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The Measurement of Firm-Specific Organization Capital

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  • Baruch Lev
  • Suresh Radhakrishnan
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    Abstract

    We develop a firm-specific measure of organization capital and estimate it for a sample of approximately 250 companies. We test the validity of the organization capital measure within a widely used investment valuation model and show that our organization capital estimate contributes significantly to the explanation of market values of firms, beyond assets in place and expected abnormal earnings (growth potential). We then examine whether capital markets are efficient with respect to organization capital, namely whether stock prices fully reflect the value of this resource. We find that while investors recognize the importance of organization capital, they do not fully factor its value into equity prices. We ascribe this fault or market inefficiency to poor disclosure of information about intangible capital.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9581.

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    Date of creation: Mar 2003
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    Handle: RePEc:nbr:nberwo:9581

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    1. Louis K. C. Chan, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.
    2. Rosen, Sherwin, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 366-82, August.
    3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    4. Charles R. Hulten, 2000. "Total Factor Productivity: A Short Biography," NBER Working Papers 7471, National Bureau of Economic Research, Inc.
    5. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-61, June.
    6. Andrew Atkeson & Patrick J. Kehoe, 2002. "Measuring Organization Capital," NBER Working Papers 8722, National Bureau of Economic Research, Inc.
    7. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    8. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
    9. Bronwyn H. Hall., 1993. "Industrial Research During the 1980s: Did the Rate of Return Fall?," Economics Working Papers 93-217, University of California at Berkeley.
    10. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
    11. Brown, Stephen & Lo, Kin & Lys, Thomas, 1999. "Use of R2 in accounting research: measuring changes in value relevance over the last four decades," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 83-115, December.
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    Cited by:
    1. Margit Osterloh & Bruno S. Frey, . "Shareholders Should Welcome Employees as Directors," IEW - Working Papers 228, Institute for Empirical Research in Economics - University of Zurich.
    2. Arvanitis, Spyros & Loukis, Euripidis N., 2009. "Information and communication technologies, human capital, workplace organization and labour productivity: A comparative study based on firm-level data for Greece and Switzerland," Information Economics and Policy, Elsevier, vol. 21(1), pages 43-61, February.
    3. A. Arrighetti & F. Landini & A. Lasagni, 2011. "Intangible assets and firms heterogeneity: evidence from Italy," Economics Department Working Papers 2011-EP02, Department of Economics, Parma University (Italy).
    4. Wilson, Daniel J., 2009. "IT and Beyond: The Contribution of Heterogeneous Capital to Productivity," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 52-70.
    5. Spyros Arvanitis & Euripidis N. Loukis & Vasiliki Diamantopoulou, 2013. "Are ICT, Workplace Organization and Human Capital Relevant for Innovation? A Comparative Study Based on Swiss and Greek Micro Data," KOF Working papers 13-333, KOF Swiss Economic Institute, ETH Zurich.
    6. Dieter Sadowski & Oliver Ludewig, 2003. "Organisational Capital: The Power of an Economic Metaphor: Organisational Capital in German Establishments," IAAEG Discussion Papers until 2011 200302, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    7. Alok Johri, 2009. "Delivering Endogenous Inertia in Prices and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 736-754, October.
    8. Ruy Lama & Juan Pablo Medina, 2012. "Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 5-46, March.
    9. Roth,Felix & Thum, Anna-Elisabeth, 2010. "Does intangible capital affect economic growth?," CEPS Papers 3667, Centre for European Policy Studies.
    10. Verbic, Miroslav & Polanec, Sašo, 2011. "Innovativeness and intangibles in transition: the case of Slovenia," MPRA Paper 32127, University Library of Munich, Germany.
    11. Bronwyn Hall, 2006. "R&D, productivity and market value," IFS Working Papers W06/23, Institute for Fiscal Studies.
    12. Spyros Arvanitis, 2005. "Computerization, workplace organization, skilled labour and firm productivity: Evidence for the Swiss business sector," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 14(4), pages 225-249.
    13. Spyros Arvanitis & Euripidis N. Loukis, 2009. "Employee Education, Information and Communication Technology, Workplace Organization and Trade: A Comparative Analysis of Greek and Swiss Enterprises," KOF Working papers 09-234, KOF Swiss Economic Institute, ETH Zurich.

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