The paper examines empirically the relation between intellectual capital efficiency and firms’ market valuation in India. Using data from Indian listed companies and Pulic’s Value Added Intellectual Coefficient (VAIC) measure, the paper constructs panel regression models for 10 years across seven industrial categories to examine the relationship between the intellectual capital efficiency and firms’ Market-to- Book Value (MTBV). The results suggest that the explanatory power of the individual components of intellectual capital efficiency (physical capital efficiency, human capital efficiency and structural capital efficiency) is observed to be better than the aggregate composite measure (VAIC). The results also affirm that expenditure on innovative capital and relational capital captures additional information on structural capital and has a positive effect on firms’ value contemporaneously. Further, in the presence of all the intellectual capital components, firms with greater innovative capital and relational capital in the ensuing year tends to have higher MTBV in the following year. The study does not support the idea that after controlling for structural capital efficiency, the firms with greater innovative capital tend to have higher MTBV during pre- and post-2008 financial crisis in general and across the Indian industries. The results extend the understanding of the role of intellectual capital in creating firms’ MTBV for companies in Indian economy.

Firms’ valuation approach differs across the stakeholders. The promoter, economist, accountant, trader and investor perceive firms’ value differently. However, the persistent difference between the firms’ book value and market value has been a fortified field of inquiry queuing from Ohlson (1995). The increasing gap between firms’ market and book value across the markets has drawn a wide research attention to explore the invisible value omitted from financial statements (Lev, 2001; and Lev and Radhakrishnan, 2003). Examining over a period of 24 years, data on US firms listed in S&P 500, Lev (2001) reported that book value only captures 20% of firms’ market value. Against this backdrop, it is understood that the firms’ valuation is an important consideration for investors, practitioners and regulators. Further, market value has a more meaningful implication than the book value. The investor has to pay the price to the firm to own a part of the business regardless of what book value is stated. Thus, high market value of a firm provides liquidity, high growth, high market capitalization and profitability.

Financial analyst, investors and managers sought to identify the proxies that predict firms’ value. A wide array of parameters have been used in the literature to measure the firms’ value (Basu, 1977, Campbell and Shiller, 1988; Pastor and Veronesi, 2003, 2005 and 2006; and Fink et al., 2010). However, the Market-to-Book Value (MTBV) ratio is used as one of the most accepted standard measures in valuation literature. The present study attempts to fill the gap in the existing literature by empirically examining the relation between intellectual capital efficiency and firms’ market valuation in India.

Applied Economics Journal, Value Added Intellectual Coefficient (VAIC), Market-to- Book Value (MTBV), Bombay Stock Exchange (BSE), Sample Selection, Intellectual Capital on Firms’ Valuation: An Empirical Investigation with Reference to India.