The Contribution of Intangibles To The Value Creation PDF

Journal of Business Studies Quarterly
2013, Volume 5, Number 1 ISSN 2152-1034
The Contribution of Intangibles to the Value Creation
Maha BEN TANFOUS

Faculty of Economic Sciences and Management
University of Tunis El Manar
Adresse: B.P 248 El Manar II, 2092, TUNIS, TUNISIA
E-mail: maha_bentanfous @yahoo.fr
Abstract
This research aims to demonstrate that the combination of intangible assets leads to more value
creation than the partial contribution of each of them. Our study observed a sample of 252 non-
financial French companies listed on the Paris Stock Exchange over the period 1999-2007. This
sample is subdivided into three groups: industrial, service and technology sector. The results
indicate firstly that the manufacturing companies are more involved in intangible activities
followed by the service companies. Secondly, the relationship between intangible expenses and
value creation (market capitalization) is non-linear (U inversed). Finally, the integration of the
different immaterial assets contributes more to the value creation.
Keywords: intangible assets, research and development, advertising, incentive schemes,

employee training, market capitalization, curvilinear link, optimal value of immaterial expense.
1- Introduction
With the globalization, the emergence of new information technologies and the
intensification of competition, the economic value of a company reflect to a large part its
intangible assets. This phenomenon has led to a radical change of the corporate strategies by
neglecting the traditional manufacturing for the benefit of new activities based largely on
research and development, patents, software, human resources, as well as new organizational
structures.
Taking into account the increased importance of intangible investments in recent years,
more and more companies resort to the publication of the components of their intangible capital.
Indeed investors react positively to the announcement of this type of investment. For example,
Chan.H (1990) demonstrated that the announcement of R&D investment leads to a significant
increase in the stock return, Frieder and Subrahmanyam (2005) found that investors favor the
shares of known firms, finally Hanssen and Joshi (2009) point out that the advertising of a new
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product led to the increase in the stock price. These different researches confirm that the reaction
of investors is not neutral towards the intangible investments.
In this context, our study question is the following: At what level the intangibles are a
source of value creation? To answer this question, we have set two objectives: The first consists
in determining the critical threshold beyond which the intangible capital, namely, research and
development, advertising, incentive schemes and training employees does not create value. The
second focuses on showing that the combination of these four elements together led to the
improvement of their contribution in the value creation.
For the purpose to achieve our goal, this paper is organized as follows. First we look at
the studies that will be the basis for the formulation of our research hypotheses. Second, we
describe the methodology of our work by providing the database, the definition and the variables
measurement. Next we expose the results and the interpretation of the models estimation. Finally
we conclude with some suggestions for future research.
2 - Background and hypothesis formulation
Before starting the study of previous research on the contribution of the intangibles, we
give an overview of the definition and the evaluation of this concept. For a long time economists
and managers are attempting to identify the various aspects of the concept of intangible
investment.
Lacroix.M (1997, p.63) considers the intangible investment as « a virtual stream,

generating complex effects ranging from the power of knowledge to the birth of practical
achievement». By this definition, the author points out its dynamic nature, its cumulative and
virtual character. To clarify the outlines of this concept, Epingard.P (1998) defines it as « a
detour by which the knowledge production is permanently incorporated into objects, men and
organization ».
At this level, the question that arises is what it refers to intangible investment or rather
expenditure intangible? By focusing on a point of view manager, Martory.B and Pierrat.C (1996)
describe investment as « a current commitment of the company's resources which is done with
the aim of a greater future profit» . Therefore, the implementation of the material equipments
and/or the material production justify the qualification of tangible investment. On the other hand,
in the immaterial domain, if the spending is marginal in the productive process (complementary
way to the realization of a project of investment) it cannot be qualified as intangible investment.
It is rather about immaterial expenses with which the leading part is to accompany tangible
investments. It is from the effects of the immaterial spending that these authors envisage their
qualification of intangible investment.
This analysis of the definition of the intangible investment is shared by other authors.
Ochs P (1995) considers intangible investment as a « dynamic intangible investment which
incorporates a share of dominant knowledge that contributes in a specific or in a process way to
the competitiveness and to the company value». It seems to be interesting; to enumerate the
characteristics of intangible investment, particularly at the level of its effects. These last can be
isolated or considered in a process chain. In the first case, it is the specific contribution but in the
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second case, it is the interrelationship with other investments (or means implemented in the
productive process).
Previous definitions allow us to understand the different reflections conducted by

researchers. However, the presentation of typologies of the intangibles is an important step to the
realizing of the contours of these assets. In the literature, there are several typologies of the
immaterial: Classification by type of activity [OECD: Organisation for Economic Co-operation
and Development], Classification by function [Bounfour.A (1998)], Classification by the degree
of measurement [Martory.B et Pierrat.Ch (1996)] and Theories based on resources [Grant
(1991), Tézéna.S et Montcel.H (1993), Thévenard C. (1997), etc.].
During the rest of this section, we examine the empirical research reviewing the
contribution of the immaterial to the value creation. We are particularly interested in research
and development, advertising, incentive schemes and training employee. Our motivation for the
choice of these assets is driven by the following factors. First, research and development are
considered as an indicator of innovation, then advertising allows the company to create its brand
image and therefore guarantee its reputation and finally the participation and training are
approached as an indicator of favorable social environment within the company (motivation and
good integration of employees in their workplaces).
To study the contribution of the immaterial to the value creation, the majority of studies
use the market capitalization, market-to-book ratio or the price-to-book ratio as indicators of
wealth creation.
2.1- Contribution of research and development to the value creation
Green, Stark and Thomas (1996) have adopted the following assessment approach: the
market value of the company is expressed as the sum of the book value plus the sum of the
discounted residual benefits [Kay (1967), Peasne (1981), Stark (1986) and Ohlson (1989)]. The
fundamental model expresses the market-to-book ratio based on residual income and R&D
expenditures. These authors introduce other control variables for better explain the connection
between the value of the firm and the R&D investments. Among these variables, there are
market share, concentration index (industrial concentration), the debt ratio (debt/equity) and the
risk factor.
Using the ordinary least square method, the estimation indicates that the coefficients of
variables residual outcome (RIit) and R&D expenditures (RDit) are positive and statistically
significant over the study period. In effect, the introduction of control variables (for example the
market share of the undertaking, the debt ratio…) does not alter the previous findings since they
contribute less to the explanation of the market value of the company. Another result involves
the life expectancy of the R&D (The period between the year of establishment of the R&D and
the year where they start to generate revenue) which varies from three to five years. This result
affirms that the durability of the R&D is usually long but it depends on the nature of the firm
activity and the market structure. In the English market it varies from three to five years [Green,
Stark and Thomas (1996)] while in the American marketplace, it varies from five to nine years
[Lev and Sougiannis (1996)].
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Stern and Stewart (1999) conducted a study on 300 companies listed in the stock
exchange of Great Britain. The objective of this study is to explore the correlation between the
increase of R&D expenditures and the market value added (MVA). The results vary from one
sector to another. Indeed, for the pharmaceutical, electronic and mechanical industry, the R&D
contributes favorably to the value creation (correlation coefficient is positive and significant) but
in other sectors such as textile and construction materials sector, the correlation is negative.
At this level, the question that arises is: why R&D creates value for some sectors but it
destroys value for other sectors? To study the contribution of R&D to the value creation, Stern
and Stewart (1999) analyze the rapport between R&D spending; market value added (MVA) and
economic value added (EVA). They have divided the sample of companies into two groups. The
first one is more implicated in technology than the second group.
For companies highly involved in technologies, the results obtained accord that more the
added economic value is high, most the influence of R&D expenditures will be important on
market value added and vice versa. The second group of companies are less concerned in
technology but they have high value-added economic. In fact, any increase in the R&D is
associated with a decrease in the price of securities and the market value added. One explanation
for this result is as follows: It will be better for this segment of companies to focus on the current
performance before thinking about future investments.
This deduction is consistent with the Burgman.R (2002) argument. According to this
author « Manage the market value is other than the management of the current value of the
activities and the future growth value ». The value management requires that the company grows
profitably, this imperative requests in turn a good understanding of the cycle of value creation.
This sequence begins with an efficient allocation of capital which leading to the constitution of
strategic assets (resources and potentials) which consequently will influence the distinctive
competence that result in a competitive advantage. This advantage plays a strategic role in the
constitution of the economic profitability of the company and subsequently to the value creation
for the shareholders. In conclusion, create the value requires good management of strategic
assets that are other than intangible assets.
The survey of the theoretical literature above clarifies that the investment in research and
development create value over a long-term horizon and this link depends on certain factors such
as a sectoral belonging. However, none of these studies introduced the notion of «the threshold
effect », in other words, the spending of R&D contributes to the increase of the firm value but
beyond a certain level there is not a value creation anymore.
Ike.C.E and Kingsley.O (2010) have studied simultaneously the contribution of R&D
expenditures and the presence of a curvilinear liaison between the market capitalization and the
intensity of R&D. The presentation of the model to estimate as well as the definition of variables
will be discussed in details in the next section.
The dependent variable is the market capitalization divided by the total sales. It is
obtained by multiplying the share price at the end of years by the number of outstanding
securities.
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The explanatory variable is the research and development rate, which is measured by the
total expenditures divided by the turnover. Beside to this variable, the authors have introduced its
square in order to test the presence of the non-linear liaison between the market capitalization
and the intensity of R&D. Among the control variables used in the explanation of the variation of
the market capitalization of the company, Ike.C.E and Kingsley.O have chosen the debt ratio (the
total ratio of debts on total assets), the company size (logarithm of the turnover), and the market
concentration (Herfihndhal index).
The sample is composed of 6422 American firms shared between industrial and service
companies. The observation period extends from the year 1990 to 2007 and the estimation
method is the least square ordinary. The results obtained reveal the presence of a strong
correlation, on one hand, between the market capitalization and the R&D ratio and on the other
hand between the square of the R&D ratio and the market capitalization. This proves the
existence of a non-linear liaison between the market capitalization and the research and
development expenses. The results of estimation of the model display a positive and significant
contribution of research and development expenditure for the whole of the sample. Nevertheless,
the contribution of R&D is more important for the industrial companies than the services firm.
The second result point outs that the estimated coefficient of the square of the R&D rate
is significant for the total sample; therefore there is a non-linear link between the market value of
the company and research and development spending.
This literature review allows us to assume that:
H1: The contribution of the R&D to the value creation is positive but beyond a certain
threshold it becomes negative.
H11: The degree of contribution of R&D depends on the corporate sector.
2.2- Contribution of advertising to the value creation
Two sources may explain the impact of advertising on the firm value such as the
externality effect (Spillover) and the signal effect.
Indeed, advertising allows the company to differentiate itself from its competitors by the
creation of the brand for its products [Aaker (1991)]. This asset (brand), which is the result of
marketing activities, can influence the behavior of current and potential customers. For example,
Frieder and Subrahmanyam (2005) found that investors prefer invest in shares with a big brand
name, even if they do not offer immediate returns. This behavior is explained by the fact that
investors forecast a greater increase in the stock prices of these firms. Also, the customers prefer
to bet on something of which they trust and they have the knowledge on the inherent uncertainty
with regard to some things ambiguous which they possess no information. Such a preference can
lead to investment decisions for which investors prefer to hold mark securities that they have
access to the necessary information [Heath and Tversky (1990)].
Overall, these results prove that brand awareness and the perceived quality of consumed
products can have a favorable impact on the price securities of these companies.
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Another feature of the publicity lies in its role of signal sent on the market. Several
signaling mechanisms may influence the behavior of the investors, Mathur.L.K and Mathur.I and
Rangan.N (1997) analyzed the impact of the use of celebrity endorsement technique (It is a
technique which involves a famous personality) on the share price of the firm. This study found
that when Michael Jordan made advertising for the association of basketball, the market value
increase on average of 2 %. It follows that the advertisings before the launch of the product led
to the rise in the share price and may create forecasts that will be corrected after the putting to
the market of the new product [Hanssens and Joshi (2009)].
It is clear that advertising has an effect on the firm value, the question that arises how this
influence can occur? Various studies have examined the effects of advertising on sales
[Hanssens, Parsons and Schultz (2001)]; hence, the direct impact of these expenditures on
market value is less studied. Hanssens D.M, Pauwels. J.S.R and Srinivasan.S (2004) demonstrate
that the launch of a new product on the market contains information that takes time to be fully
incorporated in the share price.
Hanssens and Joshi (2010) examine the contribution of advertising to the value creation.
According to these authors, the advertising can simultaneously have an indirect impact on the
firm value through an increase in the level of sales and profits and direct impact through the
constitution of the brand. It is worth noting that the first effect will be detected on a short-term
horizon although the second one will be more important on a long-term horizon. Considerable
research provide an empirical generalization that the short-term elasticity between sales and
advertising expenses is positive but low and advertising shall not take effect in the long term
when the effect of short term is significant [Abraham M.M et al (1995)]. Therefore advertising
will indirectly affect the firm value through an increase of the turnover.
Whatever the nature of the effect of advertising, Hanssens D.M and Joshi.A (2010)
studied the contribution of this type of spending in the value creation by highlighting the direct
and indirect effect of advertising on the company value. To do this, these authors used two
indicators of value creation namely the matched firm returns (MFR) and the market-to-book ratio
(MBR).
We are only interested in the analysis of the rapport between advertising expenditures and
the market-to-book ratio. Hanssens D.M and Joshi.A (2010) divided the total sample into two
groups. The first group contains five high-tech firms and the second one consists of four
companies appertaining to the sector of sports clothing. These authors chose two companies from
the group of high-tech firms. The first one is in a leader position but the second is newly
introduced in the market. Hanssens D.M and Joshi.A (2010) proceed then to the increase of
advertising expenses and they observe its impact on the market capitalization. The study period
extends from 1997 to 2000.
For the leader company any increase in advertising expenses of 10 % has a positive effect
on the market capitalization. This increase is displayed only for the year 1999, for the remainder
of the period advertising affect negatively value creation. For the second firm the increase of
10% of advertising expenses led to an increase of the ratio market-to-book respectively to 1.4
million $, 2.28 million $, 1.44 million $ and 0.78 million $ on the four years 1997, 1998, 1999
and 2000. This growth is explained by the direct effect of the advertising expenses.
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Regards the indirect effect, it is rated simultaneously to the increase of the sales volumes
(23.52 million $, 38.18 million $, 24.18 million $ and 13.08 million of $ respectively to the four
years 1997, 1998, 1999 and 2000) and the reduction of the benefit due to the advertising cost
(4.15 million $, 5.42 million $, 6.04 million $ and 5.23 million$ of over the four years).
The last step of their study resides to measure the optimum of the advertising expenses.
Hanssens D.M and Joshi.A (2010) use the conditions of Dorfman and Steiner (1954) which
consists in determining the value of these expenses that maximize the market capitalization [For
more details on the method of determination of the critical value of advertising expenses, see
Hanssens D.M and Joshi.A (2010), page 30]. The results obtained by these authors assert that the
value creation will take place when the optimal budget allocated to advertising is greater than the
actual value. This is translated by a negative gap between the optimal and the real value.
The first firm displays a negative gap only on the 1999 year and the second firm presents
a negative gap over the years 1998 and 2000. Hanssens D.M and Joshi.A (2010) found that the
increase in these expenses led to a gain in terms of market capitalization increase only if the
existent expenses are between 94% and 117%, which correspond to the Dorfman-Steiner optimal
thresholds.
It appears from the study that any deviation of the advertising expenses from the critical
level leads to the decline of the market value of the firm. This conclusion affirms the existence of
a non-linear relationship between advertising and the market capitalization. It follows that:
H2: The contribution of the advertising to the value creation is positive but above a
certain level it becomes negative.
H21: The degree of contribution of advertising depends on the business sector.
2.3- Contribution of incentive and participation to the value creation
As reported by Buchko (1993) the employee shareholding has implications on the

individual behavior. Among these comportments, there are the motivation, the personal
involvement and cooperation between employees:
- Motivation: This attitude is one of the most studied in the literature showing that the
financial participation of employees increases their motivations [Webb (1912), Ben - Ner and
Jones (1995), Long (1978a) and (1978b), Pierce and al. (1991), Pierce and Rodgers (2004)].
- Involvement: The employee shareholding favors the implication of the latter [Fröhlich
et al. (1998), Pendleton (2001)]. In addition, a satisfied employee will be even more involved
[Hallock et al. (2003)].
Beyond these advantages, the participation and the profit sharing mechanisms generate
changes at the level of the firm. In fact, the introduction of this type of instrument offers several
advantages such as:
- Reduction of agency costs: The financial participation allows reducing conflicts

