Intellectual Capital 10

Journal of Accounting & Organizational Change
Impact of intellectual capital on financial performance: evidence from the

Bangladeshi textile sector
Leena Afroz Mostofa Chowdhury, Tarek Rana, Mahmuda Akter, Mahfuzul Hoque,
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Leena Afroz Mostofa Chowdhury, Tarek Rana, Mahmuda Akter, Mahfuzul Hoque, (2018) "Impact of
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Intellectual
Impact of intellectual capital on capital
financial performance: evidence
from the Bangladeshi textile sector
Leena Afroz Mostofa Chowdhury
Department of Business Administration, University of Asia Pacific, Dhaka, Bangladesh
Tarek Rana
Department of Accounting and Data Analytics, La Trobe Business School,
La Trobe University, Melbourne, Australia
Mahmuda Akter
Accounting and Information Systems, University of Dhaka, Dhaka, Bangladesh, and
Mahfuzul Hoque
Accounting and Information Systems, Faculty of Business Studies,
University of Dhaka, Dhaka, Bangladesh
Abstract
Purpose – The purpose of this paper is to investigate the influence of intellectual capital (IC) on financial
performance and, in turn, to provide insights into its impact on emerging economies.
Design/methodology/approach – Data were collected from 34 textile firms in Bangladesh between
2013 and 2017. The IC efficiency, through value-added intellectual coefficient (VAIC) model, and its impact on
financial performance, through return on assets (ROA), return on equity and asset turnover (ATO), was
examined using descriptive statistics and multiple regression techniques. The analysis is based on secondary
data obtained from annual reports.
Findings – The results indicate the impact of VAIC components on financial performance and also
demonstrate diverse relationships with changes in financial indicators. The VAIC components significantly
influenced productivity outcomes, with tangible capital playing a major role in both productivity and
profitability. Moreover, it was found that structural capital had a considerable effect on ATO and ROA with
human capital indicating an insignificant impact on all financial performance indicators.
Research limitations/implications – The research outcome is specific to the textile industry in
emerging economies. The study may guide future research on IC performance in textile firms and cross-
industry comparisons.
Practical implications – Managers, firm owners and regulators need to align IC to performance
management to sustain the competitive advantage in globalised competitive settings.
Originality/value – The study provides an empirical evidence and extends knowledge of IC utilisation for
enhancing the financial performance of the textile firms in emerging economies.
Keywords Intellectual capital, Return on assets, Performance management, Return on equity,
Textile industry, Asset turnover
Paper type Research paper
1. Introduction Journal of Accounting &

Organizational Change
With rapid industrialisation and technological change, intellectual capital (IC) management © Emerald Publishing Limited
1832-5912
has redefined the traditional performance measurement system for achieving and enhancing DOI 10.1108/JAOC-11-2017-0109
JAOC organisational competitiveness (Drucker, 1993; Edvinsson and Malone, 1997; Gigante, 2013;
Stewart, 1997; Sveiby, 1997). Conventional performance measurement techniques fail to
report the comprehensive organisational performance of firms that have a huge investment
in intangible assets, leading to stakeholders making ill-informed judgments (Deep and
Narwal, 2014; Firer and Williams, 2003). In spite of the difficulty associated with the
intrinsic nature of IC and its measurability (Mention and Bontis, 2013), researchers have
been fascinated with the idea of value creation and its effect on the financial performance of
firms in relation to their mobilisation of IC (Choo and Bontis, 2002; Kannan and Aulbur,
2004). However, empirical evidence of causality between IC elements and financial
performance remains insufficient in certain industries and geographical areas, in part
because of the indirect and contextual nature of IC’s value-creation potential (Janoševic et al.,
2013). The textile and garments industry is one sector for which evidence is lacking in
emerging economies context.
The textile industry has not traditionally been thought of as a knowledge-driven
industry as cheap labour and tangible capital have been considered its primary sources of
competitive advantage. China, the largest global textile and garments exporter, has been
facing a shortage of skilled labour and elevated labour costs. It has been shifting its focus to
heavy and high-tech industries, rather than relying on low value added, labour-intensive
industries like garment manufacturing (Textile Today, 2017). As China steps back, there
will be intense competition among other countries to become the leading exporter of textiles
and garments. The global textile and garments market is extremely price elastic from both
retailers’ and customers’ sides. International retailers seek to maintain their profit margins
by exploring cheaper locations from which to source their garments. With working-age
people constituting over 70 per cent of the population, Bangladesh maintained its place as
the second major exporter of textiles and garments in FY2016 with 6.4 per cent of global
exports – an increase of 0.5 per cent over the previous year (Hossain, 2017). The economy of
Bangladesh is highly reliant on the textile industry, which produced 81 per cent of its total
exports during FY2016 (BGMEA, 2017). The Bangladeshi textile and garments industry is
itself undergoing considerable transformation, with increasing foreign direct investment,
greater emphasis on product excellence and process improvement, the growing purchasing
power of the increasing middle class, and government policy ensuring compliance with
safety measures. However, Bangladesh’s core strengths related to exploiting cheap labour
may not be sustained indefinitely, as evident in the cases of China, Sri Lanka and India,
which have been shifting away from a focus on cheap labour.
Rising labour costs and pressure from international buyers regarding workplace safety
and compliance with international labour standards, particularly after the Rana Plaza
incident in 2014, have elevated the cost of production for Bangladesh (Khatun, 2017).
Maintaining the current competitive pricing and restoring buyers’ confidence have been
major concerns for the industry. Global challenges may impede Bangladesh’s dream of
becoming the frontrunner in the industry. These include the withdrawal of the generalised
system of preference (GSP), a potential tax by the US Government on garments imports;
renegotiation of preferential access to overseas markets (reserved for least developed
countries) after Bangladesh’s prospective accomplishment of developing economy status by
2024; and impeding negotiations regarding tax-free entry into the UK market as a result of
Brexit.
Studies on the Bangladeshi textile sector by Chowdhury et al. (2006) and Rahman et al.
(2008) have shown that the sector is challenged by low productivity and elevated per-unit
cost of production. Workers are mostly unskilled and workforce participation is marked by
high job turnover and absenteeism (Chowdhury et al., 2012). Low employee morale and a
lack of organisational commitment (Huselid, 1995) have resulted from industry Intellectual
malpractices. The garment and textile industry of Bangladesh must revamp its old image as capital
a destination for cheap labour by incorporating IC management. This will enable
Bangladesh to move in the right strategic direction, upholding its future growth and
satisfying the expectations of international retailers through skilled labour, backward
linkage for the sourcing of raw materials, higher productivity, well-organised lead-time
management for export items and technology upgrades, improvement in organisational
structure and working conditions and less production wastage.
Financial disclosures related to IC in emerging economies are on the rise (Abhayawansa
and Azim, 2014; Khan and Ali, 2010; Sharma and Dharni, 2017). Prior studies have
demonstrated stakeholders’ eagerness to access more comprehensive information related to
the dimensions of IC. However, IC disclosures are only useful and practical if an
organisation and its internal and external stakeholders can make sense of the disclosures
and translate them into everyday organisational and decision-making practices (Giuliani,
2016). Therefore, IC disclosures need to be informed by both decision facilitation and
decision usefulness, considering stakeholders’ expectations. IC disclosures can help
stakeholders to better interpret a firms’ core business activities, performance management

