Shah Wan 2020

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Does the efficiency of corporate Economic

convergence of
governance and intellectual capital output club
affect a firm's financial distress?
Evidence from Egypt 403
Tamer Mohamed Shahwan Received 19 June 2019

Revised 6 October 2019
Department of Management, Faculty of Commerce, Zagazig University, November 25, 2019
Zagazig, Egypt, and Accepted January 20, 2020
Ahmed Mohamed Habib

Department of Accounting, Faculty of Commerce, Zagazig University, Zagazig, Egypt
Abstract
Purpose – Using data on 51 firms traded in the Egyptian Exchange from 2014 to 2016, this paper to assess
the efficiency of corporate governance (CG) and intellectual capital (IC) practices and to explore their
influence on the probability of a firm's financial distress.
Design/methodology/approach – The relative efficiency of CG and IC practices has been measured under
the Malmquist data envelopment analysis model. A modified Z-score model was applied to assess firms'
financial distress.
Findings – The Wilcoxon signed-rank test revealed almost insignificant evidence regarding the improvement
of CG and IC efficiency over the study period. The efficiency score of CG practices had no impact on the
likelihood of financial distress. However, the efficiency score of IC negatively affected the probability of
financial distress.
Research limitations/implications – The integration of data envelopment analysis with Tobit regression was
required for identifying the significant drivers of efficient CG and IC.
Practical implications –The findings shed light on the role of CG and IC in alleviating the degree of financial
distress in Egypt as an emerging market, especially the need to raise firms' compliance with the Egyptian
CG code from a voluntary to mandatory status.
Originality/value – This study, using Malmquist data envelopment analysis, is among the first attempts to
assess the relative efficiency of CG and IC practices and their effects on financial distress.
Keywords Corporate governance index, Intellectual capital performance, Relative efficiency, Financial
distress, Egypt Paper type Research paper
1. Introduction
The existence of the “principal-agent problem” defined by Jensen and Meckling (1976) has
attracted the attention of numerous researchers and practitioners to investigate different
approaches for controlling conflict of interest between managers and shareholders. One of
the prominent approaches for handling such an agency problem is to adopt and implement
the best practices of corporate governance (CG). Many have sought to ascertain the quality
of CG practices and their role in improving a firm's financial performance and minimizing
different types of risks, particularly the risk of financial distress (eg Manzaneque et al.,
2016; Udin et al., 2017; Nasir and Ali, 2018; Luqman et al., 2018). For instance,
Gruszczynski (2006) confirms the negative association between the adoption of CG best
practices and the likelihood of the firm's financial distress. Mardly et al. (2018) point out
that the ownership structure as one of the basic dimensions of CG positively affects the Journal of Intellectual Capital
Vol. 21 No. 3, 2020
financial performance of Syrian firms. As argued by Wang and Deng (2006) and Oteng- pp. 403-430
Abayie et al. (2018), the adoption of high-quality CG mechanisms as a tool for controlling © Emerald Publishing Limited
1469-1930
the agency problem tends to sustain a high level of firm performance and preserve firms from the
DOI risk of financial distr
10.1108/JIC-06-2019-0143
JIC Moreover, Luqman et al. (2018) show that the voluntary adoption of CG attributes minimizes
the level of financial distress. However, Shahwan (2015) documents an insignificant negative
21.3
association between CG and the probability of financial distress. Pramudena (2017) also
concludes that the proportion of commissioners and the number of directors positively
influence the likelihood of financial distress.
In the context of intellectual capital (IC), numerous studies have also been directed to
examining the role of IC in enhancing financial performance and hence reducing the likelihood
404 of financial distress (eg Pour et al., 2014; Nadeem et al., 2016; Nawaz, 2017; Cenciarelliet
al., 2018). The key findings of these studies empirically support the role of IC as a strategic
asset in enhancing the firm's competitiveness, the firm value, asset management capabilities
and hence minimizing the financial distress risk.
Another stream of literature has also been directed to investigate the association between
CG mechanisms and IC (eg Ho and William, 2003; Safieddine et al., 2009; Altuner et al.,
2015; Nadeem et al., 2017). The empirical findings of these studies are not conclusive as
they show mixed evidence regarding such association and their impact on firm financial performance.
