On the association between VAIC and firms’ market value and financial performance

Purpose: The paper addresses the empirical analysis of the association of the VAIC and its components with the firms’ market and financial performance, and focuses on two critical issues until now neglected. First, the fact the any analysed association of the VAIC components with a dependent variable is influenced by the non-linearity hidden in the VAIC formula and deriving from the relationship that Pulic stated between the SCE and the HCE. Second, the fact that being the VAIC the sum of three ratio components, it is subjected to the flaws that ratio variables can generate on statistics-based analysis. Methodology: The paper develops an in-depth methodological analysis of the VAIC model, and offers a clearer understanding of the relevant issues here presented through the empirical analysis performed on a sample of Italian listed companies. Findings: First, the hidden non-linear relationship here discussed modifies profoundly the standard way to analyse the results obtained by empirical analyses. In particular, it alters the sensitivity of the dependent variable to the HCE and makes such sensitivity utterly contingent on HCE. Second, the main issues deriving from the use of ratio variables are discussed referring to the VAIC and using the analysis of the Italian case. Research implications: The paper is useful for both scholars and practitioners. It warns them about the perils of the acritical use of the VAIC and suggests that the significant efforts nowadays lavished on the building of modified versions of the VAIC suffer from the same pitfalls. Limitations: This study focuses on the simple linear regression models for the analysis of the impact of ratio variables on the VAIC. Future research will deal with other models employed by researchers. Originality/value: The paper offers new insights into the analysis of the VAIC and warns against the implications generated by ratio variables, which also apply to models other than the VAIC. Paper type: Conceptual and empirical paper