatility, quality, usability and versatility), providing a foundation for competitive advantage. The case of the pharmaceutical company shows how the IC perspective helped enhance the long-term strategic focus of the R&D department and its shorter-term operational capability.
Article
Purpose The paper seeks to develop an original monetary model for evaluating employees of a company. Employees are an important element of the business process. However, apart from their role as a means of production, their value is not disclosed on the assets side of the classical balance‐sheet. Employees may be disclosed among the assets only if they are expressed in value terms. Therefore, the fundamental aim of the paper is to provide an appropriate monetary mode for valuating employees. Design/methodology/approach A descriptive approach is sued to identify the basic problems of existing monetary models for valuating employees. According to these findings a totally different approach is taken and an original dynamic model is developed to evaluate employees. Findings Existing criteria do not offer appropriate solutions for expressing the value of an employee in monetary terms. The model presented here efficiently overcomes most of the practical problems and can be used as an appropriate estimator of employees' value expressed in monetary terms. Research limitations/implications The model presented has not been sufficiently verified in practice. The model could prove to be directly applicable in those enterprises that would like to define the value of their employees. Originality/value The model presented is original and presents one possible approach to the solution of the problems mentioned above.
Article
Purpose This paper replicates and extends the Bontis research on intellectual capital (IC) disclosures in Canadian companies and also elaborates on the Beaulieu et al. research on disclosures by Swedish firms. Design/methodology/approach The paper studies IC disclosures by French CAC‐40, Dutch AEX and German XETRA‐DAX publicly‐listed companies for the years 2000 and 2001. The paper also discusses country‐specific arguments in favour of and against voluntary disclosure by such companies and searches both the annual reports and financial statements for IC hits. Findings Applying the Gray‐scale to categorise countries, the paper finds not only that voluntary IC disclosure significantly differs between these countries, but also that this difference can be explained by country‐specific regulation and auditor conservatism. Research limitations/implications The paper only studies Dutch, French and German IC disclosures in annual reports and financial statements. These three countries are European Union member states but “differ” significantly from one another. The differences discussed in this paper, however, are by no means exhaustive, nor do they picture the “European situation” in full. Practical implications The paper recognises that the intangible nature of IC creates tension with current country‐specific legislation and strongly calls for convergence of applicable accounting standards and practices because of the increasing importance of IC and because of the improvement of corporate governance and policy making. Originality/value The paper not only extends (or fine‐tunes) previous research, but also links with the literature that discusses the consequences of country‐specific characteristics for accounting standards and practices.
Article
Purpose This paper has two purposes: to identify and explain the major forces that are causing the increasing need for operational reporting and intellectual capital (IC) reporting for European companies; and to identify the necessary and sufficient conditions for operational and intellectual capital reporting if such reporting is to be meaningful for information users. Design/methodology/approach The approach for this paper has been to examine relevant papers, reports, guidelines, compendiums, annual reports, opinions, submissions and legislation. Findings Eight determining forces are identified that make the basis of the case for the provision of operating and IC information: the long‐standing global dominance and growth of the US economy; the emergence of business models other than the value chain (especially the emergence of network businesses); the changing nature of stock exchanges; the influence of different investment fund types (mutual, pension and hedge funds); the roles of buy‐side and sell‐side analysts; global and European investment index development; rating agency activity; and financial reporting and corporate governance regime development. Practical implications The eight forces are interdependent and immutable. Comprehensive operational and IC reporting are unavoidable. Accordingly, the authors propose that the necessary and sufficient conditions for adequate enterprise information reporting are: a legal requirement for mandatory operational and IC reporting and attendant regulatory framework(s) where the legal framework is based on the concept of neglect; key operating and IC resource status and activity performance definitions and metrics that reflect the enterprise's underlying business model(s); and (3) a mapping of the capitalized operational and IC investments that are by definition normally expensed to the financial report accounts. Originality/value The authors believe that no one has previously formally proposed a mandatory operational and IC reporting requirement; a legal reference frame of reference based on the legal concept of neglect; standard definitions for operational and IC performance metrics; a reference framework for information quality that is, inter alia , based on the consistency, comparability and comprehensiveness of reported metrics; and the requirement to map all capitalized IC resources back to the financial reports of the company.
