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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.

Impact of Intellectual Capital on Financial Performance and Investment


Decisions; Evidence from Non-Financial Sector of Pakistan

Muhammad Asif Rashed Khan


MS Business Administration National University of Modern Languages, Islamabad, Pakistan.
Muhammad Adnan Afzal
Lecturer, Department of Commerce Govt. College University, Faisalabad, Pakistan.
Ashfaq Salamat
PhD Scholar, International Institute of Management & Technology Studies, Central University
of Nicaragua
Muhammad Kashif Khurshid*
Lecturer, National University of Modern Languages, Islamabad, Pakistan.
*kashif041@gmail.com
Shahnawaz Saqib
PhD Scholar, Department of Business Administration, GC University, Faisalabad, Pakistan.

Abstract
There are many models have been presented to determine the common facts of IC, like Tobin’s
Q, Skandia Navigator and Value Added Intellectual Coefficient (VAIC TM) introduced by
Australian researcher (Pulic, 2000). In this paper VAICTM calculation technique is applied to
investigate the significance of the IC on financial performance and investment decisions of non-
financial sector of Pakistan. Secondary data have been used in the unique study collected from
the financial statements of 396 companies of non-financial sector in Pakistan. Data was collected
from financial statements from 2006 to 2015 for this motive. The outcomes of the study express
that the intellectual capital has meaningful association with financial performance and
investment decisions.
Keywords: Knowledge based economy, Organizational performance, Intellectual capital, VAIC,
Investment Decisions.

Right after the end of Second World War in 1945, majority of the cultivation oriented
economies in North America and Europe shifted into industrialized economies, from shifting the
attention of land-living and manual labor, fiscal and physical assets were resources. Today, the
world economy is changing rapidly towards knowledge-based from the agricultural and
industrial based economies. In the 21st century, managements of organizations are focusing more
on intangible assets as compared to tangible assets. That's why many companies and even
national strategic plan to reposition their emerging knowledge-based economy. In the present
time of information economy, commercial capitals, comprising of tangible assets. Therefore,
there is desiring to monitor the operation through different ways to achieve the maximum

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productivity of enterprise's intangible resources. One of the vital value driver in the latest
economies where organizations are rich in knowledge and significant for the economic growth is
Intellectual capital. Knowledge based resources have got the position in main strategies to gain
competitive advantage by any company (Sveiby, 1997) studied intellectual capital as the primary
framework of formation of value in the modern business entities. By using financial ratios like
ROE, ROA or sales to total assets ratio; the impact of intellectual capital can be measured for
short term perspective.
To test the growing worth of the IC for the effective firm performance, the facts and
figures of the previous research-oriented study are analyzed how the business firms have been
enhancing the valuable portion of intellectual capital in handling all kinds of organizational
affairs efficiently. The previous studies have been shown in statistical and chronological manner,
in 1990, proportionate value of intellectual capital increased as compared to the total assets of
business firms of US, German and Japan, the valuable ratio of the intellectual capital of US,
German and Japan had grown from 10.5% to 14.5% in 2001, gradually, this figure of US
business firms had attached from 30.6% to 46.9 % while this figure of German enterprises had
increased from 15% to 30.7% simultaneously. Some researchers have found the increment of
intellectual capital approximately 70% of total assets in hi-tech enterprises of US firms, proving
the significance of the intellectual capital in the domain of business administration discipline
(Ding, 2010).
In 1969, the notion of intellectual capital was put forward by the prominent economist of
America, James K. Galbraith; he theorized that the IC was not only the type of fixed
indescribable asset in its nature but also a type of vibrant capital without fixation of capital, a
continuous process of utilizing the knowledge efficiently, a type of measuring tool to evaluate
the targets of the business firms. The intellectual capital is very assistive tool of getting
competitive advantage in the market observed by Stuart (Ding, 2010).
In the novel economy, information is the outmost indefensible key for monetary resource
and the prime and reasonably it’s the simply foundation of onward inexpensive advantage
(Drucker, 2009). Kaplan and Norton (2004) Said that in a knowledge-based economy, a firm has
its core assets namely, human, interactive and operational resources along with the scholarly
assets which together make Intellectual capital. They further stated that IC (Intellectual capital)
has primary / core significance to produce competitive advantages. Intellectual capital has been
become the crucial factor supporting to the organizational persistence and maintenance for the
gaining of competitive advantage and improvement of companies and businesses performances
(Leana & Van Buren, 1999 ).
Naquiyuddin and Heong (1992) Stated that the number of knowledge based workers and
the various prospects are anticipated to rise in the future and it will enhance the capabilities and
abilities of the businesses and companies to further improve their Intellectual capital. Human
capital is the integration of multi-faceted skills, awareness and experience of the employees
which are essential for the sustainability, practicability, usability and feasibility of the enterprise.
Pakistan's government is functioning for the well-organized economy age which is ready
for the trials of globalization. "Vision 2030", the inclusive economic strategy, dedicated to the
competence of intellectual capital funding on the well-paid 83 educationalists, skills
improvement, and science and technology, value gross national product (GNP) amounted to 1%.
Amjad (2006) Pointed out that Pakistan may finance in post-enhancement knowledge,

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technology and new products and become economical in the global economy, upsurge the
percentage of competent graduates from 4 percent to 20 by 2020. Kalim, Lodhi, and Haroon
(2002) Argued that our country Pakistan should take radical steps to mark the economy more
knowledge-oriented if standing as it is right now may become the reason to lose its current share
of world exports.

