The Valuation of Organization Capital
Published on Jan 1, 2005
Baruch Lev* and Suresh Radhakrishnan** Abstract Organization capital, a unique productive resource of the firm is often the most important contributor to corporate performance and growth. This resource, however, is rarely measured internally, nor reported to investors, thereby seriously hampering both managerial resource allocation efforts and investors’ decisions. We develop a firm-specific measure of organization capital and estimate it for a large sample of public companies. We then test the validity of the organization capital measure within a widely used investment valuation model and show that it contributes significantly to the explanation of cross-sectional differences in the market values of firms. Finally, we show that financial analysts, the major information intermediaries in capital markets, do not capture fully the value of organization capital in their widely used forecasts of firms’ earnings.