between employees and managers and contributing to the sustainability of companies
[Desbrieres.P (1997)].
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- Turnover: The companies that have adopted employee shareholding plans have
significantly lower turnover rates [Buchko (1993)].
- Absenteeism: Brown and Fairbanks (1999) demonstrate that companies that choose
incentive schemes have absenteeism rates significantly lower than other companies.
- Performance of work: Given that the financial participation of employee increases the
involvement at work [Buchko (1992, 1993), Pendleton (2001)] and the involvement in turn
favors the performance of the work, subsequently the employee participation has an effect on the
work performance which can be measured by productivity [Riketta (2002)].
However, the employee shareholding has disadvantages such as the rising costs linked to
their participation in the decision-making process [D'Arcimoles.C.H and Brillet.F (2002)] and
the risk of the capital dilution of the company.
Many studies have examined the impact of the employee participation in the capital on
the performance firm. This criterion is apprehended by different indicators such as turnover per
employee, growth rate of sales, value added, the return on assets, financial profitability, stock
price, etc.). The researches investigating the association between these two indicators are not
numerous. We revue the studies conducted by Hollandts.X (2007) and Donald.L and
Bachelard.A (2009). The first used the price-to-book ratio (PBR) and the second utilized the
market value added (MVA).
Hollandts.X (2007) has employed two groups of firms. The first is composed of 189
companies from the SBF 250 whose 104 companies practice incentive schemes and 85
companies do not exercise this mechanism. The second group consists of 152 companies
including 62 companies with shareholding employee that responded to the questionnaire. The
observation period elongates from the year 2001 to 2004. Hollandts.X (2007) estimated seven
regressions where the dependent variable is the price-to-book ratio and the independent variables
are divided into two classes.
The first group of variables reflects the employee ownership which contains three
dichotomous variables, such as, the presence of shareholding employee, the mode of holding of
securities (directly or indirectly) and the existence of an association of employees in the
company. The other variables that reflect the financial participation of employees are the
percentage of capital and of the voting rights held by the employees and the percentage of
employee shareholdings.
The second group of variables describes the corporate governance. To These explicative
variables, Hollandts.X (2007) integrates control variables, for example the number of employees,
the turnover, the industrial sector, the concentration of ownership and the structure of
government. Beside these variables, the author adds the square of the percentage of shares and
voting rights held by all the employees. The incorporation of the square of these variables
permits to see if there is or not a curvilinear relationship between the price-to-book ratio and the
variables measuring the employee participation.
A first result confers that the presence of employee ownership has a positive and
significant impact on the ratio of Price-to-book but this relation is not linear (in reverse-U).
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Hollandts.X (2007) found that the optimum depends on the nature of the stocks held by the
employees. In effect, the optimal percentage of common shares is 28.6 % and the optimal
percentage of shares with right to vote is 28 %. This means that the percentage of employee
shareholding is positively associated with the value creation for average levels and negatively
related to the price-to-book ratio for high level. Consistent with to the author, these various rates
are empirical values. They depend on the legal form of the firm, its capital distribution and the
concentration of employee ownership.
A last result demonstrates that the presence of a non-internal Director Officer reduces the
magnitude of the relation between employee ownership and the price-to-book ratio, consequently
the threshold drops to 22%. This result emphasizes that the concrete integration of employee
shareholding in decision-making within the Board of Directors has a negative effect of
moderation.
Audard.L and Bachelard.A (2009) argue that the presence of a curvilinear relationship
(U-reverse: ascending and descending phase) between the participation rate and the value
creation is the result of several determinants. Among the factors that explain the increase of the
employee participation drives to the growth of the price-to-book ratio (ascending phase), we
distinguish:
-The conflict of interest between employee shareholding and managers is low;
-The investments on corporate savings plan (CSP) are often matched without right of
entry and management fees. Accordingly, they appear much more attractive than the market such
as banks and insurers;
During the descending phase, the authors suggest the following arguments:
- Employee shareholding is better informed through its participation in the general

assemblies of the company. Therefore, they may act opportunistically at the expense of others
and eventually of the firm sustainability because they tend to prefer quick benefits.
-The employee shareholding decisions in a short-term perspective can destabilize the

direction of companies.
Audard.L and Bachelard.A (2009) presented graphically the liaison between market value
added (MVA) and the financial participation of employees. The sample is composed of 13
companies which belong to the CAC 40 observed in the period 2000-2005. At first stage, these
authors have determined the correlation for the total sample without taking into account the
corporate sector, the correlation coefficient is in the order of 0.516.
At the second stage, the authors take into account the sectorial appertaining factor. The
correlation analysis indicates that communication, media and multimedia sector (2 companies)
presents negative correlation. Hence, the general public distribution sector (2 companies), the
energy and basic products sector (4 companies) and telecommunication sector (2 companies)
present all of them a positive and high correlation and finally automotive sector (3 companies)
shows no correlation between value creation and financial participation of employees.
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Audard.L and Bachelard.A (2009) sum up that the analysis on a small sample does not
allow drawing from consistent conclusions on the relationship between the employee
shareholding and the value creation. It is for that reason; they added other indicators like
revenue, operating income, cash flow, financial autonomy, the productivity of the production
potential, the economic profitability and the part of the employees in the added value
The correlation between these indicators and the participation of the employees is low
with the exception of the correlation between the productivity and the percentage of the capital
held by the latter. According to these authors, the employee shareholding is other than a means
of remuneration. Audard.L and Bachelard.A argue that interactions between the incentive and
participation schemes and performance indicators remain complex and non-automatic.
In summary, these researches confirm the existence of a non-linear association between

the participation of employees and the value creation. This conclusion seems to be obvious,
because if the participation rate exceeds the critical threshold it will lead to conflicts between
shareholding employees and other partners, such as employees, internal and external
shareholders and managers. The examinations of these last two works permit us to formulate the
following hypothesis.
H3: The contribution of the profit sharing and participation of the employees the to the
value creation is positive but away from a certain threshold, it becomes negative.
H31: The degree of contribution of the incentive schemes depends on the corporate
sector.
The empirical results from the studies reviewed throughout this section affirm the
positive contribution of intangible investments in the value creation despite this liaison can be
non-linear and it depends of several determinants mainly sectoral belonging factor.
It should be noted that we have not considered the theoretical studies related to the
contribution of personnel training to the value creation. As stated by Ballot.G (2001) there is a
strong interaction between research and development and staff training that is materialized by
this sequence: innovation is stimulated by the personnel qualification and training of the R&D
department. In effect, the majority of R&D spending is intended to pay for a highly skilled
workforce and has an impact in terms of training and the aptitude improvement [Organization for
Economic Cooperation and Development «OECD», 2006].
In our empirical analysis, we test the contribution of the training expenses to the value
creation. To verify the connection between these two indicators we formulate following both
hypotheses.
H4: The contribution of the employees training to the value creation is positive but
above a certain level, it becomes negative.
H41: The degree of contribution of the training rate depends on the business sector.
2.4- Interrelationship of the intangible assets
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In accordance with Jacobson and Mizik (2003), the research and development alone does
not improve the value of the firm, so it is necessary that it have a value of appropriation through
advertising. It follows that research and development can create value via innovation on
condition that it is marketed.
This point of view of the complementarily of intangible assets between them is supported
by Kaplan and Norton (2004). This interrelation will make the foundation of the balanced
scorecard and the strategy map. These two tools describe the process of value creation, starting
from the learning and growth perspective and leading to the financial perspective.
The learning and growth perspective determines the critical intangible assets for the
strategy. The purposes of this perspective identifies what tasks (human capital), what systems
(informational capital) and what type of climate (organizational capital) required to support the
process of the value creation. These assets should be grouped together and aligned to the internal
process.
The internal perspective illustrates (operational management, customer management and

innovation management) processes which transform the intangible assets into customer value
and shareholder wealth.
The perspective of clients defines the value creation to the target clients. This proposal of
value is the perception of products quality and a good condition delivery. These different
dimensions of value creation depend enormously on the skills of the employees and the internal
process. Accordingly, a coherent alignment of actions and capabilities is essential for the
creation of value to customers and for the implementation of the strategy.
The financial perspective expresses the results of the strategy in financial terms. Among
the indicators that explain whether or not the company's strategy has been successful, Kaplan and
Norton (2004) cite the return on investment, value shareholder, profitability and growth
revenues, etc.
The objectives of the four perspectives are interlinked through cause-effect relationships.
This theoretical overview allows us to formulate the last hypothesis which states that:
H5: The contribution of the combination of intangible assets to the value creation is
higher than the individual contribution of each of them.
Motivated by the recent work of Hollandts.X (2007), Audard.L and Bachelard.A (2009),
Hanssens.D.M and Joshi.A (2010) and Ike.C.E and Kingsley.O (2010). Our contribution in this
research is to extend the last study to other components of intangible capital such as advertising,
incentive schemes and employee training and analyze the effect of their combination to the value
creation.
3- Methodology of research
3.1- Data collection and sample
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To test empirically our hypotheses we are resorted to accounting and stock-exchange data
of non-financial French companies listed on Paris Stock Exchange. The database used for the
analysis of our research is obtained through the following web sites. The sample of listed firms is
gathered by Next News Information (Financial Information Provider) and Yahoo Finance. The
annual reports are collected from the web site of the « Financial Markets Authority » and the
sectoral classification from the website of Euronext.
Our selected sample is composed of 252 companies that are divided into three sectors:
100 industrial firms, 71 service companies and 81 technology enterprises.
A detailed description of the characteristics of our sample in terms of intangibles intensity

[research and development « RD.I », advertising « Adv.I », incentive (profit-sharing) and
participation « IP.I » and training« Tra.I »] is represented in the following table. The values
that appear in the table represent the ratio of the expenses divided by the turnover.
INDUSTRIAL SECTOR
Code Activity sector 2 Companies RD.I Adv.I IP.I Tra.I
ICB1 number
0500 Business oil and 5
1.09 2.58 0.36 2.43
gas
1300 chemistry 5
2.28 1.97 0.34 1.78
materials
1700 Raw materials 7 3.03 9.34 1.34 0.98
2350 Building and 11
construction 0.95 4.58 0.35 1.32
materials
2700 Goods and 30 3.67 3.11 0.98 1.62
services
industrial3
3300 Automobiles and 6 6.95 7.64 0.33 5.82
equipment
manufacturers
3500 Agri-food and 14 1.93 8.67 0.22 4.72
beverages
3700 Household 22 4.21 12.09 0.18 1.51
products and
personal care4
TOTAL 100 3.01 6.25 0.51 2.52
SERVICE SECTOR
Code Activity sector Companies RD.I Adv.I IP.I Tra.I
ICB number
1 ICB: Industry Classificqtion Benchmark

