The corporate governance should look at the investment on intangible assets (ITAs) from two angles: its influence on future growth and the influence of other factors on ITA. Therefore, the purpose of this paper is first, to empirically investigate the relationship between investment on ITAs and future growth in the manufacturing sector earnings and second, to examine the effect of various variables on the level of investments on ITA in this sector.
Based on data of 384 Japanese listed manufacturing companies founded before 2001, four regression models were developed and estimated using ordinary least squares. In part, this study extends the work of Singh and Faircloth, which examined the relationship between research and development (R&D) expenditure and corporate leverage, by taking into account the other ITAs and other factors. The dependent variable used in the first model was the corporate growth and explanatory variables are changes in the ITAs (ΔITA), whilst in the other models, total investments on ITA (and changes in the investments on ITAs) against the company's size, sector, age, financial status, dividends, cash flow, and growth are regressed. Both logs and lags were used with the model's variables.
The results showed that the mean of total investment on ITA increased heavily (85 percent) between 2001 and 2005. However, ITA represents, on average, only about 1.2 percent of total assets and 1.3 percent of total sales. Regression results suggest that investment on ITA forecasts around 15 percent of the variation in a company's future growth. The company's size, segment, financial status, dividends, cash flow and growth are significant variables which predict nearly half of the variation in the investments on ITA. The inclusion of two lags of the appropriate variables in the model provides better results and the adjusted R2 increased significantly to reach, on average, 0.60.
In the internet era, companies have become heavily involved in larger investments on ITAs (intellectual capital). Since the research in the area of ITAs is undersized and much of it was directed towards R&D, this study contributes to this area of study showing how can investments on ITA in the manufacturing sector be an important element for future growth which concerns corporate governance.
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