Electronic copy available at: http://ssrn.

com/abstract=2251620

Investigating of relationship between intellectual capital and
financial performance of Petrochemical Companies listed in
Tehran Stock Exchange

Samira Sarmadi
1


Abstract
oday, the role of intellectual capital in the profitability and competitive advantage of
companies is more than financial capital. The main purpose of this paper is to raise an
awareness of intellectual capital among Petrochemical Companies listed in Tehran
Stock Exchange. Also, This study emphasis on empirical evidence of the relationship between
intellectual capital and companies' profitability indicators. Measuring the intellectual capital with
Pulics model and for measuring the companies profitability, return on assets and return on
equity are used. The time domain is between 2008 until 2012 and to test hypotheses and analyze
data panel regression, least squares (LS) is used. Research findings show that there is significant
relationship between intellectual capital and two performance indicators (return on equity and
return on sales) in Petrochemical Companies listed in Tehran Stock Exchange. Also, our findings
show that among component of intellectual capital, structural capital efficiency has most
relationship with financial performance indicators and so among the financial performance
indicators, return on sales (ROS) has most relationship with component of intellectual capital.

Key words: financial performance. Intellectual capital. Petrochemical Industry

1
. MA student in Payam Noor University
T
Electronic copy available at: http://ssrn.com/abstract=2251620

1. Introduction
During the second half of the twentieth century, the role and importance of science in economics
and business has been changed very much. The important of this matter is so much that Europe
Union in summit in Lisbon, Portugal (2000) introduced its goal to become the largest economy
in the world based on its knowledge. In the past 10 years, more than 7,000 scientific articles in
scientific journals have published about Intellectual Capital. The role and importance of the
knowledge is not only at the macro level of economy and trade but also at the company
management processes has been steadily increasing. One of the major problems of traditional
accounting systems is their inability to assaying and measuring the intellectual capital of the
companies. These systems cant ability to measure and report the real value of intangible assets.
Hence, trend to measuring and reporting the real value of intangible assets and knowledge in the
financial statements of companies has increased more than ever. Companies, especially
companies involved in industries related to the knowledge are required to understand the
importance of intellectual capital and should know that Knowledge is one of the most critical
factors in the company's ability to remain competitive advantage in the current market; also
managers should be aware of intellectual capital. Without awareness of this valuable asset,
managers cannot make the right decision and thereby perhaps be causing wasting this precious
asset. Therefore the intellectual capital reporting for managers and for company's stakeholders is
very important. Managers should be aware of the company's intellectual capital in order to
manage these assets properly and make necessary plan for better use of their assets. Stakeholders
and users of company reports also will be able to be aware of the intellectual capital available in
the organization and can take more informed decisions.

In this article, significant relationship between intellectual capital and financial performance will
be investigated in Petrochemical Companies listed in Tehran Stock Exchange.



2. Definition of Intellectual capital
From the beginning of discussions about the intellectual capital since the decade 60 till now,
different definitions have been proposed for intellectual capital. In general intellectual capital has
the meaning more than intelligence and accompanies with levels of intellectual operation (Bonits
1998). According to this definition, intellectual capital is not only a static invisible assets but a
ideological and dynamic process. In fact intellectual capital is a combination of knowledge (that
often refers to human capital) and the skill for using this knowledge. Edvinson, Eskandia and
salivan (1996) in the Europe management magazine, introduced the intellectual capital as a
knowledge that can concluded to value making.
Broking (1997). Consider intellectual capital as a difference between book value and market
value. Estewart (1997) introduced intellectual capital as a specific characteristic. Edvinson
(2000) introduced intellectual capital as the future profitability factor that derived from combine
human capital and employed labor ability of the company. Eskaych (2004) introduced
intellectual capital as a knowledge that can concluded to the value creation for the company.
David Mar (2004) defined intellectual capital a collection of a knowledge properties belonging to
the organization that causes value raising of the organization and improvement of its condition
.The similarity of all of these definitions is introducing intellectual capital as a knowledge, skill,
and ability that can lead to wealth making valuable output for the company. Therefore
intellectual capital is considered as an intellectual resource, knowledge, information and
intellectual properties that concluded to value making and profitability for the company.
Different definitions of intellectual capital create a condition to analyze and investigate the
subordinate and quality position of intellectual capital. According to different definitions of
intellectual capital, most samples consider three subordinates for intellectual capital that are;
human capital, correlative capital (customer) and structural capital (organizational). Human
capital is the main and potential ability of the organization that is a combination of the
employees general and professional knowledge. Human capital is knowledge storage in the
organization that is showed by the employees (Bonits 1998).
Employees intelligence ability and the abilities of solving problems also cause raise human
capital of the organization. Existence of creative and able human labor causes raise in present
human capital in the organization that is an effective factor in perfect using of company
resources and assets.
Correlation capital (customer) is a collection of assets that causes the relation with environment,
customers, stocks, goods suppliers, rivals, and government. Although the most important part of
correlation capital is customer relations, but shouldnt consider only these relations. Correlation
capital includes company reputation and suppliers, customers feedback systems and customers
loyalty. In fact stabilizing a strong and essential correlation with all environment parts, from
goods supplier to customer is an important factor in value making, profitability and company
market share. In general, customer capital is the knowledge employed for marketing and keeping
customers.
Structural capital (organizational) contains all of the present non-human knowledge in the
organization that includes data base, organizational diagrams, strategies, process guides and
other things that value more than its cost (Bonits 2000). In fact organization capital is some
things that remained in the organization when employees are exiting from the organization (Roos
1997).Organizational capital is an important factor to increase creativity in the organization. In
other words, if the employees of the company have the ability and creativity but the organization
structure is weak, the employees abilities and talent cant be used to create value and increase
productivity of the organization.

