The relationship between profitability and intellectual capital by using public and Huang

The aim of this study was to examine the relationship between intellectual capital and profitability models of Huang and Wang and Paulic in listed companies in Tehran Stock Exchange for the period 2007 to 2011. So, after reviewing literature review of this field of study, needed data from financial statements of 82 companies are extracted. Then by obtained data, we evaluate the regression model to explain the variable effects of intellectual capital. The results show that both interfaces of intellectual capital are a significant positive relationship with corporate profitability. Keyword: Intellectual Capital, Profitability, Huang and Wang Model, Paulic Model O R IG IN A L A R T IC L E R e ce ve d 2 5 Ju l. 2 0 1 3 A ce p te d 0 5 A u g . 2 0 1 3 INTRODUCTION Capital, in the business context, refers to any asset that will produce future cash flows. The most wellknown asset types are tangible in nature. Tangible capital therefore refers to the physical and financial assets of the organization. The value of such assets is disclosed periodically (by publicly listed companies) and can be found easily on the balance sheet of the Company’s financial records. Physical assets can mean land, machinery, inventory, plants, trucks, etc. whereas financial assets refer to the shareowners equity, retained earnings, working capital, prepaid expenses, accounts receivables, etc. Intangible assets on the other hand, such as the skills of the workforce and its organization, are increasingly becoming important towards determining future profits. However, they are much harder to determine, harder still to quantify into a value and therefore are never reported. Hence these types of assets remain largely invisible to the external world – and more often than not to insiders as well. Although Intellectual Capital is similar to tangible assets in its potential for generating future cash flows, it is radically different from tangible capital in the following respects: • Intellectual assets are non-rival assets. Unlike physical assets which can only be used for doing one thing at a time, intellectual assets can be multiplexed. For example, a customer support system can provide support to thousands of customers at the same time. It is this ability to scale with need that makes intellectual assets far more superior to physical assets. • Human Capital and Relational Capital cannot be owned, but have to be shared with employees and suppliers and customers. Growing this kind of capital therefore requires careful nurturing. • Structural capital is an intangible asset that can be owned and controlled by managers. However, it cannot be traded easily since no markets exist for this purpose. Moreover, Customers do not care about the Structural capital of their Suppliers since everyone likes dealing directly with real human beings rather than with systems. • Structural capital, in the form of just-in-time procurement processes and real time inventory control systems can be substituted for expensive capital expenditure such as storage warehouses. Hence the knowledge economy has opened up opportunities for every firm to explore whether inexpensive intangible assets can do the work of costly physical assets. • Firms that leverage their intellectual capital to do knowledge work are able to generate higher margin of profits than those who provide mass-produced solutions. • Human, Structural and Relational Capital often work together in judicious combinations to give rise to core competencies that assume strategic significance. Hence it is not enough to invest in people, systems and customers separately, but in combinations that produce end value. Intellectual Capital should be measured to: A review of over 700 papers that studied Intellectual Capital measurement related issues found five generic reasons as the purpose of measuring Intellectual Capital: © 2013, Science-Line Publication www.science-line.com ISSN: 2322-4770 Journal of Educational and Management Studies J. Educ. Manage. Stud. , 3(4): 520-524, 2013 JEMS J. Educ. Manage. Stud. , 3(4):520-524, 2013 521 • To help organizations formulate their strategy • To evaluate strategy execution • To assist in the firm’s diversification and expansion decisions • For use as a basis for management compensation • To communicate with external shareholders The first three of these purposes relate to internal decision making the purpose is maximizing operating performance for generating revenues at the lowest cost and the sustainability of supplier and customer relations and market share. The fourth point relates to the executive incentive scheme and the fifth relates to signaling motivations to external stakeholders. There are various other studies that have concluded likewise that Intellectual Capital measurement is necessary and beneficial for both efficient internal governance and succinct external communications. If the primary objective of all for-profit companies is to effectively manage their future cash flows, then they need to manage the ultimate drivers of these cash flows – the intangible assets. Since you cannot manage what you cannot measure, their measurement becomes quite important, if not absolutely necessary. Literature review As identified by Petty et al. (2000), the literature offers several definitions of intellectual capital. Some of them consider intellectual assets as synonymous to intellectual capital and most of them take a strategic view (Edvinsson et.al 1996; Brooking 1997; Edvinsson 1997; Edvinsson et al. 1998; Stewart 1997; Nasseri 1998; Ulrich 1998; CMA 1998; ASCPA and CMA 1999; Knight 1999). In the previous intellectual capital literature the level of firm has been the focus, rather than at individual or stakeholder level (Quintas, et.al 1997). In the wider literature there has been considerable debate about the interaction between individuals and the organization. Hollis (1994) takes the view that the firm is more than a mere sum of individuals whose behavior can only be explained by their function in the whole. However, according to new intellectual capital (such as knowledge) always begins with the individual. In Japan, where individualism is viewed strongly, the mechanisms to promote workers’ intellectual skills are evaluated individually for their compensation Also, research indicates that personal qualities such as persistence are positively related to the learning of the firm (Argote et.al 1998). This notion is further supported by other research that demonstrates that individuals who engage in their activities and situations for its own sake, can be intrinsically rewarded by them (Csikszentmihalyi, 1975) and achieve extraordinary results by entering into the neurobiology of excellence (Goleman, 1995). Abeysekera (2001) suggests that if knowledge is well managed, then value is added via intellectual assets and if it is badly managed, this may lead to intellectual liabilities. Unlike the previous review by Petty et.al (2000) we recognize the existence of intellectual liabilities in the constitution of intellectual capital and therefore in ICR. Therefore, in summary, Petty et.al (2000) does not define Intellectual capital (IC) and there appears to be a silence in the literature on its meaning. However, CPA accounting handbook defines general purpose financial reporting (GPFR) as a financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs (ASCPA, 1999). Using the definition of GPFR as a basis, IC can be defined as a report intended to meet the information needs common to users who are unable to command the preparation of reports about intellectual capital tailored so as to satisfy, specifically, all of their information needs. Hypothesis: 1) There is a significant relationship between Hwang and Wang model of intellectual capital and performance. 2) There is a significant relationship between Paulic model of intellectual capital and performance. MATERIALS AND METHODS The purpose of this research is applied research, and its nature is experimental. Which seeks to explain the relationship between intellectual capital and corporate profitability indicator variables using a multivariate regression model? In this study to test the hypothesis of A Pooled Cross sectional Ordinary Least Squares (OLS) Regression is used. Population and sample Interval of time of this study is 2007 to 2011. And the statistical society of this study is companies listed in Tehran Stock Exchange. Companies in terms of increase compared to the end of the financial period to March due to the specific nature of the activity, financial institutions are not part of the banking industry. According to the above criteria, 82 companies were selected for this stud as sample of this study. Variables Profitability: Net operating income is the dependent variable, which is calculated by adding depreciation to operating profit. Intellectual Capital: To define intellectual capital as an independent variable in the model is used. Hajmohammadi et al., 2013 522 According to the model, the intellectual capital, human capital, communication, innovation and practices is as follows (: In this equation we have: