Intellectual Capital and Financial Performance : Does Board Size and Independent Directors Matter? An Empirical Enquiry

Shah, Syed Quaid Ali and Lai, Fong Woon and Tahir, Muhammad and Shad, Muhammad Kashif and Hamad, Salaheldin and Ali, Syed Emad Azhar (2024) Intellectual Capital and Financial Performance : Does Board Size and Independent Directors Matter? An Empirical Enquiry. Journal of Islamic Accounting and Business Research. ISSN 1759-0817

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Abstract

Purpose: Intellectual capital (IC) is a paramount resource for competitiveness in the knowledge-based financial sectors of the economy. As financial technology advances, specifically in the banking industry, it is vital to understand the effect of IC on financial performance. This study aims to investigate the effect of IC on return on equity (ROE), with a unique emphasis on the moderating role of board attributes. Previous studies have overlooked this moderating role. Design/methodology/approach: The study sample consists of 17 banks and a panel data set spanning 2016–2021, extracted from annual reports. Antel Pulic’s value-added intellectual coefficient (VAIC) model is used to compute IC. To analyze the data, a generalized least squares analysis is conducted. The robustness of the analysis is ensured by using the two-stage least squares (2SLS) econometric technique. Findings: The findings indicate that both the VAIC and human capital efficiency (HCE) have a significant impact on the ROE of banks. In terms of moderation, it is observed that board size (BS) exerts a negative effect on the association between VAIC, HCE, structural capital efficiency and ROE. Additionally, BS positively compounds the connection between capital employed efficiency and ROE. Similarly, the presence of independent directors (IND) significantly moderates the effects of VAIC and its components on the ROE of banks in Pakistan. Practical implications: Banks should focus on the HCE for a higher ROE. Moreover, banks ought to prioritize appointing more independent directors in the boardroom for effective utilization of IC and greater ROE. Originality/value: The findings of the study, which analyzed data from Pakistan’s banking sector, are original and provide additional insights into the literature on IC and board attributes.