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Vol-7, Special Issue3-April, 2016, pp1108-1116 http://www.bipublication.com

Case Report

The Relationship between Human Capital and Financial Performance

Vali Yasemi

Visiting professor at Payam Noor University, Ilam, Iran

Corresponding author: Email: valiyasemi_61@yahoo.com

ABSTRACT

Organizations are entering into knowledge-based economy,theeconomy in which knowledge and assets are recognized as the most important competitive advantage of organizations. One of the elements of invisible assets is human capital which has an important impact on performanceand strategicimplementation of organization. Therefore recognition, measurement, and management of human capitalhave special importance and lead to observe real values of organizations. The aim of this research is studying relationship between financial performance and human capital. The sample includes all listed companies in Tehran stock exchange between 2008 and 2012 which 83 companies was studied after screening (systematic elimination). The method of study is correlative-descriptive. Findings of the study show that there is a significant relationship between human and financial performance. Also findings indicate that there is significant relationship between human capital and earnings per share, annual stock return, and return on total equities.

Key words: financial performance, human capital, earning per share, annual stock return, and return on total equities.

INTRODUCTION

At present, the time of focusing only on industry has beenspent completely. It is era of knowledge-based economy which results in producing wealth and value added and it passes its growth and development stages. It is clear that today it can't and shouldn't see the intellectual scales as valuable and theoretical because, present century requires research, thought, and new conception. Modern organizations of any kind should renew their structures and processes, regulate their relationships and use their human resources-or human capital - optimally (Ghoreishi, 2006).In modern economy virtual and invisible assets together with real and visible assets determine

value of an organization. Most of the

organizations can present exact information about tangible assets such as land, building, machinery, and equipment but they don't have any evidence of registered proof of intangible assets like brand,

human capital, exclusive rights, and costs of research and development of human resource which create increasing value (Jasrotia, 2000). Lack of information about this matter that how much economical value of an organization is and

what relationship with performance of

organizational has, is considered among weak points of current accounting system (Hasanloo, 2012).At present conditions, traditional financial statements have lost their ability to reflect assets which have created wealth over time. Heretofore, assets and debts which were shown in financial statements were clear but at present with transmission to knowledge-based economy era, different categorization has been made in organizations.

Statement of the problem

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preserving and creating social assets. Organizations which don't pay attention to importance of knowledge in managing and handling company will face difficulty in continuing their activities. Intellectual capital has

considerable impact on performance of

organization because of importance of its composingelements (human capital, customer capital, structural capital, and physical capital). One of distinct features of knowledge-based economy is great investment on human capital and

information communication technology and

communication. Knowledge-based economy has potential of unlimited sources because human capacity for creating knowledge is unlimited. Invisible assets and human capital become complement of physicalassets. Investment is of basic and necessary elements in process of economical growth and development of country (Brojerdi&others, 2011).The aim of this research is studying mutual relationship between human capital and its effects on financial performance of organization in Teheran stock exchange. Since human capital has attracted attention of numerous groups like shareholders, managers, researchers, and politicians, therefore importance of this study is highlighting the role of human capital in evaluating managers' performances of listed companies in stock exchange in order to maximum utilization of their human capital. Findings of this study also help to better management of intellectual capital. In this research, the researcher is looking for answering to following questions.

1. Is there a significant relationship between human capital and financial performance statistically?

2. Can use of Tan-Plowman model lead to obtain higher net profit for companies?

3. Can model of human capital help to investors and shareholders in future decision making? Since the structure of human capital is used as part of issue of intellectual capital of companies in order to control operation and management of the company, performance has special importance.

Theoretical Elements of the Research Human Capital

Human capitalis one of the most important items of intellectual capital in organizations because it is the main source of creativity. These kinds of

assets are implicit knowledge in people

organization which is one of vital and influencing factors at performance of organization. But it should be noted that existence of these knowledge-oriented assets by itself are not enough in realization of performance in an organization. The purpose of company is transformation of implicit knowledge to explicit knowledge in all organizational levels. Otherwise it is impossible to create any organizational value. Human capital is

cumulative combination of general and

professional knowledge of staffs, leadership, problem solving abilities, and risk taking. What is clear from this definition is that measurement of this type of capital is difficult. Human capital promotes operational creativity of visible assets (equipment and tools) and activities invisible assets. In successful companies, heavyinvestments are done on staffs in order to increase and improve insights and abilities and experiences for competing in today changing environment. It is worth to pay attention to this point that these kinds of assets are not belong to companies and exiting individuals from the organization leads to loss organizational memory and this is considered a serious threat for organization (wulongGu and Ambrose wrong, 2010).

