Portfolio forming decisions: the role of intellectual capital

Abstract

Purpose

The purpose of this paper is to present a tool to categorize companies as potentially profitable on the basis of an intellectual capital (IC) analysis.

Design/methodology/approach

The paper distinguishes two crucial attributions for picking shares: IC and capitalization of IC-based growth potential. Using these two attributions, the author creates a portfolio from a sample of European companies and annually rebalances it. To test its attractiveness, the author then compares the portfolio with benchmarks and random portfolios during the period from 2006 to 2013 using a Sharpe coefficient.

Findings

The comparison of the constructed portfolio with the benchmarks demonstrates the importance of IC for market investors and the validity of the proposed tool. The Sharpe ratio of the portfolio is significantly higher than the mean and median Sharpe ratios of random portfolios. In addition, the importance of IC for choosing proper investment goal increases in crisis.

Research limitations/implications

This investigation can be improved by analysing other IC such as the qualification of CEOs, participation of the company in business alliances, and a company’s innovation activity. In addition, the paper considers only European companies.

Practical implications

The proposed tool provides a method to construct investment-attractive portfolios on the basis of IC.

Originality/value

The paper contributes to the literature by identifying the underestimated shares on the basis of a company’s IC and by developing an algorithm to create an IC-based investment portfolio.

Citation

Zavertiaeva, M. (2016), "Portfolio forming decisions: the role of intellectual capital", Journal of Intellectual Capital, Vol. 17 No. 3, pp. 439-456. https://doi.org/10.1108/JIC-10-2015-0087