The role of social and human capital in assessing firm value: A longitudinal study of UK firms

Abstract

This study examines the role of board social and human capital in assessing the market value of firms in the UK context. As the world economy has shifted from manufacturing to service and knowledge-based economies, attributes such as knowledge, expertise, skills, ability and reputation are increasingly fundamental to the success of business enterprises. There is a growing consensus that these attributes are an increasingly valuable form of capital, asset or resource, despite their intangibility. In accounting, there are a number of problems arising from the accountability of non-physical, non-financial capital. Firstly, some forms of capital and certain assets are neither recognised nor presented in the statement of financial position. Secondly, some accounting practices relating to intangible assets are very conservative, resulting in undervalued assets and overstated liabilities. Consequently, there is an increasing gap between the book value and market value of firms. This gap restricts the relevance of information presented in financial statements and suggests that there is something missing in financial statements. This is the research problem being addressed in this study.

While prior literature demonstrates that it has proven difficult to operationalise intangible forms of capital, there has been significant empirical attention and theoretical development in social and human forms. This thesis aims to contribute to accounting theory and practice by exploring the impact that board social and human capital have on firm market value. In light of extant research, it is hypothesised that social and human capital possessed at board level are positively related to the market value of firms. This study employs the Ohlson’s (1995) residual income valuation model to test the impact of social and human capital using a sample of UK firms listed on the FTSE All Share index for a period of 10 years (2001-2010). Social and human capital measures are derived from interlocking directorate ties and detailed biographic information of board directors. This study benefits from Pajek and Ucinet network packages to generate network maps and calculate positional metrics such as centrality and structural hole measures.