Intellectual Capital, Profitability, and Productivity: Evidence from Pakistani Financial Institutions

Abstract

The idiosyncratic and knowledge-intense nature of the financial institutions requires them to rely more on intangible than on tangible resources. Over the past two decades, researchers have been motivated to embark on the relationship between intellectual capital (IC) and performance of financial institutions. Considering the knowledge-based intellect as a critical skill of this era, the current study examines the impact of IC on the performance of 111 Pakistani financial institutions (PFIs) over the period 2007-2018. Two IC measures, i.e., value-added intellectual coefficient (VAIC) and modified value-added intellectual coefficient (MVAIC), were applied to examine the impact of IC on profitability and productivity. Robust results from the fixed effect regression and generalized method of momentum affirm the inverted U-shaped relationship between IC and performance, suggesting that the increase in IC performance of PFIs increases their profitability and productivity up to a certain level, and after that, a further increase in IC performance decreases profitability and productivity. The results further suggest that human capital is the most influencing intellectual resource which produces higher intellectual efficiencies and increases the performance significantly. The results of this study are likely to be helpful for management, regulators, policy makers, and academics and provide insights into the importance of IC and suggest that the investment in the IC improves the sustainable performance to a certain extent.Sustainability 2019, 11, 3842 2 of 30 (IC) was first published in 1969 by John Kenneth Galbraith [8]; since then, the development and the existence of IC have been considered significant to the performance and sustainability of FIs [9].Modern FIs operate in a more challenging and dynamic environment due to technological advancement, continuous innovation in systems and processes, fast-changing customer preferences, and intense competition [10]. Unlike the nonfinancial sector, the operational success, growth, and sustainability of the financial sector do not rely more on tangible assets. As the financial sector provides a range of diversified financial services, therefore, it relies more on IC elements which are intangible in nature, like advanced systems, processes, skills, expertise, supportive culture, environment, knowledge, and information [4]. IC is believed to be a key force to value creation, hidden behind the book value of institutions [11,12]. In order to understand the concept of IC, it can be explained as the combination of structure capital and human capital [11,13]. Structure capital is based on customer and organization capital. Customer capital refers to potential intangibles such as knowledge embedded in suppliers, customers, related industry associations or the government [13]. Organization capital refers to intangibles such as knowledge embedded within the routines of an institution, systems and processes, supportive culture, information systems, transaction times, and procedural innova...

Should Listed Banks Be Concerned with Intellectual Capital in Emerging Asian Markets? A Comparison between China and Pakistan

“…However, a study in Taiwan by Shiu [65] showed a negative relationship between IC and productivity of listed technological firms. Yao et al [66] found an inverted U-shaped relationship between IC and the productivity of Pakistani financial institutions. In addition, Pal and Soriya [67] confirmed that IC has no significant impact on companies' productivity in Indian pharmaceutical and textile industry.…”

“…Thus, the existence of persist profitability, unobserved heterogeneity, and endogeneity makes the results of OLS methods inconsistent and biased. Therefore, for the robustness of our results, we followed Haris et al [20] and Yao et al [66] and applied two-step GMM system estimator, which is efficient and deals with performance persistence, unobserved heterogeneity, serial correlation, and endogeneity, thus, produces robust and unbiased results.…”

“…Asset turnover ratio (ATO) is used to measure the productivity of listed banks, calculated by the ratio of bank's revenue to average total assets. This measure of productivity is used in many previous IC studies [5,[63][64][65][66][67]. (2) Independent variables.…”

“…(3) Control variables. Guided by the literature [17,18,20,66,[74][75][76], this study also controls for some bank characteristics by deploying three important variables: Bank size (SIZE), measured as the natural logarithm of total assets of listed banks; debt ratio (LEV), calculated by dividing total liabilities by total assets of listed banks; bank type (TYPE), which takes 1 if a bank is private-owned and if it is not; gross domestic product (GDP), measured as the natural logarithm of gross domestic product; and year dummy (YEAR). Table 3 presents a list of the variables used in this study with their description.…”

“…Further, the presence of endogenous variables in an equation may also create the problem of endogeneity because of simultaneity and thus, may produce biased results [20]. For example, the lower profitable banks might have a higher leverage ratio because of retaining lower equity and vice versa [66]. Thus, the existence of persist profitability, unobserved heterogeneity, and endogeneity makes the results of OLS methods inconsistent and biased.…”