2 Source: http://www.euronext.com/trader/summerizedmarket
3 Industrial goods and services : aerospace and defense (2710), electronic and electric equipment, (2730), industrial engineering (2750), industrial
transport (2770) and Support Services (2790).
4 Household products and of personal care: household products and individual construction ( 3720 ), equipments of leisure ( 3740 ) and personal
articles ( 3760 ).
54 ©JBSQ 2013
4500 Health 5 18 68.35 13.57 1.41 1.73
5300 Distribution 8 0.21 2.03 0.73 6.31
5500 Media 24 1.72 3.80 0.36 2.17
5700 Travel and 12
1.62 3.76 0.43 3.47
leisure
6500 telecommunicatio 3
0.96 1.05 0.33 1.24
ns wireline
7500 Services to 6
1.78 0.25 0.22 2.56
communities 6
TOTAL 71 12.44 4.08 0.58 2.91
TECHNOLOGY SECTOR
Code Activity sector Companies RD.I Adv.I IP.I Tra.I
ICB number
9530 software and 66
9.00 6.62 1.42 2.87
services
9570 Equipment for 15
information 15.20 16.90 4.39 2.14
technology
TOTAL 81 12.10 11.76 2.90 2.51
Table nº1: Sample description
It is clear from the table that the service sector is highly involved in R&D activities; the
major part is associated to the health branch that equals to 68.35%. At the same time, the service
sector has the largest training expenditures (2.91%). As regards the advertising expenses and
motivation of personnel, the technology sector displays the highest values to other sectors.
Finally, the examination of the industrial sector reveals that automobiles and equipment
manufacturer branches has simultaneously a high rate of R&D expenditures and staff training.
They are respectively equal to 6.95% and 5.82%. Another feature of industrial firms is related to
the marketing activities. The branch of household products and personal care represents the
higher rate of advertising expenses of 12.09%, followed by the sector of raw materials (9.34%),
the agri-food and beverages sector (8.67%) and the sector of automobiles manufacturer (7.64%).
In summary, the description of the sample allows us to conclude a priori that the degree
of investment in intangible varies from one sector to another.
3.2- Variables and measures
The definition and measurement of the different variables will be examined during the
following subsection.
3.2.1- Dependent Variable
The explained variable is the market capitalization divided by turnover. According to

Ike.C.E and Kingsley.O (2010), the capitalization reflects best the opinion of investors on net
wealth and the value of the enterprise. It is calculated by multiplying the securities price at the
5 Health : equipment and heath services, pharmacy and biotechnology.

6 Services in communities: electricity, Gas, water and multiple services.
55 ©JBSQ 2013
end of year by the number of outstanding shares. Several authors use performance measures
based on the assessment by the market in order to understand the return on investment of R&D
[Chauvin and Hirshey (1993), Bae (2008)].
To avoid the problems related to the effects of the gap between the values and to facilitate
the interpretations, we used the logarithmic variable MV.I. The transformed dependant variable
that we will use in the estimation of the contribution of intangible capital is « Ln (MV.I) ».
3.2.2- Independent Variables
We distinguish two parts of variables for the explanation of the variation of the market
capitalization. The first group relates to indicators of intangible capital and we called them
variables of interest. The second group is composed of the control variables namely the debt
ratio, the size of the firm and the competitive structure of the market.
A. Variables of interest
Among the elements of intangible capital, we cite:
 Research and development
The problem that arises for the measurement of this variable is related to the accounting
method. In accordance with accounting standards such as IFRS « International Financial
Reporting Standards » and IAS 38 « International Accounting Standards », the research and
development costs are activated when they meet the criteria of activation (generation of future
economic benefits and assessment of costs in a reliable way).
For most French companies that constitute our sample, the research and development
expenses are recognized as an expense in the period in which they are incurred. As a result, the
ratio of R&D investment is equal to:
RD.I = RD/Sales
Next to this variable in the model, the authors have introduced the square of RD.I. The
addition of this variable allows capturing the existence of a non-linear relationship between value
creation and research and development.
 Advertising
The evaluation of this variable poses no problem because different firms in our sample
record the cost of advertising in the income statement. The advertising rate is calculated as
follows:
Adv.I = Adv/Sales
 Incentive and participation
56 ©JBSQ 2013
In order to improve social policy, French companies launch a staff incentive scheme. It is
manifested either by participation in the results, incentive schemes, the corporate savings plan,
purchase options and "stock option".
The value of profit sharing and the participation of staff are represented in the account
«personnel expenses ». This rate is measured by the following ratio:
IP.I = IP/Sales
 Training rate
The amount of expenditures for training of the personnel is contained in notes out of the
financial statements (social information). The rate of training is obtained by the division of
expenditure on the training of staff on the payroll.
Tra.I = Training costs / Payroll
B. Control Variables
 Debt
The leverage is assessed by the total debt divided by total assets. It is an indicator of risk
supported by the company. According to Pantzalis (2001), the debt ratio controls the change of
the firm value due to the difference in the structures of capital.
LEV = Total debt / Total assets
 Size
The size is evaluated by the logarithm of the total turnover (sales) of the firm. In
compliance with Ike.C.E and Kingsley.O, this transformation offers a close data distribution to
the normal distribution.
SIZE = LOG (Sales)
 Market Concentration
Previous studies have shown that the concentration has an impact on the variation of firm
performance [Hsu and Boggs (2003)]. The assessment of the market structure is determined by
the Herfihndhal index. It is equal to the sum to the square of the ratio of the total turnover of the
firms with regard to the total turnover of the sector. It is other than the sum of the square of the
market share.
This index is calculated as follows:
57 ©JBSQ 2013
Where :
Si: The annual sale of the company belonging to the nth segment,
S: The total sales of the sector,
N: The number of activity branches.
4- Econometric models
We recall that our research is inspired from the work of Ike.C.E and Kingsley.O (2010).
Our empirical analysis purposes to investigate firstly, the link between value creation and each
component of the intangible capital (research and development, advertising, incentive and
participation and staff training) and secondly, the impact of the combination of the different
intangible elements on the value creation.
4.1 - Univariate models
The study of the contribution of each intangible asset is done through the following
regressions:
Regression n °1: Ln (MV.I)it = β0 + β1 RD.I it + β2 RD.I it 2 + β3 SIZE it + β4 LEVit + β5

CONCit + Σβj(YEAR)j
This regression highlights simultaneously on the study of the linear and non-linear
relationship between the market capitalization of the company and the rate of research and
development expenditure.
Regression n ° 2: Ln (MV.I)it = β0 + β1 Adv.I it + β2 Adv.I it2 + β3 SIZEit +β4 LEVit +β5

The second regression accentuates at the same time on the review of the linear and non-
linear link between the market capitalization and the rate of advertising expenses.
Regression n ° 3: Ln (MV.I)it = β0 + β1 IP.Iit + β2 IP.Iit2+ β3 SIZEit + β4 LEVit + β5

The third regression focuses on the analysis of linear and non-linear relationship between
the market capitalization and the rate of incentive and participation of staff.
Regression n ° 4: Ln (MV.I)it = β0 + β1 Tra.Iit + β2 Tra.Iit2 + β3 SIZEit + β4 LEVit + β5

The last regression emphasizes on the examination of the linear and non-linear liaison
between the market capitalization of the company and the rate of training of personnel.
Where:
The index « i » and « t » denote respectively the company and the year.
58 ©JBSQ 2013
Ln (MV.I): The logarithm of market capitalization divided by the sales
RD.I: The R&D expenses ratio (RD.I = RD/Sales)
RD.I2: The square of the R&D expenses ratio
Adv.I: The advertising rate (Adv.I = Adv /Sales)
Adv.I2: The square of the advertising rate
IP.I: The percentage of incentive and participation of employees (IP.I = IP /Sales)
IP.I2: The square of the percentage of incentive and participation
Tra.I: The proportion of training expenses (Tra.I = Training costs / Payroll)
Tra.I2: The square of the proportion of training expenses
SIZE: Logarithm of the total turnover (sales) of the firm (SIZE = LOG (Sales))
LEV: Leverage rate (LEV = Total debt / Total assets)
CONC: The market concentration ()
The next point of our empirical analysis is dedicated to the investigation of the
contribution of the connection between different elements of intangible capital.
4.2 - Multivariate model
In order to study the impact of the association between the four intangible expenses, we
use the following regression:
Ln (MV.I)it = β0 + β1 RD.Iit + β2 RD.Iit2 + β3 Adv.Iit + β4 Adv.Iit2 + β5 IP.Iit + β6 IP.I2it +