Earnings per Share

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process. With regard to difference between benefit numbers of different companies and changing profit numbers of a company during different courses compatibility of these numbers is difficult to some extent.(soleimani2012)

Annual Stock Returns

It is measurement of stock changes including stock return and modification for any types of stocksplit. Usually, at present the most important scale of measuring performance of firmsis rate of stock return. This scale by itself consists of information for investors and is used for measuring performance. When this scale is reduced it is a warning to the firm and it doesn't show suitable performance of firm. This scale has a lot of information content because measuring performance based on market value reflects information of investors well.

Return on Total Equities (ROE)

This element measures sum of profit in a year for equities namely how much profit has been obtained from a unit of equity.In fact, ROE states a ratio of profitability for stockholder (Kashani poor &Rezaee, 2011).Equities are indicating interest of main owners in net assets of the firm. Equities show the rest of main owners’ revenues of the firm from assets of the firm after subtracting its debts. In a firm, equities, infact, show their revenue(Soleimani, 2012).

Necessity of the Research

History of the world is witness of huge and undeniable role of women in different events. At present that issues of development of women are posed, role of women is paid attention severely. Conducting meetings, seminars, and different Congresses about positions of women and their roles in development indicates this important matter. With a little carful, it can be found that conducting these programs is indicating of another matter,namely the role of women as a half of developing world population has been neglected so far or at least in the recent centuries, that isn’t very pleasant. This matter shows the existence of sexual inequalities and discriminations in different political, economical, and, social fields. In order

to reach equivalence, equality, and removal of discrimination, and as a result better and more complete development of society, women should be able to participate in process of decision making in different levels of society. Promoting women to managerial positions in modern society is more important than before. Engagement of women specially in high levels of management has positive implications including decreasing rate of fertility, growth of indices of human development, and as a result, increasing knowledge, skills, and growth of public culture,

increasing hygienic indices, improving

educational development of educated women's children, and reinforcing felling of security( NastiZaee, 2009).Mutual relationship between the amount of women's participation in economical, political, and social areas and amount of development of countries is indicating paying attention to the important matter of lack of women's promotion to managerial positions. With increasing women's participation in different activities of society, they can have more control on resources and their life, fell independence, feel self confidence and self respect which it means to have an improving imagination which women have about themselves. Economical aspects of promoting women to managerial positions are also important. The costs of recruiting and keeping men are considerable and presence of women with lees financial expectations than men, decreases costs of organizations. In addition, increasing number of manager women, intensifies the conditions of competition for men and this competition both gives more right of selection to organizations and agitate the men's individual ability(Nasti Zaee,2009). Of requirements of reaching stable development is paying attention to issues of women as a half of population of any country. Without presence of women in different social areas, stable development doesn't take place (Chegini, 2011). From another aspect, presence of women in managerial positions leads to improving

performance of handling country and

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"soft" skills in management of human resources which are needed today more than before. Indeed,

present organizational conditionsrequire

democratic style of eldership and to be sensitive to individual's needs. In addition, presence of women in organizations causes development of sound culture and morality. Presence of women in managerial positions also facilitates organizational

evolution for improving organizational

communications and encouraging inventions.

purposes of the research Main purpose

Explaining amount of relationship between human capital and financial performance

Secondary purposes

1. Knowing human knowledge in companies inventions

2. The impact of human force in improving performances of companies

Conceptual Model of the Research

Efficiency of Human Capital

Efficiency of human capital show that how much value added (VA) has been createdin exchange forany spentrial for salaries and wages in the company.

