Human capital efficiency, as measured by Value-Added Human Capital (VAHU), refers to an
employee's ability to create value-added for his employer. As a key resource which is not captured
by conventional accounting, human capital and its value-creating ability may contribute to the
premium to book value at which many companies trade. This study, therefore, sought to
investigate trends in the divergence between book value and market value in South Africa, by
analysing the median market-to-book ratios of companies listed on the Johannesburg Stock
Exchange over time. The primary research objectives, however, were to empirically confirm
whether corporate financial and market performance in South Africa can be explained as a
contemporaneous and future outcome of human capital efficiency, and whether human capital
efficiency is improving. In a largely industrialised emerging market, such as South Africa, there is
some concern that companies which concentrate on efficient and productive management of their
tangible assets may neglect the effective skills development and training of their human capital
assets.
Time-series cross-sectional multiple regressions were used to analyse the intra-industry and interindustry
relationships between VAHU and financial performance (as measured by return on assets,
revenue growth and headline earnings per share) and market performance (as measured by
market-to-book ratios and total share return) in companies listed on the Johannesburg Stock
Exchange. Of the financial year-ends falling in the period 31 December 2001 to 30 June 2011,
1765 company years were covered, relating to 390 companies listed on the Main Board and ALTX.
Company size, leverage, industry and return on equity were held as control factors. The same
financial data was used to assess the median growth in VAHU over the period under review.