Intellectual Capital - Assessing Value In The Information Age

ASSESSING VALUE IN THE INFORMATION AGE

According to Computer World, the growing difference between a company's book value share price and its market value share price is often, and increasingly, chalked up to intellectual capital. As Arthur Levitt, former chairman of the Securities and Exchange Commission (SEC) told the Economic Club of New York, "As intangible assets grow in size and scope, more and more people are questioning whether the true value—and the drivers of that value—are being reflected in a timely manner in publicly available disclosure."

Indeed, Fortune reported the results of a long-term study by Arthur Andersen consultants Richard Burton, Barry Libert, and Steve Samek, who for two decades monitored the gap between the book value and the market value of 3,500 U.S. companies. The results strongly favor those who insist that intellectual capital is being unduly, and potentially dangerously, ignored. In 1978, according to the study, book value for all the companies averaged 95 percent of market value. By the end of the 1990s, book value amounted to just 28 percent of market value. While the precipitous decline in technology stocks and the attendant slowing of the U.S. economy in the early 2000s showed some of this discrepancy to be the result of a stock-market bubble, analysts were in general agreement that no small amount of the difference could indeed be chalked up to unquantified intellectual capital. In other words, investors increasingly saw value in companies that traditional accounting methods were simply incapable of quantifying. Federal Reserve Board Chairman Alan Greenspan warned that such a gap between hard accounting data and the perceptions and confidence of investors was bound to breed tremendous problems in the future if left uncorrected.