Literature Review
We can found ample of literature on financial sector locally and globally but on non-
financial sector we have not enough. Brooking (1996) Laid emphasis upon the significant
impacts of the IC to improve the economy of the undertaking which is knowledge-based on the
intellectual caliber of the people who add value to the organization with their contribution in
organizational performance. The expert team of the organization is very helpful to provide the
best possible solutions to all challenging problems of the organization and accomplish all
organizational goals diligently. Without the skillful knowledge and intellect of the workforce,
the organization can’t boost up the performance of its all departments which are well-organized
and well-managed by the people of the organization (Bontis, Chua Chong Keow, & Richardson,
2000).
In the challenging era of business where the competition among the business firms is
growing rapidly and the firms have to innovate the products and services for getting competitive
advantage and retention of the market (Hartono, 2001). The traditional financial statement of the
accounting paradigm is entirely different from the current accounting paradigm which plays an
instrumental role for decision making functions for the business owners and stakeholders.
Traditional accounting paradigm has been evaluated in the context of IC paradigm (Guthrie,
Wigfield, Metsala, & Cox, 1999).
To boost up the efficiency and productive benefits in the context of economic
development and reputation of the organization, the collective contribution of the workforce of
the organization is very significant. Therefore, the expenditures related with the training, health
and other basic allowance are not counted as expenses but an investment to get the advantageous
impacts upon the performance of the organization. When the collective skills, expertise, and
competencies are polished by training courses, the people of the organization would perform
better to achieve the targets of the organization successfully and the facilities like health
insurance and other basic pay allowances and bonuses are good incentives to motivate the people
to work with dedication and honesty and it is good for improving the performance of the
organization (Erickson, Bramhandkar, & Applebee, 2007).
Bontis et al. (2000) Affirms the importance of the human capital as compared with the
structural and customer relational capital to boost up the business enactment of the business. It is
the efforts and intellectual faculties of the employees of the organization which help to organize
and develop organization’s operational systems, information system, manufacturing processes,
corporate values, culture and ethics and managerial behavior. All these factors are very important
to highlight the organizational performance on the higher level.
Gan and Saleh (2010) stated that the organization’s capacity is the main focus in
evaluation of the organizational performance how an organization accomplishes its operational
tasks to generate profitable revenues. The intellectual capital is very valuable instrument to help

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the organization to meet the expectations of creditors, investors and stakeholders to enhance the
financial growth of the firm by formulating such strategic plans, policies and rules and
regulations which are supportive the possibility of successful future prospects of the
organization.
Ghaida, Ousama, Hammami, and Shreim (2016) Concluded from the results of their
empirical study, the intellectual capital is very assistive to retain the individualistic as well as
collective performance of the organization by giving sufficient space in the marketplace to earn
profitable gains. They have conducted study to boost the Qatar economy by evaluating the
knowledge-based economy and governance practices of the business firms, it would be
beneficial for Qatar Government and other business organization how the business plans and
strategies can be formulated by intellectual capital to improve the economy.
In the modern era of organizational performance, the managers, investors and
stakeholders always give significance to accounting system of any economy for decision-making
process which is taken as an index for taking decisive measures according to the strategic plans
of the top-level management. Conversely in the awareness oriented age where IC indicates the
greater portion of the value of the produce, conventional financial statement per annum, and
fractional value of the intangible assets which include the concessions, trademark, licensees and
patents etc. in other words, intellectual capital is the major significant feature of the organization
by which the organization may get competitive advantage by influencing the market efficiently
(Cao & Wang, 2015).
Seleim, Ashour, and Bontis (2004) asserted that the organizational performance can’t be
increased on the basis of macroeconomic policies but on the basis of technological advancement,
innovation, quality of intellectual, relational and structural elements, affecting the knowledge-
based research and development and education, training and intellectual caliber. Sydler,
Haefliger, and Pruksa (2014) Highlighted the significance of the conceptual theory of the IC in
the era of awareness where the monetary development has been influenced directly by the
intangible assets. In their view, the IC is vital component for the attainment of organizational
performance on higher levels.
The pragmatic literature discloses that IC emboldens the financial performance of the
firms. Sharabati, Naji Jawad, and Bontis (2010) stated that the performance of pharmaceutical
industry of Jordan has positive and significant impact of intellectual industry. Wei Kiong Ting
and Hooi Lean (2009) Defined IC or human capital as knowledge-based experience, know-how,
dedication, devotion, honesty, learning aptitude, teamwork spirit, satisfaction of employees and
customers. The competitors use this capital as competitive edge for their firms too. It can also be
supported by the argument in this way that the human capital has unification of knowledge,
skills, experience, talents of humans within the frim which are very supportive to maximize the
productivity and profitability of the business firms and ultimately the net performance of the
firms is also increased.
Pulic (2004) Considered the intellectual capital as the foundation of value making or
destroying factor of the organization employees’ capabilities which develop value added services
for the business success of the firm. James Guthrie, Petty, and Ricceri (2006) relates IC theory
with stakeholders and legitimacy theory in this sense that the stakeholders have the right of
updating information about the organizational routine works so that they may play a constructive
role within the organization on basis of the informative data and their vested interests. According

