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
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
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
"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
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.
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).
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
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
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.
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