The ratio of VA to cost of salaries and wages of entire of company (HC), indicate ability of HC for creating value in a company. Along with other theories leader writers of human capital (Edvinson, 1997), Palik states that the total costs of salaries and wages is indicator of performance of a company. So the ratio of VA to HC shows ability of HC for creating value in the company. HCE=VA/HC= (value added)/ (cost of salaries and wages of entire company) HC= total of paid salaries and wages to human resources. Similarly when HCE is compared at the level of a group of company, it is an indicating of quality of human resources of the company and its ability for creating VA for any spent Rial for HC. Companies which have higher HCE indicate that

more value added has been obtained compare to costs of salaries and wages. It means staffs of that company have high performance (Alemran, 2011).

Independent Variable

Regarding sensitivity of many companies and also regarding independent variable in this study financial performance of company which consists of three indices of earning per share,annual stock returns, Return on total equities will be studied as independent variables.

Earnings per Share (EPS)

Above mentioned index measures ratio of profit of ordinary shareholders to average of total number of stocks (Valipoor, 2009).

EPS= (Earning of ordinary share holders)/ (average of total number of share)

Human capital

HCE

Size of company

Return on total equity ROE Annual stock return Earnings per share EPS Financial

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Annual Stock returns (ASR)

It is measurement of stock changes including stock earning andadjustments for any kind of stock split. The profits from stock ownership is obtained through two sources

Dividend and distribution of cash 2. Increasing stock value

In this research and according to this model, return on total equity is as follow:

P0= price of ordinary shares in the year of x0 P1=price of ordinary Shares in the year of x1

g P D Ke 

0 1

0 0 1

P P P g 

D= dividend (Raee and Talangi, 2011)

Return on total equities (ROE)

It measures theprofit of a year compare to equities, namely for any unit of equities how much profit has been obtained during a year. In fact, ROE states a profitability ratio for share holders. This ratio is provided for indicating profitability power compare to booked capital of shareholders, and most of the time it is used for comparison between two or more companies in an industry in different sizes. Way of calculating ROE is as follow:

ROE= (pure profit)/ (sum of equities)

Control Variable Size of company

The size of company effects on the relationship between human capital and efficiency of financial performance of company.

In this study the impact of size of company on the relationship between variables and its impact on regression equation has been controlled and in order to calculate size of company natural logarithm of company has been used.

Findings

Studying normality of independent variables For normality or non normality test of dependent variable Kolomogrov-smirnovis used as follow. H0=Data has normal distribution

H1= Data doesn’t have normal distribution

6-1 Regarding the questions of researcher, the

following hypothesis has been codified.

1-6-1 Research hypothesis:

There is a significant relationship between human capital and financial performance indices.

Secondary hypotheses

Hypothesis 1 there is a significant relationship between human capital and ratio of earning per share (EPS).

Hypothesis there is a significant relationship between human capital and annual stock retunes. Hypothesis 3 there is a significant relationship between human capital and ratio of return on total equities.

Research Methodology

The research method naturally and contently is correlative -descriptive and in terms of purpose is functional. The framework of this study is inductive-deductive.

It means theoretical elements and research literature has been gathered through library studies, site research, and studying articles in the comparative framework, and information for testing hypothesis has been gathered through inductive framework. Information of this study is of after- event type.

Data gathering has been done through basic financial audited financial statements and listed papers and documents of companies. Time periods of this study is five years since 2008-2013. Population of the study includes all of listed companies (from all industries) in Tehran stock exchange.

The numbers of listed companies in Tehran Stock Exchange in the end of year 2012 are 521. After filtering and considering some scales only 83 companies remained as sample.

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Independent Variable

In this research regarding presented models, human capital was considered as independent variable. kolomogrove –Smirnove test was used

for considering H0. As you will see below, all of three variables have normal distribution.

Chart 1 test of Normality – dependent variable

Significance level

kolomogrove – Smirnove Test

The Most Standard Deviation Normal Parameter

Numbers Variable

Index The

most Negative deviation

The most Negative deviation

Absolute value

Standard deviation

mean

0.098 1.335 -0.111 0.148 0.148 6.26981 22.5880 415 EPS

0.093 0.953 -0.066 0.089 0.089 4.86276 20.2217 415 ROE

0.154 1.092 -0.088 0.135 0.135 2.12651 8.7060 415 ASR

With regard to chart 1 because statistics Kolmogorov-Smirnov Z is not significant at level of 5% with obtained amount of three variables of earning per share (1.335), return on total equity (0.953) annual stock returns (1.92) is not significant at level of< 5%. It means amount of variable is between (-1.96, +1.96) and level of significance is > 5%. So it can be said that hypothesis H0 is confirmed. Again it means distribution of quality is normal in society.