Article
Purpose – The purpose of this paper is to show whether and how International Financial Reporting Standards (IFRSs) are able to improve the quality of financial accounting information concerning intangible assets. Design/methodology/approach – Being part of a wider project investigating the ability of IFRSs to improve accounting information concerning intangibles, this paper analyses the application of some IFRSs' key innovations to Telecom Italia. Considered innovations include two of the most relevant areas of change between Italian accounting principles to IFRSs, i.e. business combinations and accounting for intangible assets with indefinite useful life. Quality of accounting information is measured through four key parameters: correctness, transparency, prudence, and timeliness. Representation provided by Italian accounting principles and US GAAP of selected accounting events are compared in terms of the four key parameters, and differences in accounting information quality are systematically observed. Findings – The findings in this paper show that the use of value-based measures in accounting actually leads to an improvement in the overall quality of information, by increasing correctness and transparency and leaving prudence and timeliness nearly unchanged. These early findings seem to support the conclusion that the path chosen by accounting evolution is correct, although some critical areas still exist. Practical implications – The methodology proposed in this paper can represent a potential guideline for a wide range of researches concerning the quality of accounting information. Originality/value – This paper provides three main contributions: a complete and structured critical review of literature on the evolution of accounting on intangible assets; an innovative framework to measure the quality of accounting information; a first in-depth analysis of the key changes in accounting for intangibles induced by IFRSs on the balance-sheets of Italian companies (through the case study).
Article
Purpose This paper seeks to provide an empirical view of the present state of intellectual capital (IC) in Finnish companies. It also examines the relationship between the concepts value of IC and efficiency of IC. Design/methodology/approach Calculated Intangible Value (CIV), which measures the monetary value of IC, and Value Added Intellectual Coefficient (VAIC TM ), which describes how a company's IC adds value to the company, were applied to approximately 20,000 companies per year during the period 2001‐2003 and studied using correlation analysis. Findings Value and efficiency of IC are described in 11 industries in both SMEs and large companies. The theoretically unclear relationship between the value and efficiency of IC remains vague even after the empirical analysis. Calculating the value of IC in relative terms by dividing the value of a company's IC by the value of its tangible assets was found to be illustrative in comparing different industries. Research limitations/implications The measures used are based on financial statement information and their validity is questionable. However, the large set of data examined has a positive effect on the reliability of the study. Practical implications The results in this paper highlight the absolute or relative value, and thus importance, of IC for a company, depending on the industry. Originality/value The industry level analysis of IC and the implementation of scarcely used CIV measure in a large set of companies enhance the existing knowledge of the measurement of IC. The analysis of the relationship between CIV and VAIC TM measures has not previously been done.
Article
Purpose – This article aims to summarise a successful, pioneering prototyping project in Germany with IC statements, supported by the German Ministry of Labour and Economics (BMWA). Design/methodology/approach – A systematic process view method has been applied. A special impact scoring method generates a map, enabling management to determine where they should give executive priority for intellectual capital investment. Findings – Most of the participating companies would like to have a more standardized Wissensbilanz with indicators for added value in order to use the tool as a complimentary report (management report) for the purpose of external reporting as well as comparison. Originality/value – The project has now inspired some 100 enterprises of different types and is now spreading outside Germany.
Article
Purpose – The purpose of this paper is to highlight the salient features of the new accounting standards on impairment of goodwill and their practical applications. Design/methodology/approach – To ascertain the research gap, the existing literatures on the subject were critically reviewed and analysed. Objectives were set to identify the significant indicators of goodwill impairment. The areas covered include business combination and goodwill impairment, effects of new standards and current practices of goodwill impairment in the UK, etc. Findings – Goodwill is a unique intangible asset in that its cost cannot be directly associated with any specifically identifiable item and is not separable from the company as a whole. Well planned strategies for preventing goodwill impairment with long‐term perspective would contribute fruitful results. Originality/value – This study provides awareness to the readers about the strategies in dealing with goodwill impairment.
