Introduction: Concept of intellectual capital is not new to the managers, researchers and academicians but its measurement and reporting have always been a problem to them. With the growth of knowledge-intensive companies importance of intellectual capital has been realized by investors. But reporting standards are unable to cope up with the expectations of the investors by not providing the accurate picture of the organization. Measuring intangible assets are difficult because of its intangible nature. Guthrie, Petty & Johanson (2001) has drawn the attention towards the problem related to accounting and management of intellectual capital. It is widely accepted that intellectual capital should be measured and managed properly by the companies. But there is a lack of consistency among the researchers and academicians about any single measuring model (Bontis et al., 1999).

To have a transparent position of the company, intellectual capital should be reported accurately in the annual reports. But Guthrie, Petty & Ricceri (2006) found that voluntary disclosure of intellectual capital is very low in and was in qualitative form rather than quantitative. Abeysekera & Guthrie (2003) conducted the study to examine the reporting of intellectual capital in the developing nation and found that Sri Lankan firms have reported a large range of intellectual capital though not using the term directly. And most of the reported items were external capital and human capital.

Ricceri & Guthrie (2008) conducted a survey to assess the information about the use of intellectual capital in decision making. Results concluded that financial professional did not found the information in the annual reports useful in taking decision and they were of the view that greater disclosure of intellectual capital would increase company’s share price. Garcia-Meca (2005) examined intellectual capital disclosure and its uses in decision making process by Spanish companies. Results found that intellectual capital was widely reported to financial analyst and also used in their decision making process.

Intellectual capital is considered as the difference between market value and book value of the firm. Further, to minimize the difference James Tobin (1969) modified it and book value was substituted by the replacement value of the companies in Tobin’s q model. Differences can also be seen among the financial reporting system of developed and developing countries. To have consistency in reporting system, International Accounting Standards (now IFRS) was adopted by many countries. India also decided to adopt IFRS from April 1, 2011 and the decision was taken by the Prime Minister Dr. Manmohan Singh at G20, a global forum of the world’s largest economies.

The present paper proposes to study the total value added efficiency of intellectual capital and its components’ association with profitability and market valuation of the two major indices i.e. CNX S&P Nifty and Junior fifty for a time period of ten years.

The paper is divided into four different sections: Section I includes the review of existing literature, Section II proposes the research methodology, Section III is for results and analysis. Section IV concludes the paper with policy implication.

I. Review of literature

Intellectual capital and intangible assets have been used interchangeably by different authors. Choong (2008) has drawn attention towards the different definitions of intellectual capital given by different authors. The crux of the most definitions was that intellectual capital is non-monetary assets without physical in nature and can generate future benefits for the organization. Sanchez, Chaminade, & Olea, (2000) divided intellectual capital into three different components namely human capital, structural capital and relational capital.

Chen, Cheng & Hwang (2005) examined the association between intellectual capital efficiency and company’s financial performance and market valuation. Results were found in support of the hypothesis that intellectual capital and financial and market performance were positively related. Investors give different value to the components of intellectual capital i.e. physical capital, human capital and structural capital. Further research and development expenditure used in the study provided additional information of the structural capital.

Firer & Stainbank (2003) investigated a sample of 65 companies in South Africa and found that intellectual capital of the South African companies have explanatory power of productivity and profitability and market valuation. Productivity was negatively and profitability was positively associated with intellectual capital. The reason for this could be less information disclosure available in the annual reports of the companies so the investors were not able to put information in the calculation and hence value of the intellectual capital was not reflected in the market valuation of the companies.

Tan, Plowman & Hancock (2007) examined the relationship between intellectual capital and financial performance of the companies. The study was carried out using the VAIC method and partial least squares (PLS). Results found that companies’ intellectual capital was positively related with its current and future performances. The three financial ratios selected as the indicator of companies’ performance were return on equity (ROE), earning per share (EPS) and annual stock return (ASR). It was also analyzed that intellectual capital efficiency was differed by industry to industry.

Villalonga (2004) empirically investigated that intangibility and sustainability of competitive advantage have inter-relationship among them. Two methods were calculated, they were Tobin’s q and hedonic regression of q. It was concluded that intangible assets play significant role in sustaining a firm’s competitive advantage.

Bruggen, Vergauwen & Dao (2009) investigated the determinants of intellectual capital disclosure in decision making. Content analysis method was used in the study of 125 publicly listed Australian companies. Contrary to previous studies, the paper found industry type and firm size as the major determinants of intellectual capital disclosure. Finally there was no evidence to support the hypothesis that there was relationship between information asymmetry and intellectual capital disclosure.

Firer & Williams (2003) examined the association between intellectual capital and traditional measures of performance i.e. return on assets, assets turnover ratio and market to book value used as proxies for profitability, productivity and market valuation. Intellectual capital was measured by VAIC model. Results of the study found no association between the intellectual capital and traditional measures of corporate performance. Physical capital remained an important factor associated with the performance of the companies.

Wang & Chang (2005) analyzed the effects of intellectual capital elements on the performance of business in Taiwanese IT companies. Results found that all elements of intellectual capital (innovation capital, process capital and customer capital) except human capital directly affected the business performance. Bozzolan, Favotto & Ricceri (2003) investigated the disclosure of intellectual capital was related to external capital and factors affecting disclosure were industry and size of the organization.

Bontis (2001) reviewed the existing intellectual capital models with their strengths and weaknesses. They are Skandia Navigator, IC-Index, Technology Broker, Intangible Assets Monitor, MVA and EVA. The author highlighted the need for more empirical research on the intellectual capital reporting to broaden the area.

Sriram (2008) investigated the importance of composition of tangible and intangible assets of the firms in evaluation of financial health. For that purpose, sample is divided into two sub-samples, one having traditional physical assets and other having primarily intangible assets. A sample of