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to stakeholder theory, the stakeholders encompass all prospective and existing investors,
government and public, creditors, employees, customers, suppliers and distributors etc.
(Donaldson & Preston, 1995).
Intellectual capital is representation of indescribable assets or knowledge-based assets.
Traditionally, the business firms are much inclined to value the tangible assets for the
enhancement of organizational performance. But in the globalized era, the hi-tech firms give
valuable space to knowledge-based or intellectual assets for the development of financial growth,
effectiveness and performance firms (Rehman et al., 2011).
In the advanced age, the intellectual capital is very critical to create the productive
impacts upon the performance of the firms. But still some firms tend to focus upon the financial
and tangible assets rather than the intellectual capital effectiveness. Though such firms consider
their financial performance the most sufficient yet there is insufficient intellectual capital
efficiency in fact (Makki & Lodhi, 2008).
Intellectual capital is the key factor of the economic development for the firms which are
knowledge-based, giving value-added attribute to IC. The IC is the fundamental source of
developing valuable economy which can be evaluated significantly to produce profitable impacts
upon the firms (Holienka & Pilková, 2014). In the old times, the world economy has been
dependent upon the industrialization-based data but in the modern times, the knowledge based
economy with tangible sources has gained much significance as management of information
system with the investment of intellectual capital is very important to earn massive revenue
(Holienka & Pilková, 2014).
The intellectual capital is measured and managed in the context of two main features,
external and internal ones. According to internal feature, there is need of better resource
allocation to boost up the efficiency with the reduction of costs within the organizational set up
while external feature relates with the accessibility of information about the current and
prospective monetary endowment of the organizations for the anticipation of the future growth in
terms of long-term forecasting. The intellectual capital is taken as the possible source of
developing monetary growth which can be assistive tool to anticipate the future performance of
the business firms (Abeysekera, 2011).
Ramezan (2011) observed the correlation between the organizational gradual structure
and IC development which has not been evaluated through researches so systematically. The
results of the study showed the strong affinity of organizational gradual structure and IC growth,
having positive influences of the gradual structure upon the IC. That’s why organic structure is
corresponding agent to enlarge the intellectual capital of the firms. The results of the study are
very supportive to the managers for developing flexible and dynamic organizational structure so
that the intellectual capital can be improved to surpass other competitive business organizations
successfully.
In the last few decades, the conventional trends of business community have been
changed rapidly. The growing competition is the distinctive attribute of all kinds of firms and
industries which were not significant in the past. The main focus of corporate sectors has been
shifting from production to service business in all over the world due to the growing significance
of intangible assets. It is need of hour to accommodate and guarantee the future sustainability
and practicability of organization to maximize the financial growth of the organization
effectively (Kharal et al., 2014).

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Intellectual Capital has got good position in adding value in marketing performance and
financial results (Jen Huang & Ju Liu, 2005). By measuring the adequacy of IC and market to
book proportion with the assistance of VAIC model to decide the correct proportionality of
market execution as far as money related efficiency, the researchers disclosed in detail the
contribution of intellectual capital for the firms of Taiwan stock market. The outcomes of the
investigation uncovered the helpful result of intellectual capital on both monetary and arcade
development of the organizations in Taiwan.
A study on Australian firms undertaken by Clarke, Seng, and Whiting (2011) with the
application of VAIC model, the outcome of study concluded that the IC has direct impacts upon
the firm performance in Australian business environment.
Rehman, Chaudhary, Rehman, and Zahid (2011) Researcher of Hailey College of
Commerce Lahore Pakistan took creativity first time to detect about the association of monetary
performance of the Modaraba firms of Pakistan and IC. They took 12 Modaraba companies to
examine IC and its basic elements HC effectiveness, customer and capital employed efficiency.
He got the empirical outcomes by using VAIC method. According to his findings one of the
most controlling element of (IC) which is human capital explains that as more as we invest on
the employees we get the more productivity form them so the human capital effectiveness
exposed a resilient and progressive link with the efficiency of the Modaraba companies.
Kehelwalatenna and Kehelwalatenna (2016) Explored the productive link between IC and
monetary efficiency of firms including the internal as well as external performance. It also
indicated the association of intellectual capital of the firms and responsive approach of the
investors and stakeholders. The empirical study was conducted by them on basis of conceptual
and regression models, showing the positive contribution of intellectual capital of the firms for
developing the investor interest and value creation to the firm performance. The intellectual
capital is exclusively correlated with the performance of the firms and shareholder reaction,
generating the massive revenues and ultimately the financial growth. The financial growth and
organizational performance are linked directly with the knowledge, skills, experience, training,
honesty, loyalty and proficiency of the firm which may eventually lead to the progress and
prosperity of the business firms.
Cao and Wang (2015) affirmed the innovative and differentiation strategies are the most
instrumental tools to promote the organizational performance which is entirely based on the
managerial aspects of the people of the organization. If the people of the firms are dedicated and
loyal to their firms, they would tend to launch innovation and differentiation to take the
economical edge in the market and the brain power of humans are utilized to boost the general
performance of the organization. The firm performance can be enhanced on the basis of these
complementary components of firm, intellectual, relational and structural, without these tangible
and intangible assets, the workings of the department cannot be preceded productively.
In the changing world, competitive environment has been developing the risky factors as
well as favorable ones. In the era of globalization, the IC is the main factors of surviving the
existence of the firms in the competitive environment by creating the competitive advantage as
compared to other competitions in the market place. The successful business competition is
retained by managing the intellectual capital so strategically. The IC is known as the skills and
awareness of the employees within the organization to proceed all kinds of business affairs inside
and outside of the organization so effortlessly. Without the intellectual capital, it is difficult to

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handle all challenging issues of the business firms and boost up the firm performance
(Pongpearchan, 2016).