Article
The purpose of this research is to deal with the human capital disclosure issue of present accounting systems. Many companies nowadays derive their competitive advantages mainly from human capital. However, under generally accepted accounting principles, all human-related expenditures are treated as expenses, which are deductions of revenues, thus misleading decision-makers into inappropriate judgments. This paper provides an alternative way of measurement and disclosure of human capital items in financial statements. The paper defines and classifies the human capital of a company in line with a theoretical framework provided by the authors, sorts out company's human capital investments according to cost development stages in human resources, isolates human capital from expenses and finally suggests disclosure in financial statements.
Article
Purpose The aim of this paper is to discuss intellectual capital (IC) from a valuation perspective and examine the nature of such capital and why traditional valuation methods fail to reflect the unique characteristics of IC and propose an alternative approach that captures them. Design/methodology/approach The paper builds on the existing literature in the fields of financial valuation and IC. The analysis of these fields allows us to combine them and discuss the possible usage and limitations of real option models for the assessment of intellectual capital in firms. Findings A valuation perspective is developed based on the real option models that have been extended from their origin in financial asset valuation to the valuation of firms' growth opportunities. Intellectual resources embody these opportunities contributing to both their evolution over time and their realisation in future. A typology of IC is developed based on the influence upon the various valuation parameters of real options. This approach provides a richer framework to analyse the relationship between IC and corporate value. Practical implications Clarification of the relationship between IC and managerial flexibility as a source of value will help managers understand how they can create and leverage such flexibility to create value. The paper enables managers to understand how different types of IC impact on risk taking, timing of investment projects and the value of speculative investments. Originality/value The paper clarifies the nature of IC in the way it contributes to managerial flexibility to gain competitive advantage and exploit growth opportunities. It extends the real options valuation framework to the valuation of intellectual assets thus providing a link among intellectual assets, business strategy and firm value.
Article
Today’s measurement systems fail to adequately account for intellectual capital (IC) in a transparent yet comprehensive manner. In spite of many recent attempts to qualify and sometimes quantify intangibles, there exists as yet not one standardized system that is sufficiently developed and globally accepted. The aim of the present paper is to contribute towards the creation of such a system. The financial method of intangible assets measurement (FiMIAM) presented in this paper aims to overcome some of the weaknesses of recent methods of IC valuation, and contribute to the creation of complete balance-sheets, reflecting both the tangible and intangible assets of a company.
Article
The issue of goodwill has been debated in many countries throughout the world. Despite numerous efforts and the existence of accounting standards and exposure drafts issued by various professional bodies internationally, there is yet to be a universally accepted accounting treatment for goodwill. The opinion on this subject differs and changes frequently. The dichotomy of having to preserve prescribed recognition criteria on the one hand and the need to report useful information on the other has led to the many controversial issues debated on the subject of goodwill. This study centres around the international accounting treatment of goodwill in the past, present and future. This study reviewed some of the issues that surrounded the accounting for goodwill where it was found that goodwill accounting had faced many problems. Besides problems, this project also looks into the prospect of the accounting for goodwill in the cyberspace era and emergence of the knowledge-based economy. This study confirms that controversy remains internationally with no solution in sight in the foreseeable future internationally.
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This paper recognises the move towards making the disclosure of data concerning intangible resources a requirement. It sets down requirements for intellectual capital measurement systems that can be safely used by companies in disclosures and which are transparent and easily used by others. The paper argues that if rigour and safety comparable with ordinary financial disclosures is to be attained then only the rigour of measurement theory applied to intangible resources will suffice. Some existing methodologies are evaluated against the axioms of measurement theory. None evaluated so far are compliant.
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Purpose Specific asset recognition rules often bar expenses for research and development (R&D) from recognition on corporate balance sheets. This tangible‐intangible accounting asymmetry has led to the development of intellectual capital reports (ICRs) for intangibles in general and for R&D in particular. Thus, two dichotomous reporting formats coexist in corporate disclosure. The purpose of this article is to bring together more closely the information on project intangibles from R&D provided by voluntary and mandatory reporting systems. Design/methodology/approach The authors used an experimental case study approach in a joint research project with a non‐university research and technology organisation (RTO). The methods deployed in the project included semi‐structured interviews, Delphi techniques and normative reasoning. Findings The results show that it is possible to use financial reporting's systematic approach and typical layout to ally the presumed strengths of financial reporting (i.e. the existence of standardised ways of interpretation and an educated readership) and indicator‐based ICRs (i.e. the capability of capturing the generic features of innovation activity). Practical implications Given the predominance of financial reporting's educated readership, it is useful to produce voluntary disclosures in such a form that the information can easily be embedded in the overall picture painted by financial numbers. Originality/value Inductive‐analytical ICRs are typically not intertwined with financial accounting. The article elaborates on linkages between financial accounting and inductive‐analytical reporting models and proposes a classification scheme for project intangibles from R&D based on information reliability.