and strategic decision-making (Sharma and Dharni, 2017).
This study highlights two separate dimensions of productivity and profitability by
exploring the relationship between intellectual capital efficiency (ICE) and the financial
performance of Bangladeshi textile firms. The contribution of this study is to increase
awareness of the current state of utilisation of intangible assets and encourage stakeholders
to consider value-added IC efficiency. This will enable companies to align performance
interpretation with improved IC disclosures.
The core purpose of this paper is to elucidate the nature and intensity of the relationship
between textile firms’ intellectual resources and their corporate financial performance in an
emerging economy. This is investigated by calculating IC efficiency using the value-added
intellectual coefficient (VAIC), an extensively applied IC measurement technique used by
researchers to determine how intellectual and physical capital affect organisational
performance and value creation. One of the prime motivations for this research is to
contribute to the scarce IC literature that addresses emerging economies, and to demonstrate
the need for IC efficiency in the textile industry’s value-creation processes.
2. Review of literature
2.1 Intellectual capital and its measurement
The measurement of IC is an extension of the human resource cost accounting literature
popularised in the 1960s (Bontis, 2003; Morse, 1973). IC can be described as an intangible
asset that creates a sustainable competitive advantage for an organisation through its
association with its resources (Bontis, 1998, 2001; Joshi et al., 2010). No consensus prevails in
the literature regarding the constituents of IC. Stewart (1997) and Sullivan (2000)
emphasised value-creation characteristics in their definition of IC; whereas Sveiby (1997)
conceptualised IC as the amalgamation of staff competencies, internal structure and external
structure. Current literature regards IC as a substantial “hidden value” in the disparity
between a firm’s market value and its book value, which is not presented in conventional
financial reporting (Edvinsson and Malone, 1997; Forte et al., 2017). A comprehensive review
of the literature identifies three major sources of IC: human capital, structural capital and
relational capital (Bontis, 1999, 2001; Janoševic et al., 2013; MERITUM, 2002).
Human capital (HC) is a core component of IC. It denotes employee competencies: their
knowledge, skills, education, relationship abilities and values (Kannan and Aulbur, 2004;
JAOC Sveiby, 1997). Bontis (1998), Edvinsson and Malone (1997) and Namasivayam and Denizci
(2006) agreed that the financial value-creation capability of HC cannot be directly owned by
an organisation. However, HC efficiency results, both directly and indirectly, in greater
organisational performance through superior output and improved creativity (Stovel and
Bontis, 2002) ensuring better client satisfaction (Cabrita et al., 2007; Namasivayam and
Denizci, 2006).
Structural capital (SC) comprises the supportive infrastructure that enables HC to
function (Kannan and Aulbur, 2004), and the perpetual capital that remains within the
organisation even after changes in staffing (Roos et al., 1997). SC facilitates greater
productivity, improved workplace practices, internal networking, knowledge sharing and
market orientation (Janoševic et al., 2013; Mention and Bontis, 2013). Although SC, on its
own, cannot influence organisational performance (Stewart, 1997), it becomes a source of
competitive advantage and innovation through leveraging IC into value creation through
simultaneous development of work processes, knowledge and organisational culture, which
fosters trust and support (Collins and Smith, 2006).
Relational capital (RC) can be defined as a function of endurance and as a firms’

competency in reacting to market intelligence (Cabrita and Bontis, 2007). RC is rooted in the
association of external relationships with a firm’s stakeholders in the value chain process
(Bontis, 2001; Cabrita and Bontis, 2007). RC is often reflected in commitment and trust from
stakeholders resulting in a firm’s reputation and customers’ brand loyalty, thereby
influencing the firm’s financial and operational results (Mention and Bontis, 2013).
The measurement of IC is an established focal point in scholarly research assessing
companies’ intangible assets. However, the measurement of IC is still in a nascent phase in
relation to the multidimensionality of IC measurement and diverse frameworks to
rationalise complex IC measurement (Goh, 2005; Nazari and Herremans, 2007). Based on the
underlying assumption of the value-creation capability of both physical and IC, Ante Pulic
and his team from the Austrian Intellectual Capital Research Centre developed a method for
value-creation efficiency analysis by corporate intellectual ability, known as VAIC (Pulic,
1998). Ease of estimation, objectivity and the verifiability of information (as data is sourced
from financial reports) have contributed to the widespread acceptance of VAIC as a method
for assessing IC (Cheng et al., 2005; Firer and Williams, 2003). The VAIC model does not
challenge any fundamental accounting principles (Iazzolino and Laise, 2013). Pulic (2000)
conceptualised capital used (tangible capital and financial capital) and IC (HC and SC) as two
major sources of value creation in firms.
The VAIC model has been subject to criticism for theoretical inconsistencies regarding
the inverse relation between HC and SC (Ståhle et al., 2011), and its exclusion of company
risk (Joshi et al., 2013; Maditinos et al., 2011). Chu et al. (2011) and Mehralian et al. (2012)
demonstrated the inability of this model to predict functional results for firms with negative
value added. The use of historical data from annual reports means that the VAIC technique
is not future-oriented. The VAIC framework also fails to take into account the third
component of IC: RC (Iazzolino and Laise, 2013; Ståhle et al., 2011), as it is not easy to capture
the effect of RC from annual financial reports. VAIC measures ICE in terms of HC and SC
(Pulic, 2000), where SC serves as a proxy for all IC components other than HC (Gigante, 2013)
as it denotes value added minus HC. According to the taxonomy of the VAIC framework, SC
is composed of organisational capital and RC (Chen et al., 2005; Ghosh and Maji, 2015).
Despite these limitations, VAIC has emerged as a recognised tool for performing
comparative analysis. It has been used in previous studies with similar research hypotheses
and methodologies to the present paper, in relation to different countries and industries
(Clarke et al., 2011; Goh, 2005; Joshi et al., 2013; Maditinos et al., 2011; Mehralian et al., 2012; Intellectual
Mondal and Ghosh, 2012). capital
2.2 Intellectual cand financial performance
Influence of IC on corporate financial performance has been an area of interest for several
researchers for decades. Their studies vary greatly with regard to determining the capacity
of IC components to influence financial performance in different country and industry
settings. Current literature embraces the research conducted by Ozkan et al. (2016) on
Turkey; Isanzu (2015) on Tanzania; Mention and Bontis (2013) on Europe; Mondal and
Ghosh (2012) on India; Joshi et al. (2010, 2013) on Australia; Gigante (2013) on Italy; Cabrita
and Bontis (2008) on Portugal; and Goh (2005) on Malaysia. These studies have found
positive correlations between IC components and financial performance, with HC playing
the dominant role. Ozkan et al. (2016) and Isanzu (2015) also recognised the contribution of
tangible capital on financial performance. Janoševic et al. (2013) found a that IC made a
positive impact on return on equity (ROE) and employee productivity, but not on return on
assets (ROA). Interestingly, all of these studies were administered in the banking context,
and HC explained financial performance more than other IC components, as organisational
success in high-quality banking service delivery is highly leveraged to IC utilisation, such as
human resources efficiency, brand image, organisational systems and processes (Ahuja and
Ahuja, 2012).
Beyond the knowledge-intensive banking sector, Maditinos et al. (2011), with a sample of
96 Greek companies, also indicated that HC had a significant relationship with financial
performance. The work of Clarke et al. (2011) put forward a divergent view, in which
tangible asset efficiency was found to impact the organisational performance of Australian
firms with IC playing little role. Sardo and Serrasqueiro (2017) observed an IC playing a
predominant role in enhancing European firms’ wealth, and having a short-term effect on
tangible efficiency in firms’ financial performance. Empirical evidence also indicates that the
effects of IC on financial performance differ in by geographical context, with greater impact
in knowledge-intensive Western economies than in emerging economies.
In the past few decades, there has been an organisational shift towards IC reporting and
disclosure, with voluntary and statutory reporting of human and knowledge-based factors
that create ongoing value for stakeholders (Edvinsson and Malone, 1997). The increased
prevalence of IC disclosure, particularly in the West, seems to have helped managers to
better align IC with corporate performance. There is great scope for emerging economies
that have not yet taken up IC reporting to improve financial results by incorporating IC into
their strategy.
Empirical research conducted by Chu et al. (2011) in China and Chen et al. (2005) in
Taiwan aimed to provide insights into the relationship between IC and financial
performance in emerging Asian economies, where IC explained financial outcome. A study
by Kamath (2008) on 25 leading Indian pharmaceutical firms established the significance of
HC on profitability and productivity of the firms, with a low-efficiency level of IC utilisation
prevailing throughout the industry. The results of Gan and Saleh’s (2010) Malaysian study
showed that IC components can have correlations with productivity. They found that
tangible capital explained profitability. Ghosh and Mondal (2009) also found a positive
association between profitability and ICE for Indian technology and pharmaceutical firms.
However, IC failed to explain the productivity and market valuation of the companies
studied. This result was consistent with later studies by Pal and Soriya (2011); Shaban and
Kavida (2013) and Vishnu and Kumar Gupta (2014) in the context of Indian IT industry and
pharmaceutical firms. Pal and Soriya (2012) performed a comparative study on the Indian
JAOC pharmaceutical and textile industries to suggest a positive influence of IC on profitability,
but found no significant link between ICE and productivity. Firer and Williams (2003) and
Dzenopoljac et al. (2017) described limited and mixed outcomes for the association of IC and
financial performance in South Africa and the Arab region, respectively, where corporate
performance is influenced mostly by physical assets. Khanqah et al. (2012) studied 28
Iranian firms during the period 2006-2009. They found the IC had insignificant influence on
the corporate performance of the firms with SC representing a significant relationship with
financial performance. Fathi et al. (2013) established a considerable positive affiliation
between financial outcome and structural capital efficiency (SCE) in Iranian firms. However,
capital used and human capital efficiency (HCE) influenced profitability variables and had
no or little influence on the growth of revenue. A study by Deep and Narwal (2014)
determined that physical capital was the only significant factor explaining profitability in
the Indian textile industry. However, another study by Deep and Narwal (2016) on the
Indian electronics industry found HC to be the deciding dimension for corporate
performance. Ghosh and Maji (2015) identified significant positive influences of tangible and
HC on ROA in the Indian electronics and banking sectors.
Very few studies have been carried out in emerging economies like Bangladesh to assess
the impact of IC efficiency on financial outcomes. Hussain et al. (2010), Mohiuddin et al.
(2006) and Najibullah (2005) examined the IC efficiency of Bangladeshi banks and concluded
that IC was inconsequential in explaining banking performance. The findings of Rahman
and Ahmed (2012), who used a mixed industry sample, also found that IC had insignificant
influence in determining the financial performance of a firm. However, Afroze (2011) found a
statistically significant correlation between IC efficiency and financial indicators through an
empirical study of 13 private commercial banks in a 12-year study period from 1998 to 2009.
Research on the impact of IC in Bangladesh has been limited, and findings so far have been
inconclusive.
2.3 Research gap