β7 Tra.Iit + β8 Tra.Iit2 + β9 SIZEit + β10 LEVit + β11 CONCit + Σβj (YEAR)j
The intention behind the estimation of this model resides in the analysis whether the
simultaneous integration of the four intangible elements allows improving their contributions to
the value creation.
The econometric software « SATAT 10 » provides the results of estimation of the

different regressions.
5 - Results and discussion
This sub-section will be organized into three points. The first will treat the descriptive
statistics. As for the second point will be dedicated to the study of the individual contribution of
intangible assets in the explanation of the value creation and the third point will treat the impact
of the association of the four components of intangible capital.
5.1 - Descriptive analysis
59 ©JBSQ 2013
The following table mentions the mean, the minimum value, maximum value, and
standard deviation related to the variables used for the estimation of the models below.
TOTAL SAMPLE
Ln (MV.I) RD.I Adv.I IP.I Tra.I LEV SIZE CONC
Mean 4.331 11.165 13.729 1.039 2.595 22.274 5.680 0.511
Minimum -2.255 0 0 0 0 0 -2.764 0.169
Maximum 9.852 1654.1 311.111 149.33 86.699 228.125 12.564 1
11 3
Standard 1.320 66.400 22.731 5.669 6.240 17.351 2.434 0.245
deviation
INDUSTRIAL SECTOR
Mean 4.057 3.820 13.471 0.550 2.294 26.761 6.393 0.561
Minimum -0.113 0 0 0 0 0 -2.764 0.239
Maximum 9.852 60.835 88.728 26.976 63.157 94.097 11.975 0.999
Standard 1.288 8.038 14.518 1.878 5.112 15.765 2.312 0.186
deviation
SERVICE SECTOR

Mean 4.456 22.000 10.230 0.666 2.860 23.831 6.178 0.680
Minimum -2.255 0 0 0 0 0 0.244 0.401
Maximum 9.030 1654.111 311.111 41.309 86.699 228.125 12.564 1
Standard 1.376 125.110 24.155 2.742 8.769 19.513 2.727 0.192
deviation
TECHNOLOGY SECTOR
Mean 4.559 10.960 17.541 1.969 2.737 15.369 4.363 0.301
Minimum -1.308 0 0 0 0 0 -0.576 0.169
Maximum 9.303 166.28 233.052 149.333 52.194 77.172 10.114 0.920
7
Standard 1.249 18.036 28.467 9.374 4.746 14.907 1.657 0.197
deviation
Table n°2: Descriptive statistics
The observation of this table demonstrates that the highest rate for research and
development and advertising expenditures characterizes respectively the service and technology
sector.
The fifth column of the table nº 2 outlines that the percentage of incentive and
participation is low for the whole sample; it varies from 0.55 to 2%. Identically to the training
rate which fluctuates between 2.3% and 2.9%.
Another characteristic that typifies the sample is related to a low disparity of the
explanatory variables with the exception of (RD.I), (PUB.I) and (LEV). These three variables
displayed the highest standard deviation. This result is valid for the total sample and the various
sectors. A high standard deviation for variables (RD.I) and (PUB.I) can be explained by the fact
that some companies spend more in research and development and marketing activities than
others do. At the level of sectors, the high-tech business is identified by a high deviation of
60 ©JBSQ 2013
advertising expenses relatively to the others sectors however the service sector presents the
highest standard deviation for variables (RD.I) and (LEV).
5.2 - Study of the correlations
The second step of the descriptive analysis is to verify the presence or not of the problem
of multicollinearity. The examination of these matrixes (see appendix) allows us to identify the
following interpretations:
- The presence of a positive correlation between the market capitalization, the research
and development expenditures (RD.I), advertising expenses (Adv.I), the incentive and
participation of the staff (IP.I) and their squares. Nevertheless, the correlation coefficient is
negative and not significant between the market capitalization and the training rate (Tra.I). This
result is checked for the total sample and three business groups.
-The existence of a strong correlation between the variable RD.I and RD.I2. The
correlation coefficient equals respectively 0.9102, 0.9010, 0.9230, and 0.8665 (significant at the
1% level of confidence) for the total sample and different sectors.
Conforming to Ike C.Ehie and Kingsley Obi (2010), the presence of multicollinearity
between these two explanatory (RD.I and RD.I2) variables poses no problem. In effect, the
objective of the study regards firstly to analyze the contribution of the research and development
rate to the market capitalization and secondly to test the presence of a curvilinear relationship
between these two indicators. In the highlight of this deduction, these authors conclude that the
omission of the variable RD.I2 may bias the results. The presence of a strong correlation is
checked for the other explanatory variables and their squares (see appendix).
- The review of the correlation matrix indicates that the correlation coefficient is positive
and very strong only for the total sample (ρ RD.I, PUB.I = 0.6118) and service sectors (ρRD.I, PUB.I =
0.9347). Thus, there is a problem of multicollinearity. To correct the problem we estimate the
contribution of each variable separately (see sub-section 5.4: Regression 1' Regression 2',
Regression 4' and Regression 5'). An explanation of this result testifies the interrelation between
R&D and advertising. In fact, RD disconnected from marketing activities does not improve the
value of the firm, as well as it is combined with it.
5.3 - Contribution of the immaterial to value creation: simple regression
Before giving the results of estimation, we must specify the econometric characteristics
of our sample. The specification test indicates that the whole sample is not homogeneous
(hypothesis null is rejected at the threshold of 1%). This translates into the presence of effects
associated with individuals (firms).
These effects may be fixed or random. The choice between these two specifications is
made through the Hausman test. The application of this test shows that the method of estimation
with fixed effect is opted for the various groups of companies excepting the technology firms
(random effect). The results of the estimation of the univariate regressions will be detailed in the
next sub-section.
61 ©JBSQ 2013
5.3.1 - Relationship between research and development expenses and market
capitalization
Dependant Variable : Market capitalization

TOTAL INDUSTRIAL SERVICE TECHNOLOGY
SAMPLE SECTOR SECTOR SECTOR
Constant 6.414188 6.891988 5.681457 5.311913
(18.61)* (10.67)* (6.91)* (18.49)*
RD.I 0.001640 0.123432* 0.000802 0.012866***
(1.03) (5.79) (0.39) (1.94)
RD.I2 -0.000009 -0.002223* -0.000000 -0.000030
(-0.99) (-5.36) (-0.23) (-0.59)
LEV -0.004602** -0.017218* 0.005605** -0.014914*
(-2.56) (-5.43) (1.97) (-4.59)
SIZE -0.258033* -0.290860* 0.005215 -0.272929*
(-5.67) (-4.71) (0.05) (-5.15)
CONC -1.06043** -1.484161** -1.909856* 1.748199*
(-2.53) (-2.15) (-2.62) (3.91)
N 221 86 60 75
R2 3.04 13,97 3 18.34
Fisher 9.61 19.26 2.53 82.18
Prob> F 0.000 0.000 0.0284 0.000
Test de Βreusch- 1793.16 908.77 231.13 558.60
Pagen
Prob > Chi2 0.000 0.000 0.000 0.000
Test 36.56 45.60 44.85 6.49
d'Hausman
Prob > Chi2 0.000 0.000 0.000 0.16541
Table n °3: Impact of research and development expenditures on market
capitalization
Values in parentheses represent the t-student,

1
Wald Chi (2): statistics of global significance used in the case of the random effect regression
*significant at the level 1%, **significant at the level 5%, ***significant at the level 10%.
The interpretation of this table demonstrates that the model is globally significant at the
threshold of 1%. Research and development contributes positively to the market capitalization.
Nonetheless, we observe some differences between the three sectors, the most significant
contribution of R&D expenditures appears for industrial enterprises (estimated coefficient equal
to 12.34% significant at the 1% threshold) and then technology companies (1.28% significant at
the 5% threshold).
Although, the descriptive analysis exhibits that the service sector registers a high value of
the rate of R&D expenditures, the results of estimation shows that the contribution of the R&D is
not significant. This result can be explained by the fact that these companies, resort to other
organisms of research such as universities (for example pharmacy and biotechnology sector, etc).
The last point of the estimation of the first regression resides in the test of the presence of
the non-linear relation between the intensity of research and development and the market
capitalization. Table nº3 mentions that the estimated coefficient of the variable RD.I2 is
62 ©JBSQ 2013
significant at the level 1% only for the group of industrial enterprises. At this stage, we can
determine the optimal value for the ratio of research and development for which the market
capitalization is maximum. To do this, we simply compute the first derivative of the equation:
Ln (MVI)it = β0 + β1 RD.Iit + β2 RD.Iit2 + β3LEVit + β4SIZEit + β5CONCit + Σβj

