Organization Capital and Expected Returns in Service and Non‐Service Firms: Evidence from Thailand

Date01 June 2020
AuthorKanis Saengchote,Srisuda Amatachaya
Published date01 June 2020
Organization Capital and Expected
Returns in Service and Non-Service
Firms: Evidence from Thailand
Chulalongkorn Business School, Chulalongkorn University, Bangkok, Thailand
Organization capital provides rms with competitive advantage, but because
of its intangible and movable nature, investors view rms with high organi-
zation capital as risker and demand additional risk premia. Similar to Eisfeldt
and Papanikolaou (2013), we nd that rms in the Stock Exchange of
Thailand with highest organization capital earn abnormal returns of 0.75%
per month relative to the four-factor asset pricing model. In addition, we also
document that the organization capital risk premium is more relevant for ser-
vice rms than non-service ones.
JEL Classication Codes: G12; E22
Accepted: 29 May 2018
Organization capital, a form of intangible capital, plays a signicant role in pro-
viding competitive advantage to rms. Researchers have argued that organiza-
tion capital is embodied in key resources such as human capital, information
technology, and innovation (Corrado et al. 2009; Lev and Radhakrishnan
2005). Unlike physical capital, which tends to be xed and immobile in nature,
organization capital is more easily transferable as employees move (Prescott and
Visscher 1980; Lustig et al. 2011; Li et al. 2018). While organization capital is
benecial, when key talent leaves a rm, part of the invested capital is trans-
ferred to the new rm, which is potentially a rival.
Indeed, Eisfeldt and Papani-
kolaou (2013) nd evidence that investors in the U.S. demand higher risk
premia for rms that have high levels of organization capital relative to rms
that invest more in physical capital. Using the methodology of Eisfeldt and
Papanikolaou (2013), we document a similar result in the Thailand between
2006 and 2016, where the portfolio of rms with the greatest organization capi-
tal relative to physical capital (high O/K ratio) earns alpha (measure of
1 While there are explicit protections for certain aspects of organization capital such as intellec-
tual property rights and legal agreements, key skills, and insights embedded in employees are
more implicit and thus difcult to protect.
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 20:2, 2020: pp. 505513
DOI: 10.1111/ir.12209

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