In the new economy, Intellectual Capital (IC) has been identified as one of the most important factors in driving economic growth. Rapid globalization characterized by advances in technology, research and development and increasing competition has been essentially driven by growth in IC. Companies operating in industries like banking, software, pharmaceuticals, hotel, etc. can be said to be extensively dependent on IC as an asset for generating revenues. Until the recent years, the true value of IC was missing from the balance sheets of firms as the focus of economists as well as accountants was primarily the transaction model comprising of historic value of tangible performance. The evidence for the same can be derived from the ever-increasing gap between market and book value of firms. As IC is the sum of hidden resources of any organization not being fully reflected in the accounting statements, neither IC nor its components are capable of being identified and analyzed by the managers. Nevertheless, looking beyond the assets reported in financial statements should be a critical exercise for every organization wholly or partly dependent on intangibles for its value creation. The present study is based on Pulic’s Value Added Intellectual Coefficient (VAIC) as a measure of IC of a firm to empirically examine the relationship between IC and traditional measures of financial performance, namely, profitability, productivity and market valuation using a sample of 10 BSE 100 IT and Pharmaceuticals companies for the period 2008-12.

There can be unanimous consensus on the fact that across varying industries and sectors, there are firms that consistently outperform their peers. Such supernormal performances generally manifested by sustained growth in sales, earnings and market value cannot be attributed to monopoly power or competition constraining regulation but rather to the organization of the leading enterprise (Lev, 2005). These organizations deploy a unique interplay of its strategic resources and processes to deliver supernormal profits. Traditional tangible assets such as land, plant and fixtures, labor continue to be indispensable to the process of physical production but they can no longer account for superior corporate performances. Their relative importance has decreased over the years and importance of knowledge assets has increased. In fact, the last two decades have witnessed a major transformation in the world economy. The transformation is driven by knowledge related intangible assets. The paradigm of business shifts from an asset-centric environment to a knowledge-based environment. It has become more important and decisive than any other physical asset and can be used for survival in a highly competitive business environment in which business firms and other groups are competing for exceptionally limited resources. Intellectual Capital (IC) refers to the knowledge assets that are available to organizations and is a large part of intangible value.

Knowledge Management Journal, Intellectual Capital (IC), Financial Performance, Market Valuation, Balanced Scorecard (BSC), Value Added Intellectual Coefficient (VAIC), IT and Pharmaceutical Companies, Measurement Models.