(YEAR)j
This threshold is calculated as follows:
The optimum is equal to 27.76%, for a rate lower than the critical threshold, any increase
in R&D spending creates value, but above this value, the effect becomes negative. Our results
are conform to those of Ike C.Ehie and KingsleyOlibe (2010) who found at the same time, that
the contribution of research and development to market capitalization is significantly positive
and the relationship between these two measure are curvilinear. Nonetheless, the industrial firms
are more involved research and development activities than the service companies are.
In summary, the results of the estimation of the first regression, we conclude that the
hypotheses H1 (the relationship between the R&D rate and the value creation is non-linear) and
H11 (the business sector influences the importance of the contribution of R&D expenditures) are
confirmed.
Now in regards to the influence of the control variables on the market capitalization we
found that size and indebtedness act negatively and significantly for industrial and technology
firms, (this result is valid for regressions are below). On the contrary, the service sector displays
different results. Indeed, debt favorably affects the enterprise value the coefficient estimated for
the debt ratio equal to 0.56% (significant at the 5% threshold). The positive impact of the debt on
the market capitalization is checked for other regressions. For the variable size, its impact is
positive but not significant. Finally, the market concentration index affects negatively the market
capitalization for industrial and services companies but it has a positive effect on the market
value of technology companies. It should be noted that this last result is valid for other
regressions (with the exception of regression n º2).
Comparison of the results that we have found and those obtained by Ike.C.E and
Kingsley.O reveals some differences. These authors have shown that the size and concentration
act unfavorably on the market capitalization and this regardless the sector of activity. The last
variable concerns the debt ratio; this indicator influences favorably the value creation of
industrial firms while it has a negative effect for the service ones.
63 ©JBSQ 2013
5.3.2 - Relationship between advertising spending and market capitalization

Constant 6.290374* 5.970963* 6.23144* 5.172488*
(11.72) (10.71) (5.53) (11.98)
Adv.I 0.000977 0.024522*** 0.001021 0.007755
(0.20) (1.78) (0.08) (1.14)
Adv.I 2 0.000004 -0.000282*** -0.000005 0.000000
(0.23) (-1.70) (-0.14) (0.03)
LEV 0.001251 -0.016222* 0.009195* -0.015701*
(0.58) (-3.93) (3.04) (-3.02)
SIZE -0.300431* -0.227059* -0.227130 -0.208922*
(-4.25) (-4.37) (-1.39) (-2.78)
CONC -0.026501 0.055860** -0.592228 1.709052*
(-0.05) (0.09) (-0.61) (2.78)
N 132 51 40 41
R2 2.82 18.19 4.59 21.10
Fisher 5.11 42.78 2.54 42.88
Prob> F 0.000 0.000 0.029 0.000
Test de Βreusch- 1050.61 636.61 175.10 337.68

Pagen
Prob > Chi2 0.0000 0.000 0.000 0.000
Test d'Hausman 27.07 7.63 351.63 6.17
Prob > Chi2 0.000 0.10611 0.000 0.18682
Table n °4: Impact of advertising spending on market capitalization

1-2
It appears from the table nº4 that advertising spending has a positive impact on the market
capitalization, however, this contribution it is significant only for the industrial company
(2.452%).Once again the results prove that the sectoral membership factor plays an important
role in the explanation of the extent of the influence of intangibles on the creation value.
The non-significance of this variable does not imply that the service and technology
sector are not involved in marketing activities. Several factors, such as the position of the
companies on the market (leaders or young companies), the advertising strategies (aggressive or
defensive) and the reactions of investors-clients to any increase in these expenditures can explain
the results. All these factors lead that these expenditures are not immediately incorporated into
the stock price [Hanssens.D.M and Joshi.A (2010)].
Another point to analyze is related to the presence or not of curvilinear relationship

between the advertising expenditures and market capitalization. In effect, the square of the
explanatory variable (Adv.I2) is significant at the threshold 10% for industrial companies. At this
step, we determine the critical level of advertising expenditures that maximize the market
capitalization. The first derivative of the second regression shows that the optimum value equals
to 43.37%.
64 ©JBSQ 2013
In summing up the results of the estimation of the second regression, we deduce that the
hypotheses H2 (the link between the advertising intensity and the value creation is non-linear)
and H21 (the appertaining sectoral factor influences the degree of the contribution of advertising
expenditures) are verified.
5.3.3 - Relationship between incentives and participation application and market

capitalization

TOTAL SAMPLE INDUSTRIAL SERVICE TECHNOLOGY
SECTOR SECTOR SECTOR
Constante 6.433914* 7.871703* 6.009694 5.426588*
(20.83) (14.04) (8.63) (20.15)
IP.I 0.023657** 0.163608** 0.132569** 0.017545***
(2.48) (2.29) (2.32) (1.65)
IP.I2 -0.000087 -0.003292 -0.003434** -0.000044
(-1.19) (-1.34) (-2.20) (-0.56)
LEV -0.004164** -0.011112* 0.005752** -0.014741*
(-2.53) (-4.01) (2.19) (-4.68)
SIZE -0.261899* -0.308804* -0.134885 -0.254541*
(-6.45) (-5.58) (-1.44) (-5.13)
CONC -1.06372* -2.884524* -1.348915** 1.458064*
(-2.90) (-4.80) (-2.16) (3.39)
N 252 100 71 81
2
R 3.86 9.35 3.26 14.25
Fisher 14.13 14.35 3.32 76.80
Prob> F 0.000 0.000 0.005 0.000
Test de Βreusch- 2333.23 1054.86 450.35 659.69
Pagen
Prob > Chi2 0.0000 0.000 0.000 0.000
Test d'Hausman 35.26 42.23 45.44 5.38
Prob > Chi2 0.000 0.000 0.000 0.2501
Table n °5: Impact of incentive and participation on market capitalization

1-2
The observation of this table shows that the motivation of staff (measured by the rate of
profit sharing and participation) influences favorably the market capitalization. The estimated
coefficient for the IP.I variable is positive and statistically significant for the total sample and
different sectors. The most important contribution is registered for industrial then the service
firms. It is clear that the corporate sector affects the liaison between intangible expense and the
value creation.
The second step of the estimation of the regression n°3 concerns the non-linearity relation
between the market value of the company and the intensity of employee’s participation. Indeed,
the estimated coefficient of the variable IP.I2 is significant only for the service sector. The
optimal value of profit sharing and participation ratio equals to 19.30%, any increase of this ratio
above the critical threshold causes a decrease in market capitalization.
65 ©JBSQ 2013
For more details on the factors that drive to the wealth creation or on the contrary to the
destruction value, see the sub-section 2.3 of this paper.
By recapitulating the results of the estimation of the third regression, we conclude that the
hypotheses H3 (the association between profit sharing and participation rate and the value
creation is non-linear) and H31 (the business sector affects the magnitude of the contribution of
shareholding employees) are approved.
5.3.4 - Relationship between training cost and market capitalization

Constant 6.519715* 7.911768* 6.475251* 5.460121*
(21.13) (14.02) (9.49) (20.11)
Tra.I 0.026738*** 0.091940* -0.007092 0.014215
(1.83) (2.73) (-0.34) (0.59)
Tra.I2 -0.000472** -0.001085** -0.000138 0.000439
(-2.49) (-2.33) (-0.54) (0.79)
LEV -0.003998** -0.010498* 0.005949** -0.014537*
(-2.48) (-3.73) (2.48) (-4.61)
SIZE -0.312458* -0.328908* -0.304185* -0.273803*
(-7.80) (-5.94) (-3.28) (-5.71)
CONC -0.704974*** -2.89652* -0.311984 1.543694*
(-1.93) (-4.76) (-0.52) (3.60)
N 247 98 68 81
R2 4.38 6.69 5.51 14.25
Fisher 15.81 13.42 5.49 76.69
Prob> F 0.000 0.000 0.000 0.000
Test de Βreusch- 2437.87 1158.24 538.30 657.43
Pagen
Prob > Chi2 0.000 0.000 0.000 0.000
Test d'Hausman 31.45 38.36 50.78 5.72
Prob > Chi2 0.000 0.000 0.000 0.33491
Table n °6: Impact of training rate on market capitalization