For instance, Faisal et al. (2016) show that board composition has no impact on IC efficiency
while CEO duality and board meetings negatively affect IC efficiency. Moreover, board size
and director's ownership positively affect IC efficiency.
Similarly, a high level of efficiency plays a critical role in achieving competitive advantage
and ensuring excellent performance. According to March and Sutton (1997), a high level of
efficiency may be key to ensuring the survival of any business organization. Failure to attain
this level adversely affects customers' expectations and their loyalty (Hackman and Wageman,
1995; Armstrong et al., 1997; Cook and Verma, 2002; Evans, 2011). Shenher et al. (1997)
argued that project efficiency is one of the four major dimensions required for assessing the
degree of project success. As documented by Serrador and Turner (2014), project efficiency
is correlated to 0.6 of a project's overall success. In addition, an accurate estimate of efficiency
tends to drive decision-makers to optimize the use of their organizational resources by
enhancing either pure technical efficiency or efficiency of scale. As a result, much effort has
been exerted to measure the relative efficiency of firms[1] in various industries via data
envelopment analysis (DEA) as an alternative to accounting indices[2]. In the retail industry,
Barros (2006) and Gandhi and Shankar (2014) have written papers; in banking, Luo et al.
(2012) and Shahwan and Hassan (2013); among health workers, Asanduluia et al. (2014); in
libraries and universities, Essid et al. (2010) and Shahwan and Kabe (2013); and in the airline
industry, Hong and Zhang (2010); Fuentes (2011). However, to the best of our knowledge, no
study has been conducted to investigate how a firm's relative performance in CG and IC
influences financial distress, especially in developing countries such as Egypt.
In Egypt (as an emerging market), a shift was observed in 1991 from the domination of a
central market economy to the adoption of a free market. One of the most important effects
of this economic transformation has been the increased interest in the level and quality of CG
practices within Egyptian corporations. In early 2001, through a joint project between the
World Bank and the Ministry of Foreign Trade, the quality of CG practices was assessed in
the light of the best practices formulated by the Organization of Economic Cooperation and
Development (OECD) (Shahwan, 2015) . In view of these developments, a voluntary Egyptian
code was issued in 2005 by the Egyptian Institute of Directors (Ebaid, 2011). Later, in October
2006, the Egyptian Businessmen's Association also issued a CG guide for family companies,
which was the first guide in Egypt and the Middle East for family business governance seeking
to develop sustainable business practices (Egyptian Institute of Directors [EIoD], 2016 ).
Then, in 2011, the Egyptian Institute of Directors (EIoD) issued the first amendment to the
CG code of 2005, so as to keep up to date with the best practices at the regional and
international levels. A second update was introduced by the EIoD in August 2016, in order to
help firms achieve the highest levels of efficiency and sustainability. The latest report on the Economic
observance of standards and codes (ROSC) issued by the World Bank shows that Egypt on convergence of
average has partially adopted and implemented the best practices of CG proposed by the
OECD (The World Bank, 2009).
output club
Regarding IC practices in Egypt, many of these practices are not well revealed due to a
high level of secrecy imposed by Egyptian firms. Moreover, the absence of mandatory
regulations decreases the disclosure level of the IC efficiency within Egyptian firms.
405
According to the Human Capital Index issued by the World Bank, Egypt achieved a score of
0.49 in 2018, where Egypt ranked 104 out of 157 countries worldwide (World Bank, 2019a, b).
Although many have studied ways of assessing the quality of CG and IC, the results have
not so far been comprehensive, for many reasons. First, no single CG indicator can be
considered appropriate for all (Munisi and Randoy, 2013; Rygh, 2016). Second, most scholars
have failed to assess the relative efficiency of CG and IC using DEA. Thus, this study helps
to extend the literature on efficiency analysis via the use of DEA to assess the relative
efficiency of Egyptian listed firms from two standpoints, CG and IC. Moreover, the present
study sheds light on the impact of these two types of efficiency on the probability of a firm's
financial distress. Accordingly, the present study investigates the following research questions:
RQ1. What are the relative efficiency scores of Egyptian listed firms with respect to
corporate governance and intellectual capital practices?