Chen et al. (2005) advocated for further examination of the impact of IC in diverse emerging
economies, in which the value-creation ability of IC may vary because of differences in
technological advancements when compared to developed countries. Aligning IC with
strategy and financial reporting can provide stakeholders with greater access to information
and greater transparency, leading to more useful decisions (Bukh and Johanson, 2003);
formulate a superior intangible asset-measurement framework (Kumar, 2005); and enhance
corporate performance and relevance in capital market (Kim and Taylor, 2012) through
information symmetry and lower cost of capital (Abhayawansa and Azim, 2014). Though
investments in IC may not consistently produce favourable results, well-designed and
implemented IC management, specific to nature of the firm/industry and country, may
explain elevated financial performance (Murthy and Mouritsen, 2011; Vergauwen et al.,
2007). Dzenopoljac et al. (2017) found that a high percentage of studies failed to demonstrate
any conclusive results from the examination of research published between 2003 and 2016.
Sharma and Dharni (2017) highlighted the increasing demand for incorporating intangibles
in strategy and financial reporting in emerging economies, with an urgent shift in
performance measurement disclosures from tangible and quantitative to intangible and
qualitative.
This review of contemporary literature has emphasised the embryonic state of IC
research and reporting in Bangladesh. Most businesses in emerging economies are not
cognizant about the strategic significance of IC for corporate performance. In Bangladesh,
the measurement, valuation and reporting of IC is not common because of lack of awareness
of IC as a strategic asset (Abhayawansa and Azim, 2014; Khan and Ali, 2010). Intellectual
Organisations’ and stakeholders’ abilities to interpret, use and manage IC information can capital
be measured through IC influence on corporate performance. Giuliani (2016) restated the
need for widespread understanding of the comprehensiveness of IC within organisations to
achieve elevated performance.
The context of textile sector is particularly intriguing as a research setting because of the
dearth of prior research and the significance of the sector for the Bangladeshi economy and
international buyers alike. Globally, the textile industry is facing momentous challenges,
reconfirming added demands on firms to enhance their utilisation of IC. As Bangladesh is on
the verge of becoming the leading textile and garments exporter globally, and a potential
market for foreign investors, the Bangladeshi textile industry provides a key opportunity to
examine the performance of IC. This study aims to fill a void in the emerging IC literature by
addressing the lack of evidence supporting the efficiency of IC and, in particular, its
influence on the financial performance of textile firms in developing countries.
3. Industry overview: the Bangladeshi textile sector