1
The table n º6 indicates that the contribution of training is significantly positive only for
the manufacturing companies at the level 1%. Now it remains to know if there is a non-linear
relationship between market capitalization and the training rate. This last regression shows that
the coefficient of the explanatory variable (Tra2) is significant at the level 5℅ for industrial
firms. The critical threshold that corresponds a maximum value of market capitalization equals to
42.33%. This result implies that the company has to dedicate 42.33% of the payroll to optimize
the value creation.
66 ©JBSQ 2013
Summarizing theses issues, we deduce that the hypotheses H4 (the link between training
rate and the value creation is non-linear) and H41 (the business sector influences the degree of
the contribution of the training) are validated.
In brief, the results of the estimation of these four regressions shows that the industrial
sector is increasingly involved in intangible investments since we found that the estimated
coefficients of these variables RD.I, Adv.I, Tra.I and there square are significant. However,
the service sector displays simultaneously a significant estimated coefficient for the variable
(I.PI) and its square (I.PI2).
5.4 - Contribution of the immaterial to value creation: multivariate regression
During this sub-section, we study the contribution of the various immaterial elements that
we examined previously. Our objective consists in analyzing if the integration at the same time
of these four immaterial components (RD.I, Adv.I, IP.I and Tra.I) improve their contribution to
the explanation of the value creation?
We will proceed by the heteroscedasticity test then the homogeneity test and finally the
test of the individual effects (Hausman test). The first two tests are remained valuable (the
samples are not homogeneous and there is not a problem of heteroscedasticity), nevertheless,
the Hausman test shows some differences from the simple regressions. The results indicate that
for the total sample and service firms, we will apply the fixed effect method but for the
manufacturing and technology companies we will use the random effects model.
In advance of analyzing the results of the last regression, it is worth noting that we have
found a strong correlation between the variable (RD.I) and the variable (Adv.I) for the whole
sample and service firms. To correct the problem of multilcolinearity, we estimate the
contribution of each variable separately. Hence, we will have six regressions to estimate. The
results are summarized in the following table:
Ln(MVI)it=β0+β1RD.Iit+β2RD.Iit2+β3Adv.Iit+β4Adv.Iit2+β5IP.Iit+β6IP.I2it
+β7Tra.Iit+β8Tra.Iit2+β9SIZEit+β10LEVit +β11CONCit+Σβj(YEAR)j
TOTAL SAMPLE INDUSTRIAL SERVICE SECTOR TECHNOLOG
SECTOR Y
SECTOR
Regression Regression Regression 3' Regression Regression Regression 6'
1' 2' 4' 5'
Constant 6.144699* 6.221099 5.336096* 6.039159* 5.54175* 5.256034*
(17.36) (11.39) (9.13) (7.04) (4.68) (11.36)
RD.I 0.001229 0.067111* 0.000001 0.002368
(0.79) (2.91) (0.00) (0.24)
RD.I2 -0.000000 -0.001207* 0.000000 -0.000005
(-0.66) (-2.81) (0.21) (-0.08)
Adv.I -0.000139 0.027217*** -0.000994 0.004930
(-0.03) (1.85) (-0.08) (0.61)
Adv.I2 0.000008 -0.000453* 0.000005 0.000014
(0.44) (-2.59) (0.15) (0.41)
IP.I 0.020109** 0.011679 0.443382* 0.112075*** 0.196134** -0.009128
(0.040) (0.77) (3.64) (1.79) (2.29) (-0.46)
IP.I2 -0.000070 -0.000047 -0.023505* -0.002864*** -0.005009** 0.000011
(-0.93) (-0.47) (-2.59) (-1.73) (-2.23) (0.09)
67 ©JBSQ 2013
Tra.I 0.050045** 0.003639 -0.00359 0.019755 -0.025852 -0.010490
(0.011) (0.16) (-0.11) (0.51) (-0.81) (-0.12)
Tra.I2 -0.000779* -0.000098 -0.000154 -0.000514 0.000200 0.003636
(-3.07) (-0.33) (-0.32) (-1.10) (0.49) (0.84)
LEV -0.004092** 0.001451 -0.015928* 0.007701* 0.010588* -0.014079*
(-2.34) (0.66) (-3.63) (2.90) (3.42) (-2.59)
SIZE -0.275593* -0.287436* -0.211925* -0.203653*** -0.142011 -0.261006*
(-5.99) (-3.98) (-3.99) (-1.74) (-0.83) (-3.01)
CONC -0.552583 -0.059378 0.304985 -0.729713 -0.563545 2.049765*
(-1.32) (0.10) (0.46) (-1.02) (-0.57) (2.93)
N 216 130 45 57 39 38
R2 4.74 2.83 18.41 6.14 7.41 20.93
Fisher 8.25* 2.80* 69.19* 2.80* 2.25* 44.88*
Prob> F 0.0000 0.0031 0.0000 0.0034 0.0196 0.0000
Test de 1811.48 990.22 409.07 237.70 146.55 294.41
Βreusch-
Pagen
Prob> 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Chi2
Test 32.72 30.91 4.58 48.70 222.83 10.37
d'Hausman
Prob> 0.0000 0.0000 0.80111 0.0000 0.0000 0.23992
Chi2
Table n °7: simultaneous contribution of the intangible elements
to the market capitalization

1-2
The regression 1' indicates that the combination of all intangible elements leads to the
improvement of the contribution of training expenditures. It becomes equal to 5% significant at
the 5% confidence level, while it was 2.673% (significant at the 10% threshold). This result
proves that the fruits of training are most important when they are associated with motivated
and well-integrated employees.
The results of the estimation of the regression 3' (industrial sector) demonstrate the
existence of a significant increase in the contribution of the Adv.I and IP.I. The first variable
grows from 2.452% (see table n °4) to 2.721 % but the second variable increases from
16.360% (see table n °5) to 44.338%.
For the service companies, the impact of training expenditures becomes more important
on the market capitalization, but it remains non-significant (regression 4'). The estimated
coefficient becomes equal to 1.975% instead of -0.709% (see table n °6). For the same group we
obtain a different result regarding the contribution of the staff incentive to the variation of the
market capitalization. Indeed, when it is combined to other intangible elements its contribution
increased from 13.256 % to 19.613 % (see regression 5').
68 ©JBSQ 2013
Finally, for the technology companies, we notice no improvement of the contribution of
the different variables. On the contrary, the estimation of simple regression gives better and more
significant results than the multivariate regression.
Now as regards the control variables, the results show that they practically did not change
sign. In effect, the size and debt affect negatively the market capitalization of the industrial and
technology firms. For service companies the market value increases with the leverage. Finally,
the impact of competition, it keeps its positive sign for technology companies but for the other
two sectors, the competition has no significant effect.
The last point of the multivariate analysis focuses on the verification of the curvilinear
link between intangible expenditures and value creation.
The observation of the table n º7 allows us to calculate the optimum values of the
intangible expenses. The following table provides these values (the empty boxes reflect non-
significant contribution of the explanatory variable):
TOTAL SAMPLE INDUSTRIAL SECTOR SERVICE SECTOR
Univariate Multivariate Univariate Multivariate Univariate Multivariate Multivariate

regession regression regession regression regession regression regression
(regression 1') (regression (regression 4') (regression
3') 5')
RD.I 27.76 27.79
Adv.I 43.37 30.03
IP.I 24.84 9.43 19.30 19.56 19.57
Tra.I 28.29 32.09 42.33
Table n °8: Comparison of the optima of the explanatory variables
(Univariate and multivariate regression)
The main results are:
- A first result is relative to the total sample. Indeed, the optimum of the training rate
increased only by 3.8% following the integration of three other explanatory variables.
- The second issue concerns the critical rate of R&D, which remained unchanged.
Hence, the optimum rates of advertising and participation employees decreased respectively by
13.28% and 15.41%. Concretely, the reduction of these two rates implies that industrial
companies can reach a maximum value of market capitalization for weaker intangible expenses.
This is an advantage for the firm, since she spends less and in return, its market value increases.
This decrease is due to the association of intangible assets together.
- A third result corresponds to service firms. They displayed an optimum value of the
ratio of profit sharing and participation that remains practically constant. The contribution of
other variables appears to be not significant in explaining the market capitalization (regression
4', regression 5').
In summary, it emerges from the last analysis that industrial companies are more involved
in intangible investments because they register the largest improvement at the level of
advertising spending and of participation of staff. Secondly are the service companies, which
69 ©JBSQ 2013
show a significant amelioration at the level of the profit sharing and the participation of the
employees. Finally, we found that the combination of different intangibles leads to the decrease
of the optimal value of immaterial expenses and simultaneously to the growth of the market
capitalization. At this level, we conclude that the fifth hypothesis is confirmed.
Conclusion
Our research brings an analysis of the impact of the combination of the intangible assets
together on the value creation. It emerges from our empirical analysis that research and
development expenditures advertising expenses, the participation of the staff and the training of
employees influence favorably the value creation of the firm (measured by market
capitalization). The degree of influence varies from one sector to another, indeed the results
obtained previously show that the industrial sector is the most involved in intangible investments
(coefficients estimated explanatory variables RD.I, Adv.I, IP.I and Tra.I are significant), then the
service sector and finally the technology sector.
The second conclusion concerns the presence of a non-linear relationship between the
market capitalization and the determinants of intangible capital. We calculated the optimum of
the explanatory variables beyond which the market capitalization decreases.
The last finding shows that the integration of the different intangible assets causes the
betterment of the individual contribution of each of them by the decrease of the optimal value of
immaterial expenses and in the same time the rise of the market capitalization.
The limits of our search are related at first to the low number of companies by branch
what prevented us from leading a more meticulous study .To our knowledge this allows to seize
better the degree of contribution of the immaterial for every sub-sector that presents the same
characteristics. The second limit concerns the absence of the data on certain indicators that seems
to be important in the study of the role of the immaterial in value creation. Among these
indicators, we cite as an example patents, share of customer's wallet, etc.
Indeed, new avenues of research can be envisaged to pursue this work. First, it would be
interesting to consider the human resources as the key source of value creation. Then when we
speak about the immaterial, we have to consider it as an inseparable group. The good association
between the various immaterial components guarantees not only the value creation for the
shareholders but for all the partners and consequently the survival and the reputation of the
company.
Certainly, our research does not allow the generalization of the results achieved for all the
firms of various sizes or various sectors. However, it participates on the debate on the immaterial
and on its crucial role at the level of the company and at the level of the economy.
70 ©JBSQ 2013
Appendix: Correlation Matrix
TOTAL SAMPLE
Ln (MV.I) RD.I RD.I2 Adv.I Adv.I 2 IP.I IP.I2 Tra.I Tra.I2 LEV SIZE CONC
Ln 1
(MV.I)
RD.I 0.2670* 1
2
RD.I 0.1620 0.9102* 1
Adv.I 0.3541* 0.6118* 0.5014* 1
Adv.I2 0.2405** 0.7667* 0.7706* 0.8244* 1
IP.I 0.1632 0.1036 0.0135 0.3256* 0.2817* 1