RQ2. Are there, on average, significant differences between the firms under study regarding
the efficiency of corporate governance practices?
RQ3. Are there, on average, significant differences between the firms under study regarding
the efficiency of the intellectual capital practices?
RQ4. Do the efficiencies of corporate governance and intellectual capital have any
significant negative impact on the likelihood of a firm's financial distress?
The rest of this paper is structured as follows. A literature review and the development of
hypotheses are covered in section 2. Section 3 presents the measurement of variables.
Section 4 describes the data collection and methodology. Section 5 reports the results and
analyses. Finally, the conclusions and implications are outlined in section 6.
2. Literature review and hypotheses development 2.1 The

efficiency of corporate governance and intellectual capital Many
researchers and practitioners have tried to assess the quality of CG and the various
submechanisms related to CG as crucial determinants of achieving high performance and
reducing the probability of financial distress ( eg Lee and Yeh, 2004; Wang and Deng, 2006;
Black et al., 2006; Lin et al., 2009; Peixoto et al., 2011; Kocmanova and Simberova, 2012;
Ferreira et al., 2013; Lima and Sanvicente , 2013; Matic and Papac, 2014; Makki and Lodhi,
2014; Achim and Borlea, 2014; Shahwan, 2015; Murhadi et al., 2018; Oteng-Abayie et al.,
2018). For instance, Daily and Dalton (1994) investigate the association between a company's
CG and a firm's default risk (distress risk). Their findings show that good CG practices reduce
the likelihood of financial distress and bankruptcy. Parker et al. (2002) confirm a negative
significant relationship between CEO replacement by an outsider and the firm's survival and continuation.
Lee and Yeh (2004) also confirm a negative relationship between good CG practices and the
risk of default. Moreover, Wang and Deng (2006) argue that CG mechanisms, that is,
ownership concentration, state ownership, and the percentage of independent directors
negatively affect default risk. Miglani et al. (2015) and Murhadi et al. (2018) confirm the
negative association between the proportion of independent directors and a firm's financial
distress; henceforth, Udin et al. (2017) find a positive relationship between insider's ownership and financial distress.
JIC In addition, Shahwan (2015) points out that CG practices within Egyptian firms have an
insignificant impact on the likelihood of financial distress.
21.3
An additional growing body of literature has also investigated the impact of CG on a firm's
efficiency. Adnan et al. (2011) examine the linkage between CG mechanisms and efficiency of
Malaysian listed banks. The empirical findings support the positive effects of smaller board size
and a higher percentage of ownership concentration on bank efficiency. Peixoto et al. (2011)
demonstrate that a firm's efficiency is associated with good government, attributable to the
406 significant positive association between the governance index and the DEA efficiency score.
Oteng-Abayie et al. (2018) also investigated the impact of CG mechanisms on the technical
efficiency scores of rural and community banks (RCB) in Ghana. The findings reveal a
significant impact of the board member's number, the board meetings' frequency, and corporate
social responsibility on RCB efficiency. Moreover, Andrieÿet al. (2018) confirm that rigid and
the best practices of CG lead to an increase in both bank's cost and technical efficiency. It
should be noted that there is a scarcity of literature on this subject, particularly when the
Egyptian context and nonfinancial firms are considered.
In the context of IC efficiency and its impact on firm performance, the extant literature affirms
the positive association between the firm's competitive advantage and the performance of the
firm's IC (eg Barney, 1991; Marr and Schium, 2001; Tovstiga and Tulugurova, 2009; Kamukama
et al., 2011). For instance, Marr and Schium (2001) support the significant influence of IC on
the firm's competitive position and financial performance.
Kamukama et al. (2011) also assert this positive impact on micro-financed firms' financial
performance. At the same time, Kamukama et al. (2011) argue that competitive advantage as
a mediator affects the association between IC and financial performance, because the
uniqueness of a firm's intellectual assets makes it hard for others to imitate the firm's products.
