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The Role of the Economic Value Added Measure and Intellectual Capital in Financial Intermediations Market Value in Tehran Stock Exchange (Tse)

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The Role of the Economic Value Added Measure and Intellectual Capital in Financial Intermediations Market Value in Tehran Stock Exchange (Tse) Australian Journal of Basic and Applied Sciences, 5(12): 1926-1933, 2011 ISSN 1991-8178 The Role of The Economic Value Added Measure and Intellectual Capital In Financial Intermediations Market Value In Tehran Stock Exchange (Tse) 1Shokufeh Etebar, 2Roya Darabi 1Sama Technical and Vocational Training College, Islamic Azad University, Karaj Branch, Karaj, Iran. 2Department of Accounting and Management, Islamic Azad University, South Tehran Branch, Tehran, Iran. Abstract: Firms' values are result in financial capital value and intellectual capital. Despite the importance of intellectual capital, by the principles of accounting but also, intellectual capital used in companies in the financial reporting of Iran are not presented. Goals research is review Evaluation of corporate valuation and study the effect of EVA, residual earning calculated by accounting standards and component of IC in market value of firms. The population of the financial intermediation industry with 25 companies in Iran, About 21 companies in the group Banks, credit institutions and other financial institutions, other financial intermediation, investment and monetary intermediation in Models were tested in the study, the results at the confidence level of 95%, indicate that: There is no significant difference between research models, for the capacities to explain variations in firms' market value, if the proxy variable of intellectual capital is not added. The capacity of residual income calculated by EVA to explain variations in a firm's market value will be significantly greater than residual income calculated by generally accepted accounting principle of Iran to explain variations in a firm's market value if the proxy variable of intellectual capital is added. Key words: economic value added, intellectual capital, market value of financial intermediations, Tehran Stock Exchange (TSE). INTRODUCTION The participants in capital markets are deeply concerned with the performance and valuation of firms. The development of the knowledge economy coupled with rising globalization, market liberalization and increased competition has pushed many firms to invest in innovation and in value creation activities, such as research and development, manpower training, new technology acquisition or advertisement, etc. in order to sustain their leadership in the market. However, intangible assets that result from these values added investments. Such as brand loyalty, human resources, sales channels, etc, are seldom recognized in balance sheets. Under current Generally Accepted Accounting Principle (GAAP) much of those expenditure are immediately expensed, since their economic benefits are highly uncertain and are difficult to measure. Such accounting procedures cause traditional accounting measurements to deviate from the real economic situation and consequently to reduce the usefulness of the information provided by such financial statements (Lev and Zarowin, 1999; Bradley, 1997). Found that many firms which engage heavily in knowledge- based innovation activities tend to have clear gaps or differences between their book values and their market values. Ohelson (1995) proposed a residual income valuation model, in which the market value of a firm can be determined by its book value, by the discounted value of its expected future abnormal earning and other information. Some accounting items in the financial statements are adjusted to present the firms whole economic value and shareholders value is increased only after its earnings exceed its cost of capital. Roos et al. (1998) argued that a value of firm is determined by its traditional physical capital, its financial capital and its intangible intellectual capital. Lev (2001) suggested that the physical and financial assets of firm can only generate normal Earnings; abnormal earnings are created through the development of intangible assets. Lev stated that if the intellectual capital of knowledge- intensive firms is not properly accounted for in the financial statements, their cost of capital will be over charged and their value systematically undervalued, which will hinder the investment and growth of those firms. In research, the valuation model used or employed will adjust accounting earnings for equivalent equity reserves and for the cost of equity capital. This means that we will, in effect, be using EVA to reflect the economic value of the firm. Corresponding Author: Shokufeh Etebar, Sama Technical and Vocational Training College, Islamic Azad University, Karaj Branch E-mail: [email protected] 1926 Aust. J. Basic & Appl. Sci., 5(12): 1926-1933, 2011 Literature Review: Since (Ball and Brown, 1968; Beaver, 1968) emphases for usefulness accounting information to investors in the capital market. Prior research results generally find accounting earnings are positively related to stock returns. But Lev and Zarowin (1990) found that the usefulness of financial information has been decreasing in the past, the main reason they argue being that financial information cannot fully reflect major changes in a firms operating activities. Lehn and makhija (1996) and Mouritsen1998 asserted where capital is derived from adjusting certain items on the balance sheet to more closely reflect the real cash flows invested. Firm risk and value creation ability of the firm better than the accounting earnings. Chen and dod (1997) investigation, showed that accounting measurements are still in the process of holding companies with the importance and EVA, more information than the operating profits in the evaluation of the firms, does not provide. Donnell et al. (2003) adopted a case study approach to measure how much value firms place on intellectual capital. In the research Huang and Wang (2008), result show residual income based on eva is no better than that based on current GAAP in capacity to explain variations in a firm's market value. And intellectual capital does provide incremental information for the evaluation of stocks. The study jHv H de Wet (2004) found stronger relationship between market value added and cash flow from operations. Result does not to superior to traditional accounting measure (EVA) in driving shareholder value. The EVA of a company is currently acknowledged as a single, most appropriate internal measure of corporate financial performance. Those studies investigate how existing management accounting and financial management techniques can be adjusted to incorporate the EVA Perspective. It also applies these adjusted techniques to a company listed on the JSE securities exchange south Africa. (JHv H de Wet and FJ de Hart, 2010). The purpose of study Chen et al. (2005) is to investigate empirically the relation between the value creation efficiency and firms' market valuation and financial performance. The result extend the understanding of the role of intellectual capital in creating corporate value and building sustainable advantages for companies in emerging economies, where difficult technological advancements may bring different implications for valuation of intellectual capital. Also, JH de Wet and JH Hall (2011) evaluate with combining a variable costing approach with leverage analysis and value analysis opens up new opportunities to investigate the effect of certain decisions on the MVA and the share price of a company with a spreadsheet model to illustrate what the relationship between EVA, MVA and leverage and to determine what impact changes in any variable like sales or costs will have on the wealth of shareholders. Kalyta (2010) investigate impact on measure of firm value in the sample of 3667 public U.S, firm consistent with the prediction, the number of directors-scientists has a positive impact on the firms Q and stock returns in knowledge-intensive sectors. Appointing a scientist to the board raises the stock price in a three- day window around the nomination announcement by 1% and leads to abnormal returns of 2.5% over the 12-month post-event period. The Relationship Between Intellectual Capital and Economic Value Added: Therefore, the effect of intangible assets (intellectual capital) and economic value added on the market value of firms in various industries including financial intermediation industry, for regard to affect that have EVA and IC on the market value of the organizations. Research in mind, will be necessary with review the role and necessity reporting EVA and IC criteria, that in the traditional reporting in Iran and are not presented in the form of financial statements. Research Goals: 1. Models to evaluate the company's value, by three factors: Book value, Economic value added, Intellectual capital is determined. 2. The Accuracy of the value calculated by the accounting book value and earnings under accounting standards Iran is measured. 3. Ability or Power residual income calculated by the measure EVA with Ability or Power residual income calculated by accounting standard of Iran, in predicting or explain the difference in market value is compared. 4. Assessing improve the provision of information about intellectual capital reflected in the financial statements by listed companies in Tehran Securities and Exchange Commission 5. Assessing the impact of knowledge management and intellectual capital on firms' value. 1927 Aust. J. Basic & Appl. Sci., 5(12): 1926-1933, 2011 Hypotheses Development: Today, more intangible assets will be considered by investors. Bose (2008) Intellectual capital is appeared an important value driver in today s organizations as business and economy.
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