Conceptual Framework

INDEPENDENT VARIABLES DEPENDENT VARIABLES

INTELLECTUAL FIRM’S FINANCIAL


CAPITAL PERFORMANCE

(VAIC)Capital
Human Return on Assets (ROA)
Efficiency (HCE)
Return on Equity (ROE)
Structural Capital
Efficiency (SCE) FIRM’S INVESTMEMT
DECISIONS

Capital Employed
Investment in Fixed Assets
Efficiency (CEE)

Figure 1.1 Conceptual Framework

Hypotheses of the study


H1: “There is a significant impact of VAIC on financial performance of non-financial sector of
Pakistan.”
H2: “There is significant Impact of Human Capital Efficiency (HCE) on financial performance of
non-financial sector of Pakistan.”
H3: “There is significant Impact of Structural Capital Efficiency (SCE) on financial performance
of non-financial sector of Pakistan.”
H4: “There is significant Impact of Capital Employed Efficiency (CEE) on financial Performance
of non-financial sector of Pakistan.”
H5: “There is significant Impact of VAIC on investment of non-financial sector of Pakistan.”

Data and Research Methodology


Data collection Sources
Secondary data have been used in this valuable research. To evaluate the relationship of
IC on the performance and investment decisions of the listed firms of Pakistan Stock Exchange
(PSX) returns on the equity, return on the assets, EPS and firms investment decisions are taken
as dependent variable of the study. Under other conditions the DVs of the current study include;
value added intellectual capital (VAIC). For these DVs and IVs, data are gathered from the

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audited yearly reports of the non-financial organizations which is mostly accessible from their
official websites.

Population and sample size of the study


Three hundred and ninety-six firms are listed in Pakistan Stock Exchange under non-
financial sector have been taken as population and the sample size of this study incudes the 80
companies which are operating in the Pakistan from the last two decades. The current study
sample size is selected on the basis of the proportionate random sampling technique. This
sampling technique proceeds that “A probability sampling design in which every single element
in the population has a known and equal chance of being selected as subject” (Sekaran &
Bougie, 2010). For each variable of the study data of ten years from 2006 to 2015 was collected
from the selected firms.

Data Analysis Techniques


Statistics such as frequencies, the standard deviation and the mean, by which we get
descriptive evidence about the set of data, (Sekaran & Bougie, 2010). Beside with the descriptive
statistics, correlation analysis is also applied on the data. “Analysis done to trace the mutual
influence of the variables on one another”, (Sekaran & Bougie, 2010).
Regression test, Fixed Effect Model (FEM) and Random Effect Model (Froot & Stein)
with the help of E-Views software 9.0 is applied on the data on the basis of the causal nature of
the variables of study. ROA and ROE variables are used as the dependent variables to measure
the firm performance; Where to calculate the impact of the intellectual capital following heads
are used as the proxies of the VAIC; (CEE), (SCE) and (HCE) as the independent variables.
However, the current study employs the combination of variables with somewhat changes as
Return on Assets (ROA) and Return on Equity (ROE) as a measure of firm performance.

Econometric Models
There are two econometric approaches that are dynamic to approximation the coefficients
Fixed Effects Model and Random Effects Model respectively. To compare the findings of both
models Hausman Test is used. The association and the model organizations for the current study
are according to the work of (Demirgüç-Kunt & Huizinga, 1999; Flamini, Schumacher, &
McDonald, 2009; Saona, 2016). Following is the empirical form of the model:
FPit = β0 + ∑𝑘𝑘=1 𝛽𝑘𝑌𝑖𝑡𝑘 + 𝜖𝑖𝑡
FP = Financial Performance (dependent variable)
𝑖𝑡 = 𝑖 is individual unit and 𝑡 is the time period
β0 = Constant
𝛽 = Coefficient of Independent variables
𝜖 = Error term
For the current study following equations, using the four dependent variables are developed.

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Model 1 ROAit= β0 +β1CEEit + β2HCEit + β3SCEit + ε it


Model 2 ROAit = β0 +β1VAICit + ε it
Model 3 ROEit = β0 +β1CEEit + β2HCEit + β3SCEit + ε it
Model 4 ROEit = β0 +β1VAICit + ε it
Model 5 INVTit = β0 +β1CEEit + β2HCEit + β3SCEit+ ε it
Model 6 INVTit = β0 +β1VAICit + ε it
Where;
Constant
β0
Coefficients
β 1 to β 4 = coefficients of the independent and control variables.
ROE = Return on Equity
ROA = Return on Assets
CEE = Capital employed efficiency
HCE = Human capital efficiency
SCE = Structural capital efficiency
𝑒 = error term

Variables and their Operational Definitions


Financial Performance Gages
Financial performance of an organization is measured to check that either a firm is using
its assets efficiently to maximize its profits / wealth maximization. The value of an organization
can be defined as when it sets its expected value of future cash flows (Kothari, 2001). On the
other side, another famous definition of the value of an organization is found in the literature is
by (Eyenubo, 2013), an organization which efficiently meets its objectives.