In addition, the efficiency of IC may well be linked with resource-based theory, which postulates
that controlling the firm's tangible and intangible assets can earn sustainable advantage and
value-added, which are positively reflected in the firm's performance (Riahi-Belkaoui, 2003 ;
Chen et al., 2005). The value-added intellectual coefficient (VAIC) is increasing being used in
business and academic applications as an aggregate measure of IC capacity in a firm (eg
Yalama and Coskun, 2007; Muhammad and Ismail, 2009; Baye, 2014).
Overall, the aforementioned studies – on the one hand – have provided mixed evidence
regarding the impact of CG on the firm performance and the likelihood of financial distress. On
the other hand, the majority of studies have revealed that good practices of IC would enhance
a firm's long-term financial health. At the same time, the aforementioned studies pay little
attention to the use of DEA as a nonparametric technique for assessing the relative efficiency
of the decision-making units (DMUs) against their competitors with respect to CG practices and IC.
Based on these arguments, this study is, as far as could be discovered, one of the first attempts
to use Malmquist DEA for assessing the efficiency level of CG and IC practices within Egyptian
firms. To this end, the present study aims to test the following hypotheses:-
H1. On average, there were statistically significant differences in a firm's corporate
governance efficiency score over the study period.
H2. On average, there were statistically significant differences in a firm's intellectual
capital efficiency score over the study period.
2.2 The link between the efficiency of corporate governance, intellectual capital, and financial
distress risk The diversity of risks surrounding business organizations, especially the adverse
consequences of the last financial crisis, has threatened the continuity of the presence of
many institutions all over the world (OECD, 2009). In both developing and emerging Economic
economies, there are notable fluctuations in the likelihood of financial distress and bankruptcy.
Outecheva (2007) justifies such variations in the number of defaults as a reflection of the
convergence of
market's cyclicality. For instance, according to KPMG distressed debt investment and exit output club
strategy survey issued in (2007), the nonperforming loans in Germany gradually increased
from V100 billion in 2005 to V150.3 billion in 2007. Moreover, the report of corporate default
and recovery rates issued by Moody's investor service in (2018) indicates a decrease in total
defaults from 143 firms all over the world in 2016 to 91 firms in 2017, with $78 billion as a 407
total value of defaults in 2017. In the context of Egypt as an emerging market , the World
Bank report issued in 2019 shows that the average value of the nonperforming loans ratio
scored 4.2 percent in 2019, compared with the ratio of 19.3 percent during the financial crisis
in 2007. This remarkable decline in bank nonperforming loans to gross loans for Egypt and
other countries, on one hand, enhances the confidence in the financial system.
On the other hand, a high level of volatility in this ratio reflects uncertainty regarding the
efficiency of corporate borrowers' management.
Accordingly, this high level of fluctuations in the nonperforming loans ratio attracts the
attention of relevant stakeholders, that is, creditors, investors, employees, owners, and
managers for constructing a financial model to predict the risk of financial default before its
occurrence or identifying the significant determinants of the financial distress phenomenon.
In this vein, since the 1960s, many studies have focused on the development of financial
models and the trade-off among numerous quantitative and statistical methods in order to
develop an analytical method or mechanism for predicting the occurrence of a financial
distress well in advance ( Mselmi et al., 2017; Mansouri et al., 2016; Pustylnick, 2011;
Daines et al., 2010; Altman, 1983; Ohlson, 1980; Altman, 1968; Beaver, 1966).
In the framework of seeking to build such an early warning system for financial distress,
recent studies related to financial distress also suggest that CG mechanisms and IC could
have a significant impact on the likelihood of a firm's financial distress (Cardoso et al., 2019;
Udin et al., 2017; Shahwan, 2015; Elloumi and Gueyie, 2001; Demirkan and Platt, 2009; Liet
al., 2008; Lieu et al., 2008; Parker et al., 2002). For instance, Cardoso et al. (2019) support
the existence of a significant U-shaped format between the board size and the likelihood of
firm financial distress. Udin et al. (2017) examine the impact of ownership structure as a
major attribute of CG mechanisms on the financial distress using 146 Pakistani public limited firms.
