The Effect of Intellectual Capital on Market Valuation for Firms Listed in the Nairobi Securities Exchange

Abstract

Intellectual capital can be viewed as a resource of knowledge available on the company that produces high-value assets and economic benefits in the future for the company. There has been a lot of interest on intellectual capital at both theoretical and empirical levels. Theorists have identified three components of intellectual capital, namely: human capital, structural capital and customer capital. There has been consensus from empirical review of previous studies that intellectual capital has positive impact on productivity and profitability of a firm. However, there has been conflicting findings and conclusions thereon on the effect of intellectual capital on the market value of a firm. This study sought to establish the effect of intellectual capital, both as an aggregate and as disintegrated into its three components, on the market value of firms listed in the Nairobi Securities Exchange (NSE)

Data was obtained from 34 firms that had been listed in the NSE from 2003 to 2012 and those that had their financial year ending on 31st December. Pulic, (2000) Value Added Intellectual Coefficient model (VAICTM) was adopted as to measure the intellectual capital indicator. Multiple linear regressions and correlation analysis were applied to analyse the data.

The major findings from the analysis of the data collected were that there is a positive relationship between intellectual capital as a whole and in individual components on the market value of firms listed in the NSE. It was thus concluded that intellectual capital has a positive effect on the market value.

From the findings and conclusion thereon, it is recommended that there should increase in investment in intellectual capital. Firms should focus on enhancing the capacity of their human capital which was found to have the highest effect on the market value. They should enhance their structural capital by ensuring that they have proper systems and procedures by which to track their actions. Customer capital should also be enhanced by endeavouring to satisfy customer needs.

This study suggests a further research on the effect of intellectual capital on growth of firms listed in the NSE and Kenyan economy.