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Claims the greatest challenge facing the accounting profession is understanding the huge difference between its balance sheet and market valuation. This gap represents the core value of the company – its intellectual capital represented by brands, products, competitive advantage, patents, trade marks, customer relationships, R&D, human capital etc. The present financial accounting framework is criticised, especially in the USA and Europe, as inadequate and failing to communicate the most important assets and resources of today’s business, known as intangible assets or intellectual capital. As a result, there is a huge value gap and distortions between a business entity value as reported in the financial statements with the value put by investors on the stock market or even in merger and acquisitions cases. In the new knowledge economy (k-economy), knowledge rather than physical assets drives innovations, revenue and profits growth, and nurtures new competitive advantages. Looks at the challenges encountered by accounting and where it is heading in the k-economy environment.
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Purpose The purpose of this research is to assess the visibility of intangible assets on the balance‐sheet of pharmaceutical companies. Further, how these assets overlap with intellectual capital and whether a relation can be established between intangible assets and company performance. Design/methodology/approach Intangible assets reporting practices of a group of 52 globally operating pharmaceutical companies are analysed. These assets are related to intellectual capital definitions and company performance. Findings Results indicate that the majority of companies are specifying intangible assets and that a considerable overlap occurs with intellectual capital. Intangible assets may constitute substantially to the companies' assets. However, clear relations of intangible assets with company performance could not be established. Practical implications Imperfections in the reporting of intangible assets are observed. These are the non‐uniformity of generally agreed accounting principles and practice around the world, the specification of goodwill and the position of R&D. A number of proposals are put forward to improve the visibility of intangible assets and to bring these in line with intellectual capital definitions. Originality/value The value of the paper can be found in the approach to fulfil the ideal of intellectual capital valuation through the more practical way of intangible asset specification on the balance‐sheet. For the group of companies studied, this paper assesses the situation in 2003 and the way ahead to further improvement.
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Purpose The paper seeks to discuss empirically and contrast the hypothesis of the Theory of Intellectual Capital, which maintains that the difference between the market value of a firm and its book value can be explained exclusively in terms of internal, intangible assets that are peculiar to the firm. Design/methodology/approach The paper takes the form of a conceptual discussion, graphical analysis, basic descriptive statistics and basic correlational statistics. Findings Not all overvaluation of corporate assets can be explained by intangible assets of an internal nature. A significant portion can be explained by external factors, unrelated to the management of the firm, such as the general economic cycle or the sector of economic activity in which the firm is active. Hence, any economic importance that intellectual capital might hold for business management is bounded. Research limitations/implications The research is limited to the upper echelons of the largest US firms according to their ranking and the database of the Fortune 500 magazine. Subsequent phases in the research will attempt to observe other populations of firms. Practical implications The purpose of the new accountancy of the firm in the information and knowledge society must not be to balance financial positions with the market valuation of the firm. There are external factors that are beyond management's control. Prudent accounting practices preserve their value. Corporate leadership must focus its action on the internal assets that are open to management, on those that are a source of value creation. Originality/value This article reviews, discusses and empirically contrasts a fundamental hypothesis of the Theory of Intellectual Capital and points to a more reasonable path through which to establish the relation between intangible assets and the difference between the market value and the book value of a firm.
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The decision-free approach to the valuation of R&D projects is mathematically identical to a probability-adjusted sequence of real options, when systematic (or market) risk is set to zero. Besides adding confidence to the calculation, this observation allows a clean separation of the value contribution of the option to abandon contained in a stage gate approach plus the additional value gained from market risk (as measured by volatility). One consequence is to enable the risk-adjusted valuation of R&D projects on a compact and familiar set of variables: net present value, initial investment, and the estimated cost, duration and probability of success for each R&D stage. An estimate of the value of the project at the completion of each successive R&D stage is also a useful output of the method.
