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

• Author: Kanis Saengchote,Srisuda Amatachaya
• DOI: http://doi.org/10.1111/irfi.12209
• Published date: 01 June 2020
• Date: 01 June 2020

Organization Capital and Expected

Returns in Service and Non-Service

Firms: Evidence from Thailand

SRISUDA AMATACHAYA AND KANIS SAENGCHOTE

Chulalongkorn Business School, Chulalongkorn University, Bangkok, Thailand

ABSTRACT

Organization capital provides firms with competitive advantage, but because

of its intangible and movable nature, investors view firms with high organi-

zation capital as risker and demand additional risk premia. Similar to Eisfeldt

and Papanikolaou (2013), we find that firms 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 firms than non-service ones.

JEL Classification Codes: G12; E22

Accepted: 29 May 2018

I. INTRODUCTION

Organization capital, a form of intangible capital, plays a significant role in pro-

viding competitive advantage to firms. 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 fixed 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

beneficial, when key talent leaves a firm, part of the invested capital is trans-

ferred to the new firm, which is potentially a rival.

1

Indeed, Eisfeldt and Papani-

kolaou (2013) find evidence that investors in the U.S. demand higher risk

premia for firms that have high levels of organization capital relative to firms

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 firms with the greatest organization capi-

tal relative to physical capital (high O/K ratio) earns alpha (measure of

1While 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 difficult to protect.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:2, 2020: pp. 505–513

DOI: 10.1111/irfi.12209