First Secondary Hypothesis

There is a significant relationship between human capital and

Ratio of earning eachshare (EPS).

For testing this statistical hypothesis correlation coefficient test is used. If correlation coefficient between human capital elements and earnings per share is significant at the level of 95%, statistical hypothesis H0 is rejected andH1 is accepted at significance level of 95%.

Chart 2Pearson-correlative coefficients, significance level and the number of statistical samples between elements of human capital with ratio of earningper share

Human capital Earnings per share

Human capital Pearson correlative

coefficient

Amount of Sig

Numbers of data

1

415

0.807

0.000

415

Earning per Share Pearson correlative

coefficient

Amount of Sig

Numbers of data

0.807

0.000

415

1

415

Critical value for this hypothesis is 0.000 which is the same level of significant and it has been considered for testing by SPSS. Regarding chart 2 the amount of validity of test for first hypothesis is 0.000 and is<0.05. As a result hypothesis 1 is conformed at the error level of 0.05.

It can be said that EPS has significant relationship with human capital HCE during 5 years. With regard to amount of Pearson- Correlative coefficient which is 0.807,it can be said that this relationship is positive. This relationship is intense (between 0.7 and 1 the relationship is intense).

Second secondary hypothesis

There is a significant relationship between human capital and return on total equity (ROE).

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Chart 3 Pearson-correlative coefficients, significance level and the number of statistical samples between elements of human capital and efficiency ofequities.

Human capital

Return on total equity

Human capital Pearson correlative coefficient Amount of Sig

Numbers of data

1

415

0.831 0.000 415

Efficiency stockowners rights Pearson correlative coefficient

Amount of Sig Numbers of data

0.831 0.000 415

1

415

Critical value for this hypothesis is 0.000 which is the same level of significant and it has been considered for testing by SPSS. Regarding chart 3 the amount of validity of test for first hypothesis is 0.000 and is<0.05. As a result hypothesis 1 is conformed at the error level of 0.05. It can be said that ROE has significant relationship with human capital HCE during 5 years. With regard to amount of Pearson- Correlative coefficient which is0.831, it can be said that this relationship is positive. This relationship is intense (between 0.7 and 1 the relationship is intense).

Third Secondary Hypothesis

There is a significant relationship between human capital and annual stock return.

In order to test this statistical hypothesis correlative coefficient is used. If correlative coefficient between element of human capital and annual stock return is significant at least at the level of 95%, statistical hypothesis H0 is rejected and statistical hypothesis is accepted at minimum confidence of 95%.

Chart 4 Pearson-correlative coefficients, significance level and the number of statistical samples between elements of human capital and annual stock return.

Human capital Return on total

equity

Human capital Pearson correlative

coefficient

Amount of Sig

Numbers of data

1

415

0.812

0.000

415

Efficiency of yearly stock Pearson

correlative coefficient

Amount of Sig

Numbers of data

0.812

0.000

415

1

415

Critical value for this hypothesis is 0.000 which the same level of significant and it has been considered for testing by SPSS. Regarding chart 4the amount of validity of test for first hypothesis is 0.000 and is<0.05. As a result hypothesis 1 is conformed at the error level of 0.05. It can be said

that ASR has significant relationship with human capital HCE during 5 years. With regard to amount of Pearson- Correlative coefficientwhich is 0.812, it can be said that this relationship is positive. This relationship is intense (between 0.7 and 1 the relationship is intense).

Main Hypothesis

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Chart 5 Pearson-correlative coefficients, significance level and the number of statistical samples between elements of human capital with indices of financial performance.

Dependent variable Independent variable

Human capital

Ratio of earning per share

Pearson-correlative coefficient Amount of Sig

Numbers of data

0.807 0.000 415

Return on total equity Pearson-correlative coefficient Amount of Sig

Numbers of data

0.831 0.000 415

Annual stock returns Pearson-correlative coefficient Amount of Sig

Numbers of data

0.812 0.000 415

Critical value for this hypothesis is 0.000 which is the same level of significant and it has been considered for testing by SPSS. Regarding chart 15-4the amount of validity of test for main hypothesis is 0.000 and is<0.05. As a result hypothesis 1 is conformed at the error level of 0.05. It can be said that there is a significant relationship between human capital and indices of financial performance of the company during 5 years. With regard to amount of Pearson- Correlative coefficient which is 0.807, 0.831, and 0.812 for variables of earning share, Return on

total equity and Annual stock returns

respectively,it can be said that this relationship is positive. This relationship is intense (between 0.7 and 1 the relationship is intense).