IP.I2 0.0874 0.0636 0.0051 0.3038* 0.3350* 0.8589* 1
Tra -0.0269 0.0155 0.0086 -0.0148 -0.0227 0.0120 -0.0078 1
Tra2 -0.0567 -0.0035 -0.0042 -0.0232 -0.0162 0.0045 -0.0051 0.8871* 1
LEV - -0.1046 -0.0603 -0.0879 -0.0755 -0.0069 0.0168 0.0174 0.0112 1
0.1682***
SIZE -0.2734* - -0.1123 -0.2487 -0.1983** -0.1600 -0.0959 0.0273 -0.0015 0.176*** 1
0.1865***
CONC 0.1016 0.0913 0.0730 0.0469 0.0374 0.0440 0.0366 -0.0190 0.0329 0.1459 0.1442 1
INDUSTRIAL SECTOR
Ln 1
(MV.I)
RD.I 0.1982 1
2
RD.I 0.2214 0.9010* 1
Adv.I 0.3286** 0.1544 0.0838 1
Adv.I2 0.2872*** 0.1427 0.0529 0.9017* 1
IP.I 0.2315 0.0806 0.0256 0.5425* 0.6808* 1

IP.I2 0.1519 0.0212 0.0011 0.5044* 0.6614* 0.9021* 1
Tra 0.1519 0.2258 0.1138 0.0398 -0.0026 0.0321 0.0012 1
Tra2 0.0053 0.1997 0.1176 0.0218 -0.0203 0.0060 -0.0098 0.8908* 1
LEV -0.0798 -0.0235 -0.0372 0.0161 -0.0192 -0.0790 -0.0122 -0.0387 -0.0311 1
SIZE -0.2297 -0.1171 -0.1500 -0.1946 -0.2268 -0.0674 -0.0656 0.1154 0.0232 -0.0607 1
CONC 0.2349 -0.0956 -0.0708 0.1692 0.0789 -0.1079 -0.0575 -0.1384 -0.0764 0.0302 -0.1114 1
SERVICE SECTOR
Ln 1
(MV.I)
RD.I 0.4092* 1
2
RD.I 0.2830** 0.9230* 1
Adv.I 0.3707* 0.9347* 0.8520* 1
Adv.I2 0.2576*** 0.9464* 0.9845* 0.8980* 1
IP.I 0.2310 0.2061 0.0518 0.2273 0.0514 1

IP.I2 0.2037 0.1574 0.0329 0.2211 0.0605 0.9412* 1
Tra -0.1146 0.0196 0.0204 -0.0347 -0.0164 0.0644 -0.0017 1
Tra2 -0.1486 -0.0122 -0.0070 -0.0342 -0.0151 0.0466 -0.0044 0.9460* 1
LEV -0.1969 -0.1606 -0.1066 -0.1537 -0.1018 -0.0998 -0.0909 0.0475 0.0158 1
SIZE -0.2572** -0.2747** -0.2033 - -0.2083 -0.1047 -0.1013 0.0178 -0.0211 0.2116 1
0.2646***
71 ©JBSQ 2013
CONC 0.1091 0.1387 0.0792 0.2165 0.0990 0.1547 0.1026 0.0777 0.0593 -0.1060 -0.1792 1
TECHNOLOGY SECTOR
Ln 1
(MV.I)
RD.I 0.2811 1
RD.I2 0.1794 0.8665* 1

Adv.I 0.3674** 0.4524* 0.3512** 1
Adv.I2 0.2719 0.3566** 0.3405** 0.8561* 1
IP.I 0.1718 0.3415** 0.3408** 0.3749** 0.4369* 1

IP.I2 0.1206 0.3119*** 0.3714** 0.4075** 0.5356* 0.8826* 1
Tra 0.0693 -0.0590 -0.0365 -0.0252 -0.0637 -0.0140 -0.0207 1
Tra2 0.0736 -0.0647 -0.0355 -0.0372 -0.0406 -0.0176 -0.0117 0.8522* 1
LEV -0.1311 -0.0087 0.0388 0.0084 -0.0057 0.1080 0.0872 0.0690 0.0508 1
SIZE - - -0.1928 -0.2467 -0.2538 -0.2580 -0.1610 -0.0519 -0.0675 0.0917 1
0.2697*** 0.2553***
CONC 0.2170 0.1801 0.1287 0.0911 0.0843 0.2410 0.1672 -0.0298 -0.0313 0.0710 0.0445 1
*significatif au seuil de 1%, **significatif au seuil de 5%, ***significatif au seuil de 10%
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Journal of Business Studies Quarterly

2013, Volume 5, Number 1 ISSN 2152-1034

The Contribution of Intangibles to the Value Creation

Maha BEN TANFOUS

Keywords: intangible assets, research and development, advertising, incentive schemes,

2 - Background and hypothesis formulation

Lacroix.M (1997, p.63) considers the intangible investment as « a virtual stream,

Previous definitions allow us to understand the different reflections conducted by

2.1- Contribution of research and development to the value creation

This literature review allows us to assume that:

H11: The degree of contribution of R&D depends on the corporate sector.

2.2- Contribution of advertising to the value creation

H21: The degree of contribution of advertising depends on the business sector.

2.3- Contribution of incentive and participation to the value creation

As reported by Buchko (1993) the employee shareholding has implications on the

- Reduction of agency costs: The financial participation allows reducing conflicts

-The conflict of interest between employee shareholding and managers is low;

- Employee shareholding is better informed through its participation in the general

-The employee shareholding decisions in a short-term perspective can destabilize the

In summary, these researches confirm the existence of a non-linear association between

2.4- Interrelationship of the intangible assets

The internal perspective illustrates (operational management, customer management and

3.1- Data collection and sample

A detailed description of the characteristics of our sample in terms of intangibles intensity

1 ICB: Industry Classificqtion Benchmark

3.2- Variables and measures

3.2.1- Dependent Variable

The explained variable is the market capitalization divided by turnover. According to

5 Health : equipment and heath services, pharmacy and biotechnology.

3.2.2- Independent Variables

Among the elements of intangible capital, we cite:

 Research and development

 Incentive and participation

Tra.I = Training costs / Payroll

LEV = Total debt / Total assets

SIZE = LOG (Sales)

This index is calculated as follows:

S: The total sales of the sector,

N: The number of activity branches.

4.1 - Univariate models

Regression n °1: Ln (MV.I)it = β0 + β1 RD.I it + β2 RD.I it 2 + β3 SIZE it + β4 LEVit + β5

Regression n ° 2: Ln (MV.I)it = β0 + β1 Adv.I it + β2 Adv.I it2 + β3 SIZEit +β4 LEVit +β5

Regression n ° 3: Ln (MV.I)it = β0 + β1 IP.Iit + β2 IP.Iit2+ β3 SIZEit + β4 LEVit + β5

Regression n ° 4: Ln (MV.I)it = β0 + β1 Tra.Iit + β2 Tra.Iit2 + β3 SIZEit + β4 LEVit + β5

RD.I: The R&D expenses ratio (RD.I = RD/Sales)

RD.I2: The square of the R&D expenses ratio

Adv.I: The advertising rate (Adv.I = Adv /Sales)

Adv.I2: The square of the advertising rate

IP.I: The percentage of incentive and participation of employees (IP.I = IP /Sales)

IP.I2: The square of the percentage of incentive and participation

Tra.I: The proportion of training expenses (Tra.I = Training costs / Payroll)

Tra.I2: The square of the proportion of training expenses

LEV: Leverage rate (LEV = Total debt / Total assets)

CONC: The market concentration ()

4.2 - Multivariate model

Ln (MV.I)it = β0 + β1 RD.Iit + β2 RD.Iit2 + β3 Adv.Iit + β4 Adv.Iit2 + β5 IP.Iit + β6 IP.I2it +

The econometric software « SATAT 10 » provides the results of estimation of the

5 - Results and discussion

5.1 - Descriptive analysis

IP.I 0.1718 0.3415 0.3408 0.3749** 0.4369* 1

significatif au seuil de 1%, significatif au seuil de 5%, significatif au seuil de 10%