Return on Asset (ROA)


Finkelstein and D'aveni (1994); Weir & Laing, 1999) stated that Return on Assets (ROA)
is frequently used element of financial performance for firms. A firm gained return on asset by
investing in the capital assets. It is a public figure which can be seen by the customers,
shareholders, and all other concerned parties of a business. The return on assets can be got by
dividing the annual net income ratio to total asset average through the financial year of a
business. ROA is calculated by the given formula
ROA = Annual net Income/Total asset average

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Return on Equity (ROE)


Every business has its ultimate goal to increase the wealth of the shareholders by
producing profits. Every business has its concerned parties such as stakeholders and the
investors. Various researchers have employed this variable to measure the performance of the
businesses. This variable gives the clear understanding and view of financial performance of the
companies to the investors and the shareholders of the businesses. Increase of firm’s wealth
which is done by the generation of profit for the sake of all stakeholders’ investors benefits is
main and priority base objective of any organization. In intellectual research (ROE) return on
equity is accounting base ration of organizations financial performance (Baysinger & Butler,
1985). ROE provides the investors of the company transparent picture of the organizations about
its profit generation by the shareholders invested money into the business (Epps & Cereola,
2008). It deals with the profitability of the shareholders from their investments. ROE can be
considered by annual net income divided by the shareholder’s equity. Its formula is given below
ROE = Annual Net Income/Average of Shareholders equity

Investment Decisions
It is the ratio of total investment of a firm during an accounting year to its fixed assets.
Investments = Total Investment/Fixed Assets.
Investment decisions variable with using of (Umutlu, 2010) entitled the effect of
Intellectual Capital (IC) on investment decisions, obtains from the ratio of whole of the company
i in year t to fix assets.

Mechanisms Of Value Added Intellectual Coefficient


Human Capital Efficiency
It is the proficiency of the human capital of the company and the human capital is
calculated by taking the total wages and salaries (indirect labour + direct labour + administration,
selling and marketing salaries of employees. No one can deny the worth of human into any
organization even in this era of advancement and innovation in technologies and other means.
The most valued asset or the liabilities of a firm are considered its humans (Khan, 2010 #52). It
refers to the connoisseurs or experience, knowledge and employee skills which they share with
the organization for value addition (Baron, 2011). For an organization, human capital is its most
precious asset. It is the blend of the employee’s skills, abilities and capabilities which can be
further enhanced and polished by extensive training programs. It helps a company to ultimately
achieve its goals and increases the organizations’ effectiveness and efficiency. The stronger the
human capital of an organization has, the more efficient an organization becomes and it enhances
its Value Added Efficiency (VAE).

Structural Capital Efficiency


Bontis (2001) stated that structural capital includes all the copy rights, procedures,
databases, methods, techniques, patents and the appraisal systems of an association, human asset

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of the organization are only excluded from it. He auxiliary stated that all the prescribed
instructions and procedures of the organization are also the part of it. How much capital
employed is efficient can be measured by this way.
ST = VA – HC
Capital Employed Efficiency
It is the efficiency of capital employed of the organization and is calculated by taking net
book value of the total assets of the firm. It can be calculated as (CEE=VA/ CE)
Value Added Intellectual Coefficient (VAIC=ICE+CEE): Points out value creation
efficiency of the resources in all (summation of the preceding indicators). It articulates the
intellectual capability of a local or national economy, organization.

The VAIC Method


Value added intellectual coefficient (VAIC) method castoff in the current study was
familiarized by (Pulic, 1998). It offers an up-to-date way of quantifying value creation efficiency
in corporations from the published data sources like annual reports. VAIC is designed to
meritoriously gauge the adeptness in summing value Leana and Van Buren (1999 ) to an
organization, concentrating on value accumulation in a business and not on control of cost (Pulic,
2000). The human capital is chiefly responsible for the company’s overall financial performance
is the core concept of the value added intellectual coefficient (VAIC). The VAIC is centred on
the succeeding calculations:
(i) “VA = OUT – IN
Where
VA = value added from current year’s resources.
Out = total sales and
In = cost of materials, components, and services.
Value added can be alternatively calculated as follows:
VA = OP + EC + D + A
Where VA= Value added, OP = operating profit, EC = Employee cost, D = depreciation, and A
= Amortization value.
(ii) CEE = VA/CA where CEE is the capital employed efficiency of the firm and CA = capital
employed (net book value of total assets).”
(iii) HCE = VA/HC where HCE is the efficiency of the human capital of the organization and
VA = Value added while HC = total wages and salaries (indirect labor + direct labor +
administration, selling salaries and marketing).
(iv) SCE = ST/VA where efficiency of structural capital of the company is denoted by SCE and
ST = VA – HC.
(v) VAIC = CEE + HCE + SCE where VAIC directs to corporate value creation efficiency.