The findings reveal a significant negative relationship between foreign shareholders and the
likelihood of financial distress. However, insider ownership has a significant positive
association with financial distress. Moreover, both government ownership and institutional
ownership have an insignificant impact on the probability of financial distress. Demirkan and
Platt (2009) show that firms are less likely to be engaged in accruals management under
good governance attributes. Li et al. (2008) also point out that ownership concentration,
state ownership, independent directors, and ultimate owner have a negative impact on the
probability of financial distress. However, the association between managerial ownership
and the probability of financial distress is insignificant. Lieu et al. (2008) argue that financial
distress is less likely to have occurred when a firm increasing depends on independent
directors and supervisors.
In a similar context, Muranda (2006) shows that the board's power imbalance can be
attributed to the small number of nonexecutive directors, hence, increasing the occurrence
of financial distress. This implies that increasing the number of nonexecutive directors would
restore the board balance. Elloumi and Gueyie (2001) also report that the composition of the
board of directors is the major determinant of financially distressed firms. However, Boyd
(1995) and Dowellet al. (2011) argue that the effectiveness of CG mechanisms for reducing
the firm's financial distress mainly depends on the firm and environmental characteristics.
Abdullah (2006) also finds no linkage between the financial distress status and both of board
JIC independence and the duality of CEO. It should be noted that there is an inconclusive
agreement regarding the impact of CG on a firm's financial distress.
21.3
In the context of the association between IC and financial distress risk, several studies
support the positive impact of IC on the likelihood of firm's financial distress (eg Kennedy
and Beyerlein, 2005; Cabrita and Bontis, 2008; Zeghal and Maaloul, 2010; Mehralian et al.,
2012; Ardalan and Askarian, 2014; Mollabashi and Sendani, 2014; Pour et al., 2014; Nadeem
et al., 2016; Dzenopoljac et al., 2016; Nawaz, 2017; Cenciarelliet al., 2018). For instance,
408 Yosano and Koga (2008) document a direct impact of IC indicators on the credit condition of
small and medium-sized Japanese firms. Guim on (2005) also supports the positive impact
of IC on the firm's financial health over the long term. Dumay and Tull (2007) concluded that
IC efficiency leads to a decline in a firm's cost of debt and an increase in its market value,
thus ensuring the stability of the firm's financial health. Tseng et al. (2013) confirm the
significant impact of IC on the firm's financial performance in years of prefinancial and
postfinancial crisis. Nadeem et al. (2016) concluded that IC indicators should be used as
significant predictors in the corporate financial distress model. Cenciarelliet al. (2018) also
concluded that IC has a negative impact on the likelihood of default. Based on the theoretical
framework and empirical results of the relationship between CG attributes, IC, and financial
distress, the current study is hypothesized that:
H3. The efficiency of corporate governance negatively affects a firm's financial distress.
H4. The efficiency of intellectual capital negatively affects a firm's financial distress.
3. Measuring corporate governance, intellectual capital, and financial distress 3.1 The
aggregate corporate governance index (ACGINX)
The present study makes use of the aggregate corporate governance index (ACGINX)
developed by Abousamak and Shahwan (2018). This index is constructed to assess the
quality of CG practices in accordance with the best practices mentioned in the Egyptian
corporate governance code issued in February 2011. The index contains 32 items divided
into four subindices, as follows: (1) board of directors subindex ( BODINX) with 10 items; (2)
disclosure and transparency subindex (DINX), with 11 items; (3) ownership and control
structure subindex (OWINX), with six items; and (4) shareholders' rights and investor
relations subindex (SRINX ), with five items. A detailed description of these items may be
found in Abousamak and Shahwan (2018, pp. 345–346).
Following Ferguson et al. (2002), and Kamel and Shahwan (2014), only insignificant
differences lie between the weighted and the unweighted approach in scoring the CG indices.
Here, the weighted dichotomous approach was deployed to score the ACGINX. Following
Shahwan (2015), each item within each subindex gets a score of “1” in the case of “item
availability” and “0” otherwise. The aggregate score for each subindex, namely BODINX,
DTINX, OWINX, and SRINX, is calculated by adding the sum of CG scores obtained for each
item within these subindices. Following Javaid and Saboor (2015), the aggregate CG score
for each firm is simply the average of the aggregated subindices scores. This implies that
equal weight has been assigned to each of those four subindices.
