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The Measurement of Firm-Specific Organization Capital

Author

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  • Baruch Lev
  • Suresh Radhakrishnan

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.

Suggested Citation

  • Baruch Lev & Suresh Radhakrishnan, 2003. "The Measurement of Firm-Specific Organization Capital," NBER Working Papers 9581, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9581 Note: EFG
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
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    4. Andrew Atkeson & Patrick J. Kehoe, 2002. "Measuring Organization Capital," NBER Working Papers 8722, National Bureau of Economic Research, Inc.
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    6. Charles R. Hulten, 2000. "Total Factor Productivity: A Short Biography," NBER Working Papers 7471, National Bureau of Economic Research, Inc.
    7. 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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    9. 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.
    10. 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.
    11. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-461, June.
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    Citations

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    Cited by:

    1. Arrighetti, Alessandro & Landini, Fabio & Lasagni, Andrea, 2014. "Intangible assets and firm heterogeneity: Evidence from Italy," Research Policy, Elsevier, vol. 43(1), pages 202-213.
    2. repec:wsi:rpbfmp:v:09:y:2006:i:04:n:s0219091506000860 is not listed on IDEAS
    3. 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.
    4. repec:wsi:ijitmx:v:03:y:2006:i:03:n:s021987700600079x is not listed on IDEAS
    5. Spyros Arvanitis & Euripidis N. Loukis & Vasiliki Diamantopoulou, 2013. "Are ICT, Workplace Organization and Human Capital Relevant for Innovation?," KOF Working papers 13-333, KOF Swiss Economic Institute, ETH Zurich.
    6. 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.
    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. Margit Osterloh & Bruno Frey, 2006. "Shareholders Should Welcome Knowledge Workers as Directors," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 10(3), pages 325-345, September.
    9. Roth,Felix & Thum, Anna-Elisabeth, 2010. "Does intangible capital affect economic growth?," CEPS Papers 3667, Centre for European Policy Studies.
    10. 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).
    11. repec:wsi:jikmxx:v:12:y:2013:i:04:n:s0219649213500317 is not listed on IDEAS
    12. Spyros Arvanitis & Euripidis N. Loukis, 2009. "Employee education, information and communication technology, workplace organization and trade," KOF Working papers 09-234, KOF Swiss Economic Institute, ETH Zurich.
    13. Bronwyn H. Hall, 2006. "R&D, productivity and market value," IFS Working Papers W06/23, Institute for Fiscal Studies.
    14. 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.
    15. Margit Osterloh & Bruno S. Frey, "undated". "Shareholders Should Welcome Employees as Directors," CREMA Working Paper Series 2005-02, Center for Research in Economics, Management and the Arts (CREMA).
    16. repec:eco:journ1:2017-04-64 is not listed on IDEAS
    17. Tomohiro Yamaguchi, 2014. "Intangible Asset Valuation Model Using Panel Data," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 21(2), pages 175-191, May.
    18. Verbic, Miroslav & Polanec, Sašo, 2011. "Innovativeness and intangibles in transition: the case of Slovenia," MPRA Paper 32127, University Library of Munich, Germany.
    19. repec:wsi:rpbfmp:v:11:y:2008:i:02:n:s0219091508001301 is not listed on IDEAS
    20. 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.
    21. 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.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General

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