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VAIC does not offer the money price of IC. It simply sum-up the three efficiency aspects of
different kind of IC and an productivity index is calculated which shows by what means the IC
of an organization subsidizes to value addition. In order to amount IC efficiency, (Pulic, 2000)
also offers VAIC’s subsidiary idea that adds structural efficiency and human capital (ICE = HCE
+ SCE).

Data Analysis & Discussion


Descriptive Statistics
Descriptive statistics engaged to assure the properties of the observations like, mean,
maximum, minimum, standard deviation etc. descriptive statistics test used to check the
normality of the data. Standard deviation results show how much your data is varies from the
mean. The descriptive statistics results are shown in the table 4.1 for all the dependent and
independent variables. ROA and ROE are applied as a dependent variable while the
INVESTMENT, CEE, SCE, HCE and VAIC are the IVs.

Table 1 Descriptive Statistics


Min. Max. Range Mean Std. Dev. N
ROA -33.770 53.130 86.900 6.786 11.352 800
ROE -299.400 357.520 656.920 13.804 39.277 800
INVT -0.929 1.692 2.621 0.106 0.233 800
VAIC -246.784 82.1751 328.960 2.36857 11.3126 800
CEE -0.578 1.174 1.752 0.177 0.195 800
HCE -14.836 18.102 32.938 1.511 2.560 800
SCE -246.789 11.059 257.848 0.227 9.006 800
The table 4.1 is regarding the results of normal distribution of the data of 800
observations. The minimum value of ROA is -33.77 and maximum value is 53.13 with a range of
86.9. The mean value of ROA is 6.786 and its standard deviation is 11.352. The mean value of
ROE is 13.804 while the standard deviation is 39.277. If we have look on SCE which has the
mean value of 0.227 and the standard deviation is 9.006.
The mean value of the investment is 0.106 while the standard deviation is 0.233. The
maximum value is 1.692 and the minimum value is -0.929. The CEE value of mean is 0.177 and
its standard deviation is 0.195. HCE mean value is 1.511with the standard deviation of 2.560.
The maximum value of SCE is 11.059 while the minimum value is -246.789. VAIC mean value
is 2.36857 and the standard deviation is 11.3126.

Table 2 Correlation Matrix


ROA ROE INVT VAIC CEE HCE SCE
ROA 1
ROE 0.6529 1
INVT 0.1984 0.1024 1
VAIC 0.1869 0.1527 0.0738 1

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CEE 0.7352 0.4990 0.1453 0.1466 1


HCE 0.4023 0.2784 0.1685 0.3519 0.3833 1
SCE 0.0878 0.0854 0.0353 0.8039 0.0425 0.0228 1
The correlation results shown in the above table explain the relationship between IVs and
DVs. The table shows the strong positive relation between ROA and CEE with the value of
.7352. But the correlation between ROA and HCE is positively moderate with the value of
0.4023 and ROA, VAIC, and SCE is positively weak with the values 0.18.69, and 0.0878
respectively. The correlation between ROE and CEE is strongly correlated with the value of
0.4990 and ROE, VAIC, HCE and SCE is positively weak with the values 0.1527, 0.2784 and
0.0854 respectively.

Panel Data Regression Analysis


Model 1 ROAit= β0 +β1CEEit + β2HCEit + β3SCEit+ ε it

Table 3 A Redundant Fixed Effects Test and Hausman Test


Effects Test Statistic d.f. Prob.
Cross section F 6.243518 (79,717) 0.0000
Cross section Chi-square 418.797112 79 0.0000
Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross section random 28.458517 3 0.0000

Table 3 B Fixed Effects Model


Dependent Variable: ROA
Variable Coeff. SE T Prob.
C -0.990496 0.458772 -2.159017 0.0312
CEE 41.69432 2.124673 19.62388 0.0000
HCE 0.024504 0.114616 0.213794 0.8308
SCE 0.716301 0.319762 2.240103 0.0254
R2 0.741961 F-statistic 25.14203
Adjusted R2 0.712450 Prob (F-statistic) 0.000000
The outcomes of Panel data (regression) 1st Model are exhibited in above tables.
Financial performance has been measured by DV ROA. Significant P Value (0.0000) of cross-
secession Chi-square suggests to running fixed effects model. Significant P Value (0.0000) of
Hausman test endorses using the fixed effects model. The outcome of table 4.3B signify that
coefficient of Capital Employed Efficiency (CEE) is 41.69 which indicates that CEE have
positive relationship with the monetary performance measuring tool ROA. The p-value validates
that results are massively significant in other words any addition or deletion in CEE will sizably
affect the ROA of the PSX listed companies. The value of (SCE) is 0.71 which illustrates
constructive association between structural capital efficiency and monetary performance (ROA)

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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.

of the non-financial firms. The results are in accordance with (Amjad, 2006; Andreeva &
Garanina, 2016; Cleary & Quinn, 2016; Holienka & Pilková, 2014). 0.7419 and 0.7124 are
values of R and Adjusted R-square respectively. Adjusted R2 presents the coefficient of all the
IVs explains that all the selected IVs give 71% change in the DV (ROA). F-statistics have value
25.14 with tabulated p-value of 0.0000 also supports the overall fitness of the model.