The first Bangladeshi garments factory opened in Dhaka in 1960 (Chowdhury et al., 2012), and
the Bangladeshi textile and garments sector became a global name to reckon with in the mid-
1980s (Robbani, 2000). The industry epitomises the success Bangladesh has achieved by taking
advantage of global opportunities by transforming under-privileged and poor segments of
the country into a potent workforce (Chowdhury et al., 2006; Quddus, 1999). The textile sector is
the highest foreign exchange earner for Bangladesh, experiencing exponential growth over the
past few decades, from US$1m in FY 1977-1978 (Gehl Sampath, 2007) to US$34.24bn in FY
2015-2016 (Naim-Ul-Karim, 2016). The database of the Export Promotion Bureau of
Bangladesh indicated a growth in the export of both knitwear garments (7.47 per cent) and
woven garments (12.81 per cent) for FY 2015-2016, compared to the previous fiscal year. With
swelling global demand for low-priced garments, Bangladesh is continuing to consolidate its
position as a leading global garment exporter riding on its huge young population and
competitive labour costs (Matsangou, 2016). The textile sector, which accounted for about 5 per
cent of the country’s GDP in FY 2007 (Gehl Sampath, 2007), is now the largest job provider in
the country, constituting 28.1 per cent of GDP in FY2016 (Akter, 2017).
Gehl Sampath (2007) characterised the Bangladeshi textile sector as composed of
“conventional sweatshops” with high-volume and low value added products, and
highlighted the underutilisation of IC in the sector. The inability to adopt innovative
technology, unavailability of backward linkage, weak physical infrastructure for
transportation, disinterest of foreign buyers in technology transfer, and a shortage of able
managerial and technical staff were identified as the main impediments for developing IC in
Bangladesh (Gehl Sampath, 2007). The sector suffers from questionable labour practices,
unsafe working environments and bare-minimum wage levels (Chowdhury et al., 2012). The
World Bank’s ease of doing business rankings found Bangladesh slipping one place to 177
in 2017. Rises in the energy prices have increased production costs. Domestic currency
depreciation, double-digit inflation and the high cost of financing have been areas of major
concern in the industry (Islam et al., 2013). A increased lead time for shipment due to
inefficiency in Bangladesh’s ports has led to a decline in exports to the USA (Dhaka Tribune,
2017b). Coupled with labour unrest (Akter, 2017) in recent years, the industry has been faced
with difficulties regarding compliance, quality, reliability and worker safety, along with a
slowdown in the economies of the major-buyer European nations and major challenges from
competing nations gaining advantages with trade agreements like the GSP and FTA
(Hossain, 2013; Matsangou, 2016). The tragedy involving Tazreen Garments at Rana Plaza
JAOC highlighted the need for safety compliance in textile workplaces, and this need has been
voiced particularly by international buyers. Productivity can be enhanced through
improved working environments, job satisfaction and consequent competitiveness in the
industry (Abdullah, 2009). In recent years, Bangladesh has made significant progress
towards a safer and more compliant textile and garment manufacturing facilities. In total, 80
per cent of all essential factory upgrades have been accomplished under Accord inspection
(autonomous and legally binding agreements between international brands and trade
unions) (Dhaka Tribune, 2017a). Though ensuring superior working conditions and
adhering to buyers’ requirements has been regarded as costly (Khatun, 2017) and an
impediment to competitive advantage, appropriate IC management will result in enhanced
efficiency with reduced waste, greater energy efficiency, sustainable technology and greater
value adding, ensuring sustainable growth.
4. Conceptual framework and hypothesis development

The purpose of the research is to elucidate the influence of each component of IC on three
commonly used financial performance indicators in the Bangladeshi textile industry.
4.1 The value added intellectual coefficient

Through an extensive literature review, VAIC method was determined to be the most
appropriate approach to IC measurement. The intellectual ability and efficiency of a firm are
calculated in the VAIC model as HCE, capital employed efficiency (CEE) and SCE. The sum of
these efficiencies is termed the VAIC, which is often denoted as BPI (business performance
indicator). Greater VAIC performance represents better efficiency (Joshi et al., 2013).
Thus, VAIC = HCE þ CEE þ SCE
4.2 Value added (VA)

The value created by a firm can be measured by the difference between the outputs (OUT)
and inputs (IN) in a particular fiscal year. Output is the firm’s annual operating revenue
generated by selling its goods or providing services; input refers to the firm’s operating
expenses except for the employees’ salaries and allowances (these are treated as an
investment, not expenditure) (Pulic, 1998; Puntillo, 2009).
Thus, VA = OUT IN
Value addition can be calculated as operating profit before interest and tax (EBIT)
adding back non-cash expenses like depreciation, amortisation and employee costs (Pulic,
1998; Puntillo, 2009):
VA ¼ P þ C þ D þ A;
where:
P = Operating profits;
C = Employee costs;
D = Depreciation; and
A = Amortisation.
4.3 Intellectual capital efficiency

ICE is obtained by summing up human and structural capital efficiencies:
ICE ¼ HCE þ SCE Intellectual
capital
where:
ICE = Intellectual capital efficiency;
HCE = Human capital efficiency; and
SCE = Structural capital efficiency.
4.4 Human capital efficiency

HC calculation comprises all expenses related to employees’ compensation and
development. HCE ratio indicates the contribution made by every unit of money invested in
HC to the value added in the firm. As the first step, the efficiency of using HC is estimated in
terms of value creation by calculating the ratio HCE, which is the ratio of the firm’s value
added (VA) to the firm’s human capital expenditure. These expenses are revealed in the
salary and wage costs of the firm as given in their annual reports (Deep and Narwal, 2014):
HCE ¼ VA=HC
where:
VA = Value added for the firm;
HC = Total wages and salary costs for the firm; and
HCE = Human capital coefficient for the firm.
4.5 Structural capital efficiency

The second step in the VAIC method involves calculating efficiency in terms of SC on value
creation through the ratio of SC and VA. The SCE ratio is the indicator for the contribution
made by every unit of money invested in SC to the VA in the organisation. SC serves as an
appropriate proxy for SC and RC (Gigante, 2013):
SC ¼ VA – HC
The relationship between HC and SC is inverse in the value addition process of the entire IC
base (Pulic, 2000):
SCE ¼ SC=VA
where:
VA = Value added for the firm;
SC = Structural capital for the firm; and
SCE = Structural capital VA for the firm.
4.6 Capital employed efficiency

CEE ratio provides the contribution made by every unit of capital employed (CE) to the VA
in the firm. Capital used includes all the physical and material financial assets of the firm:
the sum of equity capital, the accumulation of profit-adjusting entries and liabilities with
interest (Gigante, 2013). CE also can be defined as total assets net of goodwill and
intangibles (Greenblatt, 2010) minus current liability:
JAOC CE ¼ TA CL
CEE ¼ VA=CE
where:
VA = Value added of the firm;
CE = Capital used of the firm;
CEE = Capital used efficiency coefficient of the firm;
TA = Total assets (excluding goodwill and intangibles); and
CL = Current liabilities.
Financial excellence is still regarded as the supreme objective in the corporate world. In this
study, it was assumed that superior IC performance leads to enhanced financial performance
potentially explained separately through IC components (Mondal and Ghosh, 2012). The
financial performance indicators considered in this paper are profitability indicators such as
ROA and ROE and the productivity indicator, asset turnover (ATO). The selection of these
conventional financial indicators was made following usage in previous research (Firer and
Williams, 2003; Gan and Saleh, 2010; Joshi et al., 2010; Mondal and Ghosh, 2012; Pal and
Soriya, 2012; Ozkan et al., 2016).
Investments in various IC components may not play an equal instrumental role in the
divination of financial performance. Most research suggests that certain combinations of
VAIC components influence performance, depending on the intrinsic characteristics of the
industry (Murthy and Mouritsen, 2011). Based on the literature review, the authors
developed the research framework illustrated in Figure 1.
Investment in HC boosts operational efficiency in tangible asset utilisation and generates
intangible assets (Mondal and Ghosh, 2012), exhibiting a direct impact on the financial
performance of a firm (Cabrita and Bontis, 2008; Ghosh and Maji, 2015; Goh, 2005; Isanzu,
2015; Joshi et al., 2010, 2013; Ozkan et al., 2016). However, many scholars, including Bontis
(1998, 2000, 2008), Cohen and Kaimenakis (2007) and Mention and Bontis (2013), conclude
that the association is mediated through, or influenced by, structural or RC.
4.7 Research hypotheses

