Intellectual Capital and Profitability: A Firm Value Approach in the European Companies

Over the last decades, the world economy arose from an industrial economy into a knowledge-based economy. In the new era of knowledge, intangible assets are seen as the most important assets, driving companies towards unexpected returns. Intangible assets are capable to generate future benefits, which are drivers for differentiation. The companies are no longer seen as a pure production function, to be recognized in its structural complexity. The companies are seen as new age networks, structured around their resources and capabilities, most of them embodied by employees. The profitability of companies in the knowledge age is increasingly related to human factors and less based on tangible elements. Thus, it is strongly related to intellectual capital and less to physical capital. The concept of intellectual capital has been widely discussed over the recent years and there is no single definition of the concept. Sometimes we can observe some interdisciplinary around it. The purpose of this paper is to investigate the association between the degree of intangibility of European companies and their profitability, and the association between the degree of intangibility and the value of firms. The companies were ranked according their own capacity to develop and drive a knowledge intensive activity. Based on its intangibility, two groups of companies were extracted. The sample was based on the 500 largest European companies, rated by the Financial Times 2014 classification. Data relates to 2013 economic year. Profitability was measured by the following ratios: return on assets, return on equity, return on employed capital, and return on sales. The most relevant results of the empirical researchevidence a statistically significant association between intangibility and profitability. This assumption corroborates the principles stated in intangibles literature and in related accounting standards.