Business Valuation Based on Intellectual Capital: A Hierarchical Clustering-MARS Approach

The traditional valuation methods developed in industrial economy can´t accurately appraise firms in knowledge economy due to their ignorance of intellectual capital. Based on the value creating mechanism of intellectual capital, this study proposes a novel valuation approach named hierarchical clustering-MARS approach. The method intelligently searches similar firms as target firm through hierarchical clustering, and utilizes nonparametric multivariate adaptive regression splines (MARS) technique to estimate the value creation function for target firm. Then the target firm value is forecasted using the estimated value creation function. The study also investigates the effectiveness of the new approach by a sample of Chinese high technology firms listed in A-share market. The empirical result proves that the hierarchical clustering-MARS approach meets the accuracy requirement of appraisal and is of practical use.