To achieve the research objective of illustrating the influence of HCE on financial
performance, the following hypotheses were constructed:
H1. There is a positive association between HC efficiency and higher financial

performance.
HUMAN CAPITAL
STRUCTURAL
CAPITAL FINANCIAL
PERFORMANCE
1. ATO
INTELLECTUAL 2. ROA
CAPITAL EFFICIENCY 3. ROE
CAPITAL
Figure 1. EMPLOYED
Conceptual model EFFICIENCY
H1(a). There is a positive association between HC efficiency and higher ATO. Intellectual
capital
H1(b). There is a positive association between HC efficiency and higher ROA.
H1(c). There is a positive association between HC efficiency and higher ROE.
Bontis et al. (2000) termed SC a facilitator in fostering creativity and learning among human
resources. Thus, human capability is used to the fullest through effective and efficient use of
SC that leads to improved competence and reduced production costs (Bozbura, 2004; Fathi
et al., 2013; Khanqah et al., 2012; Mention and Bontis, 2013).
H2. There is a positive association between SC efficiency and higher financial

performance.
H2(a). There is a positive association between SC efficiency and higher ATO.
H2(b). There is a positive association between SC efficiency and higher ROA.
H2(c). There is a positive association between SC efficiency and higher ROE.
Several previous studies have indicated that IC cannot function without the existence and
proper utilisation of physical and tangible capital (Chen et al., 2005; Clarke et al., 2011;
Dzenopoljac et al., 2017; Firer and Williams, 2003; Ghosh and Maji, 2015; Pulic, 1998;
Puntillo, 2009; Sardo and Serrasqueiro, 2017). This implies that companies with higher CEE
post better financial results.
H3. There is a positive association between tangible capital efficiency and higher
financial performance.
H3(a). There is a positive association between tangible capital efficiency and higher
ATO.
H3(b). There is a positive association between tangible capital efficiency and higher
ROA.
H3(c). There is a positive association between tangible capital efficiency and higher
ROE.
5. Research design and methods

5.1 Regression models
In response to the research questions, three linear regression models were developed to
examine the associations between the dependent variables: ROA, ROE and ATO, and the
independent variables: the VAIC components (SCE, CEE and HCE), with the control variables
of firm size and leverage (LEV) of firms:
JAOC ATOit ¼ a0 þ a1 CEEit þ a2 HCEit þ a3 SCEit þ a4 LEVit þ a5 SIZEit þ « it (1)
ROAit ¼ a0 þ a1 CEEit þ a2 HCEit þ a3 SCEit þ a4 LEVit þ a5 SIZEit þ « it (2)
ROEit ¼ a0 þ a1 CEEit þ a2 HCEit þ a3 SCEit þ a4 LEVit þ a5 SIZEit þ « it (3)
5.2 Variable definitions

5.2.1 Dependent variables. As indicated above, an analysis of contemporary research
literature identified widely used financial performance indicators: profitability indicators,
such as ROA, and ROE; and productivity indicators, such as ATO. These three performance
indicators can be defined as:
ATO ¼ Sales=average assets

ROA ¼ Profit after tax=average assets
ROE ¼ Profit after tax=average common stock equity:
The “average asset/equity” denominator is calculated as the summation of the beginning

and ending period total asset/equity, divided by two.
5.2.2 Independent variables. The efficiency levels, calculated in this regression model
through HCE, CEE and SCE, served as independent variables.
5.2.3 Control variables. For linear multiple regression analysis, two control variables
(size of the firm and leverage) were considered (Firer and Williams, 2003). A study by
Sharma and Dharni (2017) established that IC disclosures and utilisation are likely to
increase with firm size. The level of a firm’s external funding, calculated through leverage, is
a major determinant of the extent of voluntary disclosures (Watts and Zimmerman, 1986;
White et al., 2007), aiding stakeholders in making informed decisions about financial
performance. Leverage and firm size were measured by “debt–equity ratio” and “natural log
of total assets” respectively (Ghosh and Maji, 2015).
5.3 Data collection, sampling and analysis

The secondary data used in this empirical study were collected from the published
database of annual reports of textile firms over the five-year period from 2013 to 2017.
A total of 50 textile firms are currently listed with the Dhaka Stock Exchange (DSE).
The study was confined to the usable data provided by 34 of the listed textile
companies. The sample excluded firms from which there was difficulty in obtaining
financial information for the study period; firms with negative value addition, as
indicated in the studies by Firer and Williams (2003) and Deep and Narwal (2014); and
new firms in their initial public offering with limited financial disclosures for the study
period. Ten of the listed textile companies were graded either Z or B category shares, i.e.
they did not publish regular annual financial reports, hold annual general meetings or
declare dividends as per DSE regulation. The VAIC technique was applied as a basic
methodology to calculate IC efficiency. The study also made limited use of descriptive
statistics with financial information from 2013 to 2017. The industry averages of
financial ratios and VAIC performance indicators were calculated to examine Intellectual
performance trends in the industry. ICE was calculated and tested for the effect of IC on capital
financial performance by using hierarchical multiple regressions in SPSS 21.
6. Discussion of results
6.1 Descriptive statistics
Table I illustrates the mean, standard deviation and variance of the dependent variables,
independent variables and control factors from the study sample. Profitability ratios (ROE
and ROA) and productivity (ATO) had means of 9.06, 4.99 and 0.7587 per cent, respectively,
as reported in the financial statements. Comparison of CEE, HCE and SCE values implies
that value added in the industry generated resulted more from human resources than from
tangible and structural assets during the study period.
Figures 2 and 3 provide insights into trends in the Bangladeshi textile industry through
industry averages of financial performance indicators and VAIC components over the five-
year period from 2013 to 2017. It may be observed that financial outcomes in terms of
profitability and productivity ratios fluctuated throughout the study period (Figure 2). The
industry posted the highest financial ratios in 2014 in terms of ROE and ATO with tumbling
performances after this time. FY2017 was a dismal year for the industry in terms of ROE
and ATO. A downward trend was persistent in ROA throughout the period. VAIC
performance of the textile sector echoed the trend of the financial ratios, as evident in
Descriptive statistics Minimum Maximum Mean SD Variance
HCE 1.0707 24.3369 4.0855 3.5028 12.2690

SCE 0.0660 0.9449 0.6197 0.2164 0.0470
CEE 0.0362 2.4336 0.3953 0.4891 0.2390
ROE 0.0007 0.4206 0.0906 0.0639 40.8210
ROA 0.0006 0.5543 0.0499 0.0535 28.6440
ATO 0.2100 3.8400 0.7587 0.6024 0.3630 Table I.
Leverage 0.0293 6.6002 1.1064 1.1146 1.2420 Descriptive statistics
Size 19.1821 23.4996 21.7485 1.0009 1.0020 of the textile industry
Average Financial Ratio Trend of Textile Industry

0.9
0.8
0.7
0.6
0.5 ATO
0.4 ROA
ROE
0.3 Figure 2.
0.2 Average financial
ratio trend of textile
0.1
industry (DSE listed)
0 from 2013 to 2017
2013 2014 2015 2016 2017
JAOC Figure 3. The VAIC performance again oscillated with HC having the predominant influence
on overall VAIC performance. Although FY2016 was a promising year for the industry, with
improvement in most components of VAIC, FY2017 showed another plummeting drift.
International buyers’ concerns about safety compliance, wages and work environments, and
cancellations of orders after the Rana Plaza incident in 2014, may explain the dismal
performance in FY2015 and beyond. Operating costs are considered in calculation of both
financial performance and VAIC. The inconsistent VAIC and financial performance in
recent years may be viewed as part of increased operating and compliance costs in the
industry and the consequent higher cost of doing business (Khatun, 2017), which was
necessary to restore buyers’ confidence.
6.2 Correlation analysis