2-1 Methods of measuring the intellectual capital
As there are different definitions for intellectual capital, there are also different samples for
measuring and estimating the intellectual capital. In fact the first measuring model of intellectual
capital can related to James Tobin who measured the relation between market value and
company substitution (1978). After Tobin different estimating methods have been used in the
world by many companies.
As mentioned above, generally there are 37 models for evaluating and measuring the intellectual
capital. About different models of evaluation the intellectual capital, should say that all of the
models of intellectual capital measuring are placed in two groups:
1-The models that evaluate intellectual capital in the of qualitative and non-monetary such as
Balance scorecard, Scandia director and
2-The models that evaluate intellectual capital in the form of quantitative and monetary such as
economic value added, economic value added coefficient and

3. Research literature
So far, many researchers have been done in order to measure intellectual capital of companies in
different countries. Including research of Bontis in Canada (1998) and Bontis and colleagues
research in Malaysia (2000) showed that there is a positive relationship between the elements of
intellectual capital (human, structural and customer) and industry performance, human capital,
regardless of industry type have effect on corporate performance, and structure capital have
positively relationship with financial performance. Belkaoui Research (2003) conducted in
multinational US companies showed that there is a significant positive relationship between the
financial performance of U.S. multinational corporations and corporate intellectual capital. Chen
and colleagues (2005) investigated the relationship between intellectual capital with market
value and financial performance of companies listed on the Taiwan Stock Exchange. They used
the intellectual capital Pulic model to measure intellectual capital and the regression analysis
showed that if the company's intellectual capital is more, their financial performance and market
value will be higher. Piotan and his colleagues (2007) investigated the relation between IC and
financial function in Singapore stock exchange based on three financial indexes (earning per
share, ratio of return on equity and ratio of yearly return). The result showed that there is positive
relation between IC and financial function indexes and there are meaningful differences between
IC rate in different industries
In Iran, Anvari Rostami and Seraji examined different methods and models for measurement of
intellectual capital. In another study, Seraji, Anvari and Rostami investigated the relationship
between intellectual capital and stock market value of companies listed in Tehran Stock
Exchange. Findings showed that intellectual capital is highly correlated with stock market value.
Hemmati and Nikoonasbati investigated the relationship between intellectual capital and ratio of
market value to book value and financial performance of companies listed in Tehran Stock
Exchange between 2006 to 2010. The results showed that significant positive relationship exists
between intellectual capital and ratio of market value to book value and financial performance.
Abbasi and Sedqi in a research studied the effect of performance of each of the elements of
intellectual capital on companies financial indicator in Tehran Stock Exchange. The results
showed that the firms with higher intellectual capital have better financial performance. Setayesh
and Kazemnejad (2010) in their study investigated the effect of intellectual capital on the
performance of companies listed in Tehran Stock Exchange. The results showed that between
2002 and 2007, intellectual capital has a significant positive relationship with rate of return on
assets and asset turnover, but here is no significant relationship between intellectual capital and
ratio of market value to book value.

4. Research method
This study is a descriptive study and in terms of purpose, is an applied research. The purpose of
this study is investigating of relationship between intellectual capital and financial performance
in Petrochemical Companies listed in Tehran Stock Exchange.

4.1. Research hypotheses
4.1.1. Main hypothesis
There is significant relationship between intellectual capital and financial performance.

