Research Design

Project “The Changing Role of Companies’ Intangibles over the Crisis”

Elena ShakinaAngel Barajas

12.04.2013

The Aim of the Discussion

To identify the common framework of our study

To agree on terms and methodology

To draw a core specification of the empirical analysis

To have a common understanding of the key outlines of our study

The Framework of our Study

Considering a positive economic profit as a condition of value creation

Examining intangibles on key value drivers

Establishing critical impact of exogenous economic shocks (crises) on companies’ value drivers

We learn more about the value creation process on turbulent markets

Research Framework:EVA concept

NOPAT

Capital Charge EVA

EVA Invested Capital ROIC WACC

WACC ROIC industry

WACC – alternative costs of invested capital

Market Value (Equity + Debt)

Invested Capital

Market Value Added EVA1

EVA2EVA3

MVAMVA MV IC

Research Framework:MVA concept

Research Framework:Value creation EVA & MVA

Economic profit (or EVA) is an indicator of companies performance which shows if a particular company succeeds covering alternative costs of its investors

Market value added is an outcome of investors estimations (expectations) regarding companies’ future – investment attractiveness

Value Creation as a management goal to meet requirements of investors (Steward, Stern, Copeland, Koller, O’Byrne etc )

Investors are looking for companies with positive (or increasing) EVA and providing a growth of MVA

Exploration of EVA drivers (managers’ view)

Research Framework: Specifying value creation process

Investment decisions made by companies’

managers:• to invest in resources

which provide competitive advantages

input

• Companies resources

output

• EVA

outcome

• MVA

Positive and increasing EVA

• is a goal of managers• is a signal for investors

to buy

Shows that companies value drivers were

recognized by investors

Exploration of MVA drivers (investors’ view)

Exploration EVA as an indicator of investment attractiveness

12

“Production function”

Inputs (Intangibles)Output: EVA

(competitive advantages )

Outcome: MVA (outcome of investment

attractiveness)

Value creation process

Economic crisis which influences a value creation process

by affecting market conditions and investors’ expectations

Research Framework: Specifying crisis impact

Key assumption

Value creation process and value drivers are likely to be changed across

crisis periods

Research Framework:Value Drivers of EVA &MVA

EVA is associated with companies’ intangibles

which provide competitive advantages

the quality of human resources, social capital

the efficiency of relations with companies customers,

suppliers, partners, investors

innovative activities

internal business processes

MVA is associated with companies’ intangibles which are treated by investors as growth

enhancers

top-management qualification and expertise

marketing network, contracts, brands, reputation

intellectual property, new products

quality management system

Human Capital

Relational Capital

Innovative Capital

Structural Capital

Research Methodology

Quantitative analysis

Hypothetico-deductive reasoning

basing on theory and practical experience

the hypotheses are put forward

Quasi-naturalistic observationsInformation is taken from companies annual reports, financial markets, rankings, information bureau, websites

Methodology:how to measure Intangibles

Most of the intangibles have no direct estimation• Proxy indicators provide a solution

Asking companies’ representatives• High degree of subjectivity• deep understanding of respondents• Much data available

Collecting data from public available sources (by involving few experts) • Restricted information and data

available• Estimations are less biased and more

objective

Methodology:proxy indicators

Proxy indicators have to be validated for each particular case! Ways to do that…

Examples:

• ‘board of directors’ qualification’ is used as a proxy indicator for the quality of all human resources as expected to have a positive correlation with the qualification of

the staff hired• ‘owners/directors ratio’ is used as a proxy indicator for principal-agent conflict as a

probability of a principal-agent conflict is rising with the decreasing involvement of investors (shareholders) in corporate management

The scale might be wrong but if we apply it for all observations, at least we are able to compare them

conducting statistical analysis

Methodology:tools

Specification &Econometric tools

to establish causality(avoiding endogeneity)

to estimate statistically significant relation

to conduct the analysis of the estimated functions

Specification• linear relation

• framework of CES production function

Estimation tools• panel data analysis

• structural equations modeling• hierarchical multiple

regression

Methodology:econometric specification

to make an accurate estimation non significant factors can be skipped

• Every specification has to take into account:• all value drivers (theoretically established)

• control variables related to country, industry, period

Inputs

Control variables

Output/outcome

Research Questions

Comparative study of different time periods: before, during and after the economic crisis

Comparative study of different European markets: UK+Germany+France (prosperous economy) and Spain+Italy (protracted economic crisis)

Comparative study of different industries: traditional vs. innovative, production vs. services, high concentrated vs. industries with high competition …

Intangible drivers of companies’ competitive

advantages expressed in EVA (industry benchmark)

Intangible drivers of companies’ investment

attractiveness expressed in MVA

Transformation of companies’ competitive

advantages into investment attractiveness (external and

internal drivers)

Examples of the Hypotheses

The more flexible the company was (in terms of changing investment strategy) the better its chances of survival during the crisis

The return to scale of intangibles employment changes across the prosperity, crises and recovery periods

Traditional industries were less influenced by the crisis shocks in relation to innovative ones

International penetration of UK and Germany companies provided them with the survival support during the recovery period

have to based either on failure of theory or on contradiction faced in the empirical studies