The Valuation of Organization Capital Across Profit and Loss Firms

Sammanfattning: Investments in intangible capital and the frequency of reported losses have increased among firms over the last decades, in turn leading to a deteriorating link between book value of equity, earnings, and equity market values. Existing literature on the valuation of loss firms suggests that the value relevance of book value of equity and earnings is moderated by the extent of knowledge capital among these firms. Using an augmented version of the Ohlson (1995) model for a sample of 80,522 U.S. firm-year observations, we show that organization capital has incremental, yet modest, explanatory power to that of knowledge capital for explaining the equity market values of loss firms. We also find consistent evidence of a positive and differential valuation of organization capital across profit and loss firms. However, when we look in more detail at qualitatively different loss firms in our sample, we find no support for a differential valuation of organization capital. This is inconsistent with our expectation and overall suggests that investors are able to assess differences in organization capital between profit firms and loss firms, but fail to do so between qualitatively different loss firms. These findings contribute to our understanding of the stock market valuation of organization capital and provide new insights into the value determinants of loss firms.