4.1.2. Sub-hypotheses
1) There is significant relationship between intellectual capital and Return on Equity (ROE).
2) There is significant relationship between intellectual capital and Return on sales (ROS).

4.2. Population and sample survey research
The method used in this research is case study method. In this method all financial statements of
Petrochemical Companies listed in Tehran Stock Exchange between 2008 until 2012 are
extracted and considering the features listed below finally 36 companies have been recognized
eligible.

1. Their financial period ended March 29.
2. Are profitable during the period of study.
3. Shareholders equity rights are not negative during the period of study.

4.3. Research model
In this study for measurement of intellectual capital, Pulic value added intellectual coefficient
model is used. Pulics intellectual capital measuring model (VAIC) was introduced in 1997.
In this year, the first scientific results based on value added intellectual coefficient was examined
in Australian banks. Pulic developed this model in 1998. The concept of value added intellectual
coefficient and its application in business were introduced at the World Congress of management
and measurement of intellectual in McMaster University. In 1999, for first time value added
intellectual capital coefficient of Croatia's top 400 companies was conducted and the results
published in the Economic Journal of this country. Pulic completed his model in 2000, and until
today so many scientific articles about the value added intellectual capital coefficient and its
various applications have been published in the world by him and other prominent professors and
professional experts from different countries. The value added intellectual coefficient in a
number of scientific conferences in the world proposed and many experts have used this factor in
business affairs. The following reasons may be considered as factors that introduced Pulics
model much better than other models for measurement of intellectual capital.
1) Value added intellectual coefficient method is very simple and transparent and provides a
basis for standard measurement.
2) In this way data required to calculate intellectual capital can easily be derived from audited
financial statements and therefore its calculation is also approvable and endorsable.
3) This model is based on both performance evaluation and creation value of tangible and
intangible assets of a company.
In Pulic model (2000) value added of company is the difference between revenue from sales of
goods and services and the cost of purchased materials and services.

Value Added (VA) = total revenue from sales of goods and services - cost of purchased materials
and services.

Value Added could be also calculated with regard to the information reflected in the annual
financial statements as follows:
Value Added (VA) = Operating income + labor expenses + Depreciation costs

In fact, in Pulic model staff salaries payment are not considered as cost but it is considered as
investment. In Pulic model, the intellectual value added coefficient has three subsets of human
capital efficiency, structural capital efficiency, and capital employed efficiency. Methods of
calculating of each of these sub-categories are as follows:
1) Human capital efficiency (HCE)
This ratio represents the value added created by employees that obtained from dividing value
added to the salary costs of employees and it means that for every $ payroll costs how much
value added is created.

ECE =
vA
BC

HC: Human capital that is equal to the cost of staff salary.

2) Structural capital efficiency (SCE)

This ratio represents the value added arise from existing processes and structures available in the
company and is obtained from structural capital divided to the value added.
SCE =
SC
vA


SC: Structural capital is obtained from the following equation:
SC: VA - HC

3) Capital employed efficiency (CEE)
This ratio represents the value added arise from the application of physical and evident assets
and it means that for every $ assets how much value added is created. This figures comes from
dividing value added to the capital employed.
CEE =
vA
CE

CE: It is capital employed which is equal to book value of total assets of company excluding
intangible assets.

Given the above definitions, Pulics value added intellectual coefficient is obtained from the
following equation:
VAIC = HCE + SCE + CEE
As indicated in Pulics model, social (customer) capital is not considered.
4.4. Research variables
Research variables are divided into two groups: independent and dependent variables.
4.4.1. Independent variables
According to the model used and basic theoretical Pulics model, components of intellectual
capital are used as independent variables and are: human capital efficiency (HCE), structural
capital efficiency (SCE) and capital employed efficiency (CEE).
4.4.2. Dependent variable
In this article, dependent variable are financial performance and profitability containing return on
Equity(ROE) and return on sales(ROS).
ROE: Return on Common Equity
R0E =
NI
E(A)

NI: Net Income
E(A): Average of common equity
ROE is viewed as one of the most important financial ratio. it measures a firms efficiency at
generating profit from every dollar of equity.
ROS: Return on sales
R0S =
NI
TS

NI: Net Income
TS: Total sales
ROS: it measures a firms efficiency at generating profit from every dollar of sales.
4.5. Research tools and statistical methods

After extracting data from the audited annual financial statements and after examination of the
data reliability and normality data were processed with the help of econometric software
(Eviews7) and applying the method of least squares regression (LS).