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Recently, with the emergence of technology-intensive venturing business and the advent of knowledge-based economy, social demands for technology valuation have increased. However, technology valuation in nature is an intractable task and existing methods for technology valuation are subject to drawbacks and limitations. The main objective of this research is to propose a new technology valuation method that generates monetary value, rather than score or index, based on the structural relationship between technology factors and market factors. The overall framework and detailed procedure of the proposed method are presented and a couple of exemplary cases are adopted to illustrate the practical application.
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The inefficient valuation of the intangible determinants of the financial position of business companies may result in significant damages for both, firms and their stakeholders. Based on the empirical literature in accounting and finance, this paper suggests possible reasons for the inefficient valuation of intangibles, provides explanations for the existence of biases in analysts' earnings forecasts and, proposes alternative ways for the improvement of the resource allocation mechanisms in the capital markets.
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This paper reviews the literature pertaining to the assessment of knowledge assets. Since knowledge assets are at the crux of sustainable competitive advantage, the burgeoning field of intellectual capital is an exciting area for both researchers and practitioners. Unfortunately, the measurement of such intangible assets is difficult. A variety of models have surfaced in an attempt to measure IC and this paper aims to highlight their strengths, weaknesses and operationalizations.
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The acquisition of privately held firms is a prevalent phenomenon that has received little attention in mergers and acquisitions research. In this study, we examine three questions: (1) What drives the acquirer's choice between public and private targets? (2) Do acquisitions of private targets elicit a more positive stock market reaction than acquisitions of public targets, which, on average, destroy value for acquirers' shareholders? (3) Do acquirers gain when their selection of a public or private target fits the theory? In this paper, we argue that the lack of information on private targets limits the breadth of the acquirer's search and increases its risk of not evaluating properly the assets of private targets. At the same time, less information on private targets creates more value-creating opportunities for exploiting private information, whereas the market of corporate control for public targets already serves as an information-processing and asset valuation mechanism for all potential bidders. Using an event study and survey data, we find that: (1) acquirers favor private targets in familiar industries and turn to public targets to enter new business domains or industries with a high level of intangible assets; (2) acquirers of private targets perform better than acquirers of public targets on merger announcement, after controlling for endogeneity bias; (3) acquirers of private firms perform better than if they had acquired a public firm, and acquirers of public firms perform better than if they had acquired a private firm. These results support the expectation that acquirer returns from their target choice (private/public) are not universal but depend on the acquirer's type of search and on the merging firms' attributes. Copyright © 2007 John Wiley & Sons, Ltd.
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This article describes Skandia's approach to measuring Intellectual Capital. As neither ‘human capital’ nor ‘structural capital’ are represented in traditional accounting systems, Skandia developed their own method for capturing the true value potential of the organization with the help of two models, the Skandia Value Scheme and the Skandia Navigator.
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Companies' financial statements no longer reflect the true value of the corporation. This is because of a widening gap between accounting book values and market values due to intangible assets such as brands not being disclosed. This paper argues that the definitional requirement for “transactions or events” appears to restrict their recognition, and therefore disclosure on balance sheets. It therefore proposes a rethink of the situation with the impetus coming from within the accounting profession.
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Human capital measurement and accounting has been under discussion for years without any satisfactory methodology emerging. The economic significance of today's knowledge-intensive organizations makes better HC measurement more pressing. We draw on insights from the knowledge-based theory of the firm and conclude we can only make sense of its human capital by looking in detail at its practices. Human capital is the value added at the level of the work practice—as traced by activity-base accounting. Overall the firm's human capital totals into its goodwill. The human capital can be estimated and then managed by allocating the goodwill to the activities taking place, a complex distribution process but one precisely complementary to that of activity-base accounting. q 2005 Elsevier Ltd. All rights reserved.
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A firm's prior knowledge facilitates the absorption of new knowledge, thereby renewing a firm's systematic search, transfer and absorption capabilities. The rapidly expanding field of biotechnology is characterised by the convergence of disparate sciences and technologies. This paper, the shift from proteinbased to DNA-based diagnostic technologies, quantifies the value of a firm's prior knowledge and its relation to future knowledge development. Four dimensions of diagnostic and four dimensions of knowledge in biotechnology firms are analysed. A simple scaled matrix method is developed to quantify the positive and negative heuristic values of prior scientific and technological knowledge that is useful for the acquisition and absorption of new knowledge.