Table II demonstrates the correlation analysis that served as an initial screening technique
for evaluating the relationship between the dependent, independent and control variables.
Results from Pearson pairwise correlations suggest that HCE is positively associated with
ROA (p < 0.05). CEE is significantly positively correlated with ROE and ATO (p < 0.01).
Results indicate a negative and significant association between SCE and both ATO (p <
0.01) and ROA (p < 0.05). Overall, correlation results imply that sample firms with a lower
level of efficiency of IC were associated with higher levels of productivity, as both HCE and
SCE have a significant negative correlation with ATO (p < 0.01). Tangible capital efficiency
predominantly correlates with ATO.
VAIC Performance Trend (Industry Average)

7.0000
6.0000
5.0000
4.0000
Index
3.0000
2.0000
Figure 3. 1.0000
Average VAIC –
performance trend of 2013 2014 2015 2016 2017
textile industry (DSE HCE 4.9191 4.0430 3.3263 3.9042 3.5019
SCE 0.7022 0.6368 0.5964 0.5892 0.6557
listed) from 2013 to
CEE 0.4048 0.4197 0.4388 0.3734 0.3614
2017
VAIC 6.0261 5.0995 4.3616 4.8669 4.5191
Variables HCE SCE CEE ROE ROA ATO Leverage Size
HCE 1
SCE 0.671** 1
CEE 0.334** 0.728** 1
ROE 0.028 0.094 0.321** 1
ROA 0.170* 0.202* 0.049 0.596** 1
ATO 0.318** 0.654** 0.811** 0.306** 0.016 1
Leverage 0.256** 0.456** 0.574** 0.312** 0.202* 0.452** 1
Size 0.391** 0.548** 0.507** 0.350** 0.024 0.415** 0.465** 1
Table II.
Correlation matrix Notes: **Correlation is significant at the 0.01 level, *correlation is significant at the 0.05 level
6.3 Regression results and analysis Intellectual
Table III presents the results of the three linear multiple regressions conducted in this capital
study, applying the control variables of firm size and leverage. The study found a
mixed relationship between the efficiency of VAIC components and the financial
performance of the textile companies for the five-year study period, 2013-2017. The
VAIC components, on the whole, had a positive and significant influence the
productivity ratio, i.e. ATO that validates the Regression equation (1). The VAIC
components explain 66.8 per cent of the variations in ATO with an adjusted R2 of 0.656
having control variables of firm size and leverage in the analysis. The VAIC
Change statistics
excluding control variable
Std. error
Regression Adjusted of the R square F Sig.
equation R R square R square estimate F Sig. change change F change
Regression results
1 0.817 0.668 0.656 0.35334 55.135 0.000 0.410 56.416 0.000
2 0.340 0.115 0.083 5.12462% 3.576 0.005 0.069 3.540 0.016
3 0.491 0.241 0.214 5.66525% 8.722 0.000 0.091 5.451 0.001
Un-standardised Standardised
coefficients coefficients
Regression equation B Std. Error Beta t Sig.
Regression coefficients
1
(Constant) 0.373 0.809 0.461 0.645
Control factors
Leverage 0.012 0.034 0.022 0.360 0.719
Firm size 0.014 0.037 0.024 0.383 0.702
Independent variables
CEE 0.893 0.102 0.725 8.785 0.000
SCE 0.445 0.271 0.160 –1.644 0.102
HCE 0.003 0.012 0.016 0.230 0.819
2
(Constant) 17.805 11.736 1.517 0.132
Control factors
Leverage –1.333 0.486 0.278 –2.741 0.007
Firm size 0.857 0.541 0.160 –1.585 0.115
CEE 3.405 1.474 0.311 2.309 0.022
SCE 9.513 3.929 0.385 2.421 0.017
HCE 0.010 0.175 0.007 0.060 0.953
3
(Constant) 42.272 12.974 3.258 0.001
Control factors
Leverage 0.747 0.538 0.130 1.390 0.167
Firm size –2.044 0.598 0.320 –3.421 0.001
Table III.
Regression results of
CEE 5.378 1.630 0.412 3.300 0.001
SCE 13.988 4.343 0.474 3.221 0.002 VAIC components
HCE 0.091 0.193 0.050 0.469 0.640 and financial ratios
JAOC components individually account for further 41 per cent change in ATO. The only
significant element at an individual efficiency level – CEE (explaining 72.5 per cent of
ATO outcome) – had a decisive role to play in ensuring higher productivity and
reaffirming the primitive stage of IC utilisation in textile sectors of emerging
economies.
The value of VAIC components did not weigh upon profitability ratios, as the
variation of the dependent variables ROA and ROE can only be explained at a level of
11.5 and 24.1 per cent, respectively, by the variations of the independent variables with
control variables. The downside of the regression result is that HCE, SCE and CEE, on
their own, can predict only 6.9 and 9.1 per cent (R2-change) of variation in ROA and
ROE, respectively. This effect is nearly negligible. Interestingly, for profitability ratios,
capital used, along with SC, had a significant role to play. From the control variables,
ROA was affected significantly by leverage, with firm size having a considerable effect
on ROE. However, in both cases, the control variables negatively affected financial
performance: the lower the control variables, the better the firms performed. HCE was
insignificant in all three regression analyses. Therefore, the textile sector can work on
building up HC potential to elevate financial performance. As proposed by Firer and

Williams (2003) and Dzenopoljac et al. (2017), the conceptual disparity between value
addition (the contribution to be the general increase in ability and wealth of all
stakeholders of a firm) and profitability (the financial ratios focussing on returns to the
firm’s owners) may explain the lack of significant association between profitability and
VAIC components in this empirical analysis.
The year-wise correlation between VAIC components and financial results depicted a
similar trend (Appendix Tables AI, AII and AIII). Again, the productivity ratio of ATO was
notably impacted by the variations in VAIC components in all five years under study. ROA
was never considerably affected by any of the VAIC components going by the year-wise
regression results. ROE seemed to be influenced significantly by VAIC components only in
2015 and 2016. In conclusion, VAIC components had little or no influence in predicting and
ensuing in financial profitability.
7. Conclusion and direction for future studies