5 - Hypothesis test and analysis of data
The first step is to examine the significant relationship between the components of intellectual
capital and return on equity; we will use the following regression equation.
ROE
it
= 0 + 1HCE
it
+ 2SCE
it
+ 3CEE
it
+
it
Table 1. Summary results of regression calculations (between components of intellectual capital
and return on equity)
Coefficient
T-test
R-squared
F-test Variable


T-statistic
Prob. (T-
statistic)
F-statistic
Prob.
(Fstatistic)
-0.461 -1.722 0.09
0.498 18.534 0.000
C
0.036 2.759 0.045 HCE
1.518 3.167 0.002 SCE
0.786 2.266 0.027 CEE

According to information given in table1 concerning dependent variable of return on equity and
with regard to the statistic F-Statistic and level Prob it can be concluded that the model have
statistically significant validity, therefore hypothesis on existing significant relationship between
the components of intellectual capital and return on equity will be confirmed.
With regard to the T-Statistic absolute value that is greater than 1.96 and level Prob (Prob.
<0.05) it is appear that there is a significant relationship between all components of intellectual
capital and return on equity. As it is indicated, human capital, capital employed and structural
capital have direct relationship with return on equity.
In summary it can be conclude that:

1. There is significant relationship between components of intellectual capital with the
return on equity. (Regression coefficient R
2
= 0.50)
2. structural capital efficiency (SCE), Capital employed efficiency (CEE) and Human
capital efficiency (HCE) with 1.51, 0.78 and 0.03 coefficients, respectively, have direct
relationship with the company's ROE.

Now we examine the relationship between components of intellectual capital and return on sales
by using the method of least squares (LS) and using the following model:

ROS
it
= 0 + 1 HCE
it
+ 2SCE
it
+ 3CEE
it
+
it

Table 2. Summary results of regression calculations (between components of intellectual capital and
return on sales)
Coefficient
T-test
R-squared
F-test Variable


T-statistic
Prob. (T-
statistic)
F-statistic
Prob.
(F-statistic)
-0.188 -3.393 0.001
0.846 102.714 0.000
C
0.011 6.667 0.000 HCE
0.299 3.019 0.003 SCE
0.422 5.873 0.000 CEE

According to information given in table2 about the dependent variable return on sales ratio and
according to the F-Statistic and Prob level,We can be concluded that the model is significant, so
this model is also verified. In other words, according to Table 2 the following results were
obtained:
1. There is direct and significant relationship between Intellectual capital and return on sales
ratio (regression coefficient = 0.84)
2. Capital employed efficiency (CEE) ,structural capital efficiency (SCE) and Human
capital efficiency (HCE) with 0.42, 0.29 and 0.01 coefficients, respectively, have direct
relationship with the company's ROE.

5.1. Conclusion
As summary, research findings can be presented in Table 3.
Regression
Results
Prob.
Adjusted
R-square
R-
square
Independent variables

Dependent
variable
HCE SCE CEE
The first
hypothesis is
confirmed
Acceptable 047 0.49 0.036 1.518 0.786 ROE
The second
hypothesis is
confirmed
Acceptable 0.83 0.84 0.011 0.299 0.422 ROS


The final research findings could be presented as follows:
1. There is significant correlation between intellectual capital and financial performance
indicators(ROE and ROS) in Petrochemical Companies listed in Tehran Stock Exchange.
2. It can be stated that among the components of intellectual capital, Capital employed
efficiency (CEE) and structural capital efficiency (SCE) have most relationship with the
financial performance indicators (ROE and ROS) in Petrochemical Companies listed in
Tehran Stock Exchange, Petrochemical Companies have depended strongly to its Capital
employed and structural capital, and actually owes much of its value added to these assets.
3. With investigate dependent variable coefficients, can be concluded that dependent variable
ROS have greatest dependent with independent variables.

5.2. Limitations of research
Limitations that existed in research components and interpretation of research findings and its
ability to generalize the case which should be considered include:
1. Lack of statistic population and shortage of studied period, which can affect the results
are among the limitations of the study.
2. Since for calculation of variables of the study, financial statements prepared on historical
cost basis are used, any change or modifying of information in the financial statements
based on current value may be influence the results of outcomes of this research.

5.3. Suggestions
According to research findings, will be presented Suggestions as follows.
1. Due to the limitation of Pulics model to items presented in financial statements annually,
Recommended, parallel Research with the current research is conducted through a
questionnaire to compare the results two methods.
2. Due to the limitations and requirements of the Iranian accounting standards
recommended companies, information about how to identify, measure their intellectual
capital in the form of a report annually board presenting to general meeting.







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