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The research and development costs of 68 randomly selected new drugs were obtained from a survey of 10 pharmaceutical firms. These data were used to estimate the average pre-tax cost of new drug development. The costs of compounds abandoned during testing were linked to the costs of compounds that obtained marketing approval. The estimated average out-of-pocket cost per new drug is 403 million US dollars (2000 dollars). Capitalizing out-of-pocket costs to the point of marketing approval at a real discount rate of 11% yields a total pre-approval cost estimate of 802 million US dollars (2000 dollars). When compared to the results of an earlier study with a similar methodology, total capitalized costs were shown to have increased at an annual rate of 7.4% above general price inflation.
Article
Background: Accounting-based profits have indicated that pharmaceutical firms have achieved greater returns relative to other sectors. However, partially due to the theoretically inappropriate reporting of research and development (R&D) expenditures according to generally accepted accounting principles, evidence suggests that a substantial and upward bias is present in accounting-based rates of return for corporations with high levels of intangible assets. Given the intensity of R&D in pharmaceutical firms, accounting-based profit metrics in the drug sector may be affected to a greater extent than other industries. Objective: The aim of this work was to address measurement issues associated with corporate performance and factors that contribute to the bias within accounting-based rates of return. Methods: Seminal and broadly cited works on the subject of accounting- versus economic-based rates of return were reviewed from the economic and finance literature, with an emphasis placed on issues and scientific evidence directly related to the drug development process and pharmaceutical industry. Results: With international convergence and harmonization of accounting standards being imminent, stricter adherence to theoretically sound economic principles is advocated, particularly those based on discounted cash-flow methods. Researchers, financial analysts, and policy makers must be cognizant of the biases and limitations present within numerous corporate performance measures. Furthermore, the development of more robust and valid economic models of the pharmaceutical industry is required to capture the unique dimensions of risk and return of the drug development process. Conclusions: Empiric work has illustrated that estimates of economic-based rates of return range from approximately 2 to approximately 11 percentage points below various accounting-based rates of return for drug companies. Because differences in the nature of risk and uncertainty borne by drug manufacturers versus other sectors make comparative assessments of performance challenging and often inappropriate, continued work in this area is warranted.
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Intangible assets--patents and know-how, brands, a skilled workforce, strong customer relationships, software, unique processes and organizational designs, and the like--generate most of a company's growth and shareholder value. Yet extensive research indicates that investors systematically misprice the shares of intangibles-intensive enterprises. Clearly, overpricing wastes capital. But underpricing raises the cost of capital, hamstringing executives in their efforts to take advantage of further growth opportunities. How do you break this vicious cycle? By generating better information about your investments in intangibles, and by disclosing at least some of that data to the capital markets. Getting at that information is easier said than done, however. There are no markets generating visible prices for intellectual capital, brands, or human capital to assist investors in correctly valuing intangibles-intensive companies. And current accounting practices lump funds spent on intangibles with general expenses, so that investors and executives don't even know how much is being invested in them, let alone what a return on those investments might be. At the very least, companies should break out the amounts spent on intangibles and disclose them to the markets. More fundamentally, executives should start thinking of intangibles not as costs but as assets, so that they are recognized as investments whose returns are identified and monitored. The proposals laid down in this article are only a beginning, the author stresses. Corporations and accounting bodies should make systematic efforts to develop information that can reliably reflect the unique attributes of intangible assets. The current serious misallocations of resources should be incentive enough for businesses to join--and even lead--such developments.
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This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. Intangible assets are both large and important. However, current financial statements provide very little information about these assets. Even worse, much of the information that is provided is partial, inconsistent, and confusing, leading to significant costs to companies, to investors, and to society as a whole. Solving this problem will require on-balance-sheet accounting for many of these assets as well as additional financial disclosures. These gains can be achieved, but only if users of financial information insist upon improvements to corporate reporting.
The financial value of intangibles: searching for the holy grail”, paper presented at the 5th World Congress on the Management of Intellectual Capital
  • D Andriessen