In this study, we modify the basic approach of Lev et al. (2009) to estimating organisation capital using UK data in order to provide further evidence of the ability of their empirical construct to explain future performance. We extend their study by setting any association between the organisation capital measure and future performance in a value relevance framework in which the incremental ability of the measure to help the prediction of future performance is associated with the incremental ability of the measure to explain market value.
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We find this particular measure of organisation capital explains future earnings and market value in the UK.
Using earnings as the measure of performance, the results of the empirical tests reported in this paper suggest that the organisation capital measure is incrementally positively associated with future earnings and equity market value. There is also solid evidence of a positive impact of the organisation capital measure on the persistence of earnings in the UK, in particular for profit firms. Associated with this evidence is evidence that the organisation capital measure is also positively associated with the coefficient of earnings in our accounting-based valuation models in the UK, again for profit firms. Finally, we find evidence that earnings persistence increases with industry adjusted organisation capital ranking. This finding is in line with the evidence that valuation coefficient of earnings in market value equations increases with industry adjusted organisation capital ranking. Overall, our measure of organisation capital seems to be value relevant because it helps in the prediction of future earnings and, for profit firms, is positively associated with the persistence of earnings.
|Short title||Organisation Capital|