Table 4 A Redundant Fixed Effects Test and Hausman Test


Model 2 ROAit = β0 +β1VAICit + ε it
Effects Test Statistic d.f. Prob.
Cross-section F 9.267380 (79,719) 0.0000
Cross-section Chi-square 561.785331 79 0.0000
Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
34.109018 1 0.0000
Table 4 B Fixed Effects Model
Dependent Variable: ROA
Variable Coeff. SE t Prob.
C 4.622080 0.390265 11.84343 0.0000
VAIC 0.925666 0.124237 7.450827 0.0000
R2 0.609147 F-statistic 14.00706
Adjusted R2 0.565658 Prob (F-statistic) 0.000000
The outcomes of Panel data (regression) 2nd Model are exhibited in above tables.
Financial performance has been measured by DV ROA. Significant P Value (0.0000) of cross-
secession Chi-square suggests using fixed effects model. Significant P Value (0.0000) of
Hausman test endorses using the fixed effects model.
The outcome of model 4.4 B signify that Value of (VAIC) is 0.9256 which show that
VAIC have positive relationship with the financial performance measuring tool ROA The results
are in accordance with (Amjad, 2006; Andreeva & Garanina, 2016; Bontis et al., 2000; Chen
Goh, 2005; Cleary & Quinn, 2016; Gan & Saleh, 2010; Holienka & Pilková, 2014). The p-value
validates that results are massively significant in other words any addition or deletion in VAIC
will sizably affect the ROA of the PSX listed companies.

Table 5 A Test cross-section fixed effects and Hausman Test


Model 3 ROEit= β0 +β1CEEit + β2HCEit + β3SCEit+ ε it
Effects Test Statistic d.f. Prob.
Cross section F 5.893197 (79,717) 0.0000
Cross section Chi-square 400.290527 79 0.0000
Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.

Cross-section random 16.391839 3 0.0009

Table 5 B Fixed Effects Model Dependent Variable: ROE


Variable Coefficient Std. Error t-Statistic Prob.
C -5.792354 1.347133 -4.299763 0.0000
CEE 105.6505 6.238872 16.93423 0.0000
HCE 0.023362 0.336559 0.069413 0.9447
SCE 2.554557 0.938947 2.720661 0.0067
R2 0.653653 F-statistic 16.50219
Adjusted R2 0.614043 Prob(F-statistic) 0.000000

The outcomes of Panel data (regression) 3rd Model are exhibited in above tables.
Financial performance has been measured by DV ROE. Significant P Value (0.0000) of cross-
secession Chi-square suggests to using fixed effects model. Significant P Value (0.0000) of
Hausman test endorses using the fixed effects model. The outcomes of table 4.5B signify that
coefficient of Capital Employed Efficiency (CEE) is 105.6505 which indicate that CEE have
positive relationship with the monetary performance measuring tool ROE. The p-value validates
that outcomes are massively significant in other words any addition or deletion in CEE will
sizably affect the ROE of the PSX listed companies. The value of (SCE) is 2.5545 which
illustrates positive relation between structural capital efficiency and financial performance
(ROE) of the non-financial firms. 0.6536 and 0.6140 are values of R and Adjusted R-square
respectively. Adjusted R2 exhibits the coefficient of all the IVs explains that all the selected IVs
give 61% change in the DV (ROE). F-statistics have value 16.5021 with tabulated p-value of
0.0000 also supports the overall fitness of the model.

Table 6 A Test cross-section fixed effects and Hausman Test


Model 4 ROEit = β0 +β1VAICit + ε it
Effects Test Statistic d.f. Prob.
Cross section F 6.832305 (79,719) 0.0000
Cross section Chi-square 448.011821 79 0.0000
Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross-section random 17.206237 1 0.0000
Table 6 B Dependent Variable: ROE
Variable Coeff. SE t Prob.
C 8.759123 1.095281 7.997148 0.0000
VAIC 2.430061 0.348671 6.969502 0.0000
R2 0.520773 F-statistic 9.766643
Adjusted R2 0.467451 Prob (F-statistic) 0.000000
The outcomes of Panel data (regression) 4th Model are exhibited in above tables.
Financial performance has been measured by DV ROE. Significant P Value (0.0000) of cross-
secession Chi-square suggests to using fixed effects model. Significant P Value (0.0000) of

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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.

Hausman test endorses using the fixed effects model. The outcomes of table 4.6 B signify that
coefficient of Value Added Intellectual Coefficient (VAIC) is 2.4300 which direct that VAIC
have positive relationship with the monetary performance measuring tool ROE. The p-value
validates that outcomes are massively significant in other words any addition or deletion in
VAIC will considerably affect the financial performance return on equity (ROE) of the PSX
listed companies.