CONCLUSION

After testing hypothesis one by one and concluding about them, it is time to general conclusion. Researcher concludes that there is direct and significant relationship between element of human capital and indices of financial performance at posed significant level in research. In this relationship the element of human capital has the most correlation and relationship with index of Return on total equity. Again in this relationship the impact of size of company on

variable of human capital and financial

performance is direct. It is worth to note that contrary to developed countries, in developing countries evaluating local markets has been grown more than human capital with increasing physical

assets and they are less dependent to IC as a performance strategy. One of the reasons is that this growth is still dependent to buying and selling and processing natural resources as a basic strategy of growth. Iran stock market is not exceptional. For this reason physical asset CEE has the most coefficients in elements of intellectual capital.

Suggestions based on research findings

Regarding results of research and hypothesis test following suggestions can be posed.

Regarding results of the first and second hypotheses there is a significant and positive relationship between human capital with indices of ratio of earning per share and return on total equity from financial indices. Therefore it is suggested to managers and investors to pay attention to internal humanforces of organizations and their proficiencies.

It is suggested to managers report situation of their human forces for users of financial statements.

Suggestions for future research

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on human capital. It is suggested to study the relationship between human capital and

non-financial performance such as customer

satisfaction, staff, rank in industry, market share.

SOURCES

1. Alemran, R, 2012, “measurement of promoting

human capital on economic growth in selected

countries OPEK member”, professional

quarterly of parks and growth centers, 8th year,

No.32, Accounting MA thesis, Azad

University Kerman Branch.

2. Brojerdi, M. H. and MostafaKazemNejad,

2011, Measurment of quantitive models of estimating intellectual capital using financial variables”

3. Chegini . A, 2011, “Estimating Models and

Methods of estimating and evaluating

intellectual capital of companies”, Accounting and accountant studies, No.34, PP 51-75 4. Ghoreshi, A, 2005, “Measurement of Human

capital and studying the relationship between intellectual capital and equity markets of companies in Tehran stock exchange”, Accounting and Auditing studies, No.39, PP. 49-62

5. Hasanloo, G. 2011” Human capital:

Development management, measurement

models”, Industrial education and research center of Iran

6. Kashani Poor, M and AsaadRezaee, 2011,

“Studying the impact of change of amount of free float on equity markets of companies in Tehran stock exchange”, Magazine of studying financial accounting 3rd year, first no. Serial number, Spring

7. Mohammadi, Gh, 2011, “Information content of economical value added for benefit predicating “, Human and social magazine of Shiraz University, 26th period, first number, PP. 137-156

8. Nastizaee, M, 2010, “A review of

measurement models of human capital: a holistic approach”, the fourth international conference of management, PP. 1-13

9. NejatiAjiPishe, A, 2007, “Measurement

indices of knowledge management and human capital”, Third international conference of management

10. Pew Tan H. Plowman D. Hancock P0., 2007,

“Intellectual capital and financial returns of companies”, Journal of intellectual capital,

Vol.8, No.1, 2007 pp. 76-95,

www.eemeraldisight.com/1469-1930.htm,

11.Raee, M and Mahdi Saeedi, 2007,

“Measurement of human capital and studying its relationship with financial efficiency of companies”, Accounting and Auditing studies, No.57, PP. 101-116

12.Soleimani, A, 2012, “The relationship between economical benefit and accounting benefit with equities of premier listed companies in Tehran

capital market”, Economical Magazine-

Bimonthly of studying Economical problems and policies No. 7and 8, September, October. 13.Valipoor, A, A, 2011, “Studying the impact of presenting accounting information of human resources in management performance and from experienced managers

14. WulongGu and Ambrose Wong, N., 2010,,

“Estimates of Human Capital in

Canada:The Lifetime IncomeApproach”.

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