This research is one of few studies focussing on IC utilisation in the Bangladeshi textile
industry. This empirical study failed to establish significant positive relationships
between financial outcome and IC efficiency in the context of the textile industry in
Bangladesh. From a theoretical perspective, this research validates previous studies on
other developing countries and extends the current understanding of the impact of IC
on financial performance in emerging economies in the specific context of the in labour-
intensive textile firms. Consistent with Abhayawansa and Azim (2014) and Giuliani
(2016), this study highlighted the lack of robust understanding, integration of
consistent framework and subsequent non-responsiveness to IC information in aligning
with corporate strategy and practices, which is essential for IC effectiveness. The
results also support the observations of Gehl Sampath’s (2007) UNCTAD report
regarding underutilisation of IC. Ten long years after the UNCTAD report, the current
study found the same underutilisation scenario for IC management in Bangladeshi
textile sector. This research outcome is consistent with previous studies on emerging
economies (Deep and Narwal, 2014; Dzenopoljac et al., 2017; Firer and Williams, 2003;
Khanqah et al., 2012; Pal and Soriya, 2012), in which IC was found to play a minimal role
to play in predicting superior financial outcomes. Deep and Narwal (2014)
demonstrated a significant and positive influence of VAIC components on profitability
and no effect on productivity ratio in the Indian textile industry. The Bangladesh Intellectual
scenario contradicted in this finding. The productivity ratio in the Bangladeshi textile capital
sector was more responsive to VAIC components than other profitability ratios. The
final conclusion that can be drawn from the study is that physical capital is the primary
determinant of financial performance. The contribution of this study can be regarded as
addressing the substantial research gap seeking to recognise IC as a major driver of
organisational accomplishment and to improve IC reporting for incorporating
knowledge management in performance framework among textile firms across
emerging economies.
For effective management of IC utilisation, policymakers, practitioners and company
owners must understand the significance of IC in enhancing corporate performance. They
must measure IC efficiently, and link IC to firms’ overall strategy. Effective IC utilisation can
be viewed as an area that the industry could work on to increase existing profit margins
through higher productivity and greater efficiency. A careful benchmarking of the IC value
chain of top-notch textile firms from the West could guide the industry in redefining its
distinctive competence, and bring about organisational changes in form of high value and
high-tech production process with a highly skilled and trained labour force. In this way,
Bangladesh might avail itself of the opportunity to overtake China as the world’s leading
textile and garments exporter, and gain a sustainable competitive advantage in the global
market. SC enhancement, through the inclusion of lead time management for smooth and on-
time transportation process of export items, technology upgrades, backward linkage for raw
material procurement and superior workplace practices, may serve as a starting point for
strategic IC performance enhancement. HC can be developed through systematic training,
knowledge transfer, managerial and technical skill development, employee motivation and
retention. To facilitate understanding of IC within organisations, managers and firm owners
must engage in designing and implementing a set of concepts and techniques to invest,
measure and report IC by incorporating IC in future strategy formulation. To aid
stakeholders, investors and managers in making informed investment and managerial
decisions, textile firms must provide a balanced picture of how they are aligning IC with
operations and strategy.
Finally, this study supports the findings of Abhayawansa and Azim (2014) that the
inconsistent framework and discursive pattern of IC reporting make IC information less
functional for stakeholders, as evidenced in the impact analysis of IC to financial
performance measurement and management. This study has implications for Bangladeshi
national policymakers and standard-setting bodies as they consider additional regulations
on mandatory IC reporting and disclosures to raise stakeholders’ consciousness about the
impact of IC on financial performance and to foster comparability in IC reporting among
firms. The study has relevance to international investors and retailers, as Bangladesh is a
recognised frontier market for future investment and a vital destination for the textile and
garments industry. Awareness of efficient utilisation of IC as a strategic asset can elevate
productivity, providing a larger profit margin for international retailers as well as local
manufacturers.
This paper has several limitations, most of which are endemic to empirical studies. There
are two main limitations specific to this study. First, caution is warranted when generalising
the findings of the study as it focuses on one industry. The results are relevant to the
sample, industry, geographical location and period under study. Second, this study has the
inherent limitations of the of VAIC model. Nonetheless, future studies could take account of
cross-industry and cross-geographical settings to perform a meta-analysis to explain the
value creation power of IC in influencing financial performance in a more precise way.
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No. 1, pp. 25-44.
Appendix Intellectual
A1. Regression between components of VAIC and ATO (Yearwise) capital
Std. error of
Year R R square Adjusted R square the estimate F Sig.
Regression results of VAIC components with ATO (year-wise)

2017 0.959 0.920 0.902 0.18257 50.480 0.000
2016 0.877 0.769 0.725 0.31462 17.322 0.000
2015 0.836 0.699 0.634 0.43353 10.685 0.000
2014 0.841 0.707 0.652 0.31022 12.864 0.000
2013 0.730 0.532 0.435 0.501948 5.465 0.002
2012 0.819 0.670 0.592 0.262531 8.541 0.000
Year B Std. Error Beta t Sig.
Regression coefficients of VAIC components with ATO (year-wise)

2017
(Constant) 0.101 1.030 0.098 0.923
Leverage 0.029 0.044 0.047 0.663 0.514
Size 0.004 0.046 0.007 0.087 0.931
CEE 1.027 0.106 0.985 9.644 0.000
SCE 0.157 0.395 0.060 0.398 0.694
HCE 0.003 0.022 0.015 0.129 0.899
2016
(Constant) 0.357 1.666 0.214 0.832
Leverage 0.118 0.076 0.181 –1.541 0.135
Size 0.019 0.077 0.031 0.243 0.810
CEE 1.015 0.179 0.837 5.684 0.000
SCE 0.486 0.454 0.164 –1.072 0.294
HCE 0.001 0.015 0.008 0.080 0.937
2015
(Constant) 1.802 2.481 0.726 0.475
Leverage 0.017 0.102 0.034 0.169 0.867
Size 0.006 0.109 0.009 0.054 0.957
CEE 0.268 0.314 0.212 0.854 0.402
SCE –3.823 1.363 –1.174 –2.804 0.010
HCE 0.287 0.126 0.731 2.274 0.033
2014
(Constant) 0.665 2.570 0.259 0.798
Leverage 0.027 0.034 0.124 0.787 0.439
Size 0.057 0.120 0.091 0.477 0.638
CEE 1.022 0.382 0.741 2.678 0.013
SCE 0.005 1.212 0.002 0.004 0.997
HCE 0.031 0.059 0.140 0.534 0.599
2013
(Constant) 0.371 1.544 0.241 0.812 Table AI.
Leverage 0.051 0.049 0.156 –1.024 0.318 Regression results of
Size 0.028 0.069 0.070 0.400 0.693
VAIC components
CEE 0.628 0.265 0.621 2.372 0.027
SCE 0.497 0.563 0.285 0.882 0.388 with ATO
HCE 0.012 0.022 0.127 0.544 0.592 (year-wise)
JAOC A2. Regression between components of VAIC and ROA (Yearwise)
Adjusted Std. error of

Year R R square R square the estimate(%) F Sig.
Regression results of VAIC components with ROA (year-wise)

2017 0.498 0.248 0.077 3.0793 1.452 0.246
2016 0.320 0.102 0.070 2.5971 0.592 0.706
2015 0.420 0.176 0.003 2.6858 0.984 0.449
2014 0.360 0.129 0.034 0.0860 0.792 0.516
2013 0.499 0.249 0.070 1.00046 1.389 0.269
Regression coefficients of VAIC components with ROA (year-wise)

2017
(Constant) 29.475 17.376 1.696 0.104
Leverage 0.839 0.742 0.246 1.131 0.270
Size –1.333 0.769 0.418 1.732 0.097
CEE 1.832 1.796 0.319 1.020 0.319
SCE 8.470 6.656 0.592 1.272 0.216
HCE 0.455 0.379 0.422 1.199 0.243
2016
(Constant) 11.918 13.750 0.867 0.394
Leverage 0.312 0.630 0.114 0.495 0.625
Size 0.497 0.636 0.195 0.781 0.442
CEE 1.928 1.474 0.380 1.308 0.202
SCE 4.530 3.744 0.366 1.210 0.237
HCE 0.036 0.120 0.063 0.300 0.766
2015
(Constant) 2.437 15.372 0.159 0.875
Leverage 0.453 0.632 0.241 0.717 0.480
Size 0.027 0.677 0.010 0.039 0.969
CEE 1.441 1.946 0.304 0.741 0.466
SCE 1.369 8.445 0.112 0.162 0.873
HCE 0.501 0.782 0.341 0.641 0.528
2014
(Constant) 11.534 20.504 0.563 0.579
Leverage 0.123 0.272 0.094 0.452 0.655
Size 0.499 0.956 0.132 0.522 0.607
CEE 0.288 3.046 0.035 0.095 0.925
SCE 8.783 9.671 0.478 0.908 0.373
HCE 0.119 0.469 0.088 0.253 0.802
2013
(Constant) –15.570 58.828 0.265 0.794
Table AII. Leverage –3.863 1.881 0.471 2.054 0.053
Regression results of Size 0.200 2.635 0.020 0.076 0.940
CEE 14.677 10.093 0.575 1.454 0.161
VAIC components SCE 30.410 21.461 0.691 1.417 0.171
with ROA (year-wise) HCE 0.585 0.821 0.251 0.713 0.484
A3. Regression between components of VAIC and ROE (Yearwise) Intellectual
capital
Std. error of
Year R R square Adjusted R square the estimate(%) F Sig.
Regression results of VAIC components with ROE (year-wise)