Table 7 A Redundant Fixed Effects Test and Hausman Test


Model 5 Investmentit = β0 +β1CEEit + β2HCEit + β3SCEit+ ε it
Effects Test Statistic d.f. Prob.
Cross-section F 2.239191 (59,537) 0.0000
Cross-section Chi-square 131.972239 79 0.0000
Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross-section random 4.164060 3 0.2443

Table 7 B Dependent Variable: Investment


Variable Coeff. SE t Prob.
C -7.776417 2.650297 -2.934168 0.0035
CEE 113.9397 11.18553 10.18634 0.0000
HCE 0.886144 0.689988 1.284289 0.1995
SCE 0.255879 0.140026 1.827371 0.0681
R2 0.205339 F-statistic 51.33505
Adjusted R2 0.201339 Prob (F-statistic) 0.000000
The outcomes of Panel data (regression) 5th Model are presented in above tables. ROA
used as dependent variable to capture the financial performance. Significant P Value (0.0000) of
cross-secession Chi-square suggests to using fixed effects model. Significant P Value (0.0000) of
Hausman test endorses using the fixed effects model. P-value from Hausman test is insignificant
(0.2443) which endorses using the random effects model. The outcomes of table 4.7 B signify
that coefficient of Capital Employed Efficiency (CEE) is 113.9397 which indicate that CEE is
positively associated with investment decisions. The p-value validates that results are massively
significant in other words any addition or deletion in CEE will sizably affect the investment
decisions of the PSX listed companies. The coefficient value of structural capital efficiency
(SCE) is 0.2558 which illustrates the positive relationship of structural capital efficiency with
investment decisions of the non-financial PSX listed firms. 0.2053 And 0.2013 are values of R
and Adjusted R-square individually. Adjusted R2 exhibits the coefficient of all the IVs explains
that all the selected IVs give 20% change in the DV investment decisions. F-statistics value is
51.3350 with tabulated p-value of 0.0000 also supports the overall fitness of the model.

Table 8 A Redundant Fixed Effects Tests and Hausman Test


Model 6 Investmentit = β0 +β1VAICit + ε it

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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.

Effects Test Statistic d.f. Prob.


Cross section F 13.099908 (59,539) 0.0000
Cross section Chi-square 533.707227 59 0.0000
Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross-section random 12.171511 1 0.0005
Table 8 B Fixed Effects Model Dependent Variable: Investment
Variable Coeff. SE T Prob.
C 5.418576 0.298382 18.15988 0.0000
VAIC 0.114289 0.029140 3.922100 0.0001
R2 0.610862 F-statistic 14.10190
Adjusted R2 0.467451 Prob(F-statistic) 0.000000
The outcomes of Panel data (regression) 6th Model are presented in above tables. ROA
used as dependent variable to capture the financial performance. Significant P Value (0.0000) of
cross-secession Chi-square suggests to use fixed effects model. Significant P Value (0.0000) of
Hausman test indorses using the fixed effects model. P-value from Hausman test is also
significant (0.0005) which recommends using the fixed effects model. The fallouts of table 4.8B
signify that coefficient of (VAIC) is 0.114289 which shows that VAIC is positively associated
with the Investment decisions. The results are in accordance with past studies like (Fama &
Jensen, 1985). The p-value validates that outcomes are massively significant which means that
the any increase or decrease in VAIC will sizably affect the Investment decisions of the PSX
listed companies.

Conclusion and Recommendations


Conclusion
The apprehension about the Intellectual capital performance since the economic crisis
and after the failure of many notorious organizations such as Enron has amplified and due to the
reason of such kind of cases; precautionary measures were taken by many governments to
enhance the IC performance for the improvement of the financial performance of the
corporations and particularly to investor’s rights protection within the organizations or in the free
/ financial capital markets. This current study is directed to check the influence of IC on the
performance and investment decisions of non-financial sectors corporations listed at Pakistan
Stock Exchange (PSX) of Pakistan. Study procured three elements of Intellectual Capital as
independent variables whereas investment decisions, (ROA) and (ROE) as a measure of firm’s
performance (dependent variables). For the current study data is composed from the financial
reports published by the firms of non-financial sector listed at PSX annually. Data is also
gathered from the official websites of PSX and State Bank of Pakistan (SBP). 10 years data is
collected from the period of 2006-2015. The analysis of data is done by using panal data
technique using Eviews 9.0. While whether to use the REM or FEM is made according to the
results of Hausman test.
The regression results indicated that CEE, HCE and SCE has substantial and constructive
influence on performance of the organizations using ROA. The results are aligned with the prior

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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.

research made by (Makki & Lodhi, 2008).The results also reveal that CEE, HCE and SCE has
significant and constructive relationship with that of ROE. VAIC also showed positive impact on
performance using ROA and ROE. Impact of CEE, HCE, SCE and VAIC is also positive on the
investment decisions. Form the outcomes it can be determined that IC has positive impact on
returns and investment decisions, and the same research findings are supported with past studies,
so firms can improve their financial performance by investing in intellectual capital.

Limitations of the study


The most concerning and highlighting limitation of this research study is that it does not
include the entire population of the PSX listed corporations in the non-financial sector of the
Pakistan. This study has the limit in its room that it only includes the non-financial sector of the
Pakistan, it does not touch the financial sector of the country in this particular regard.
The current study is carried out on the basis of only the quantitative methods of research
only. There exists a possibility that if the researcher could include the qualitative methods of the
research that may help in the wider generalizability and the applicability of the results. The time
span of the current data collection period is also not too smart and wide only 10 years, it might
be extended with the help of more resources and time. Factor of time constraint is also present in
the study. The conclusion of the current research cannot be applied on to the companies of the
financial sector of the Pakistan. Last but not the least is that the financial performance of the
study is measured only with the most widely used variables and the other variables of
performance such as leverage can produce different results. The consequences of study should be
involved in flexible way of these limitations and the approaching researchers should try to
surprise them though doing more research in the area.

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