2017 0.558 0.311 0.154 7.0717 3.320 0.053
2016 0.684 0.468 0.366 6.0941 4.579 0.004
2015 0.714 0.510 0.404 4.3046 4.791 0.004
2014 0.443 0.196 0.029 4.7542 1.173 0.351
2013 0.499 0.249 0.070 1.0005 1.389 0.269
Regression coefficients of VAIC components with ROE (year-wise)

2017
(Constant) 71.696 39.905 1.797 0.086
Leverage 0.328 1.703 0.040 0.193 0.849
Size 3.554 1.767 0.465 2.011 0.057
CEE 7.002 4.124 0.508 1.698 0.104
SCE 24.112 15.286 0.702 1.577 0.129
HCE 0.833 0.871 0.322 0.956 0.350
2016
(Constant) 75.645 32.264 2.345 0.027
Leverage 0.949 1.478 0.114 0.642 0.526
Size 3.533 1.492 0.455 2.368 0.026
CEE 6.941 3.460 0.449 2.006 0.055
SCE 12.026 8.785 0.319 1.369 0.183
HCE 0.075 0.282 0.043 0.266 0.792
2015
(Constant) 2.612 24.637 0.106 0.916
Leverage 2.502 1.013 0.639 2.469 0.021
Size 0.097 1.085 0.018 0.090 0.929
CEE 2.683 3.119 0.272 0.860 0.399
SCE 4.482 13.535 0.177 0.331 0.744
HCE 0.647 1.253 0.212 0.516 0.611
2014
(Constant) 39.607 24.339 1.627 0.117
Leverage 0.490 0.323 0.313 1.516 0.143
Size 1.921 1.135 0.424 1.692 0.104
CEE 1.904 3.616 0.191 0.527 0.603
SCE 19.308 11.480 0.874 1.682 0.106
HCE 0.565 0.556 0.350 1.016 0.320
2013
(Constant) 15.570 58.828 0.265 0.794
Leverage 3.863 1.881 0.471 2.054 0.053 Table AIII.
Size 0.200 2.635 0.020 0.076 0.940
Regression results of
CEE 14.677 10.093 0.575 1.454 0.161
SCE 30.410 21.461 0.691 1.417 0.171 VAIC components
HCE 0.585 0.821 0.251 0.713 0.484 with ROE (year-wise)
JAOC About the authors
Leena Afroz Mostofa Chowdhury is an Assistant Professor at the University of Asia Pacific. She
completed her MBA in management accounting at the University of Dhaka, Bangladesh. Her
research interests include management accounting, intellectual capital and strategic performance
measurement. Her work has been published in professional and academic journals. Leena Afroz
Mostofa Chowdhury is the corresponding author and can be contacted at: leena_du10@hotmail.com
Tarek Rana is a Lecturer in Accounting at La Trobe University. He earned his PhD in
management accounting and public sector governance at The University of New South Wales,
Australia. His current research is focussed on the development and use of management control,
performance measurement and risk management systems to measure public value and social impact
in public services, not-for-profits and social enterprises. His work has been published in Public Money
and Management.
Mahmuda Akter is a Professor in the Department Accounting and Information Systems at the
University of Dhaka. She earned her PhD in Japan and has published research papers in international
journals, edited books and conference proceedings. She serves as a director of state-owned enterprises
and contributes to national policy development. She is a member of the Editorial Advisory Board of
Japanese Management and International Studies and is a director of the Japan Society of
Organization and Accounting (JSOA).

Mahfuzul Hoque is a Professor in the Department Accounting and Information Systems at the
University of Dhaka. He has served as the Director of Learning and Professional Development and
the Secretary of the Institute of Chartered Accounts of Bangladesh (ICAB). He earned his PhD in
Japan in the area of management science and engineering and has published a number of research
papers, including articles in international journals, edited books and international conference
proceedings. He is a Managing Editor of Japanese Management and International Studies and the
Director of the Japan Society of Organization and Accounting (JSOA).
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Journal of Accounting & Organizational Change

Impact of intellectual capital on financial performance: evidence from the

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1. Introduction Journal of Accounting &

stakeholders to better interpret a ﬁrms’ core business activities, performance management

Relational capital (RC) can be deﬁned as a function of endurance and as a ﬁrms’

2.3 Research gap

3. Industry overview: the Bangladeshi textile sector

4. Conceptual framework and hypothesis development

4.1 The value added intellectual coeﬃcient

4.2 Value added (VA)

4.3 Intellectual capital eﬃciency

4.4 Human capital eﬃciency

4.5 Structural capital eﬃciency

4.6 Capital employed eﬃciency

4.7 Research hypotheses

H1. There is a positive association between HC efﬁciency and higher ﬁnancial

H1(c). There is a positive association between HC efﬁciency and higher ROE.

H2. There is a positive association between SC efﬁciency and higher ﬁnancial

H2(a). There is a positive association between SC efﬁciency and higher ATO.

H2(b). There is a positive association between SC efﬁciency and higher ROA.

H2(c). There is a positive association between SC efﬁciency and higher ROE.

5. Research design and methods

ROAit ¼ a0 þ a1 CEEit þ a2 HCEit þ a3 SCEit þ a4 LEVit þ a5 SIZEit þ « it (2)

ROEit ¼ a0 þ a1 CEEit þ a2 HCEit þ a3 SCEit þ a4 LEVit þ a5 SIZEit þ « it (3)

5.2 Variable deﬁnitions

ATO ¼ Sales=average assets

ROA ¼ Profit after tax=average assets

ROE ¼ Profit after tax=average common stock equity:

The “average asset/equity” denominator is calculated as the summation of the beginning

5.3 Data collection, sampling and analysis

Descriptive statistics Minimum Maximum Mean SD Variance

HCE 1.0707 24.3369 4.0855 3.5028 12.2690

Average Financial Ratio Trend of Textile Industry

6.2 Correlation analysis

VAIC Performance Trend (Industry Average)

Variables HCE SCE CEE ROE ROA ATO Leverage Size

building up HC potential to elevate ﬁnancial performance. As proposed by Firer and

7. Conclusion and direction for future studies

critical review”, Journal of Intellectual Capital, Vol. 14 No. 4, pp. 547-563.

Journal of Intellectual Capital, Vol. 12 No. 4, pp. 531-551.

Regression results of VAIC components with ATO (year-wise)

Regression coefﬁcients of VAIC components with ATO (year-wise)

Adjusted Std. error of

Regression results of VAIC components with ROA (year-wise)

Regression coefﬁcients of VAIC components with ROA (year-wise)

Regression results of VAIC components with ROE (year-wise)

Regression coefﬁcients of VAIC components with ROE (year-wise)

Organization and Accounting (JSOA).

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