3.2 The intellectual capital performance (IC)

The value-added intellectual coefficient (VAIC) method was proposed by Pulic (1998) as a
useful tool for assessing a firm's intellectual capital performance. Many researchers have
considered the VAIC model the most appealing technique for measuring the IC performance
(eg, Chen et al., 2005; Shiu, 2006; Tan et al., 2007; Chan, 2009; Chu et al., 2011;
Dzenopoljac et al., 2016). According to Shiu (2006), the VAIC model provides a standardized and coheren
measure of IC performance. Chu et al. (2011) argue that the VAIC model and its components can be Economic
powerful predictors of firm financial performance. Mehralian et al. (2012) also support the use of
VAIC model as a good predictor for the firm's profitability rather than the firm's productivity. However,
convergence of
some studies point out some limitations of the VAIC model (Maditinos et al., 2011; Stahle et al., output club
2011). As argued by Stahle et al. (2011), the VAIC model can be merely considered as an investment
model in both labor and capital as the VAIC model has nothing to do with the IC. Iazzolino and Laise
(2013) concluded that the VAIC is not a proper proxy for the value of intellectual capital. Andriessen
(2004) also shows that the VAIC model does not differentiate between capital and expenditures. 409
Moreover, Cenciarelli et al. (2018) argue that the VAIC does not consider the holistic aspect of IC.
Accordingly, the VAIC should be used as an indicator for value creation via the IC contribution.
Moreover, the results of the VAIC model should be interpreted with caution due to the aforementioned
drawbacks.
Following Leitneret al., 2005; Al-Musali and Ismail (2012); Al-Musali and Ismail (2014); and Pour
et al. (2014), the VAIC can be mathematically described as: VAIC CEE HCE SCE
(1)
where CEE represents the efficiency of capital employed. HCE refers to human capital efficiency and
SCE refers to structural capital efficiency.
CEE is mathematically measured by dividing the value-added (VA) for a company to the book
value of the net asset (CE), where the value-added for company (VA) represents the sum of operating
profits (OP), total employee costs (EC), depreciation (D), and amortization (A).
HCE refers to human capital efficiency, which can be quantitatively measured by dividing
the value-added (VA) to the total salaries and wages (HC) for the company.
Finally, the structural capital efficiency (SCE) can also be computed by referring the structural
capital (SC) of a specific firm to its value-added (VA), where the structural capital (SC) for company
5 (VA–HC).
3.3 The likelihood of corporate financial distress and control variables To

assess the likelihood of corporate financial distress, the modified Altman Z00 Score model proposed
by Altman et al. (1995) – as one of the best-known distress prediction models – was employed in the
present study. The proposed model is suitable for both nonmanufacturing and industrial companies
and also for companies operating in emerging countries. Following Altman and Hotchkiss (2006), the
Altman Z00 Score can be used for assessing a firm's financial distress, in that increasing the value
of Z reduces the risk of financial distress. The value of the Z00 Score can be mathematically
estimated as follows (Altman and Hotchkiss, 2006):
Z00Score 3:25 6:56X1 3:26X2 6:72X3 1:05X4 (2)
where:
X1 5 working capital/total assets

X2 5 retained earnings/total assets
X3 5 earnings before interest and taxes/total assets
X4 5 market value equity/book value of total debt
Following Altman (2005), and Altman and Hotchkiss (2006), a company with a Z00 Score of over
5.85 has a low risk of bankruptcy (a healthy firm), whereas a Z00 Score below 4.15 represents a firm
already within the area of insolvency (an unhealthy firm). A Z00 Score between 4.15 and 5.85
indicates potential bankruptcy or a gray area. In the current study, the selected sample was classified
into two groups: healthy versus financially distressed firms.
JIC On one hand, firms with Z-score above 4.15 are classified as healthy ones. On the other
hand, firms with Z-score below 4.15 are treated as financially distressed firms. This implies
21.3
that “Z-Score” in the coming section (4.2.2) is either “1” if the firm is classified as a distressed
firm or “0” if it is a healthy one.
Regarding the control variables used in the present study, as argued by Daily and Dalton
(1994), Mollabashi and Sendani (2014), and Shahwan (2015), certain firm-specific variables,
namely, firm size, leverage, return on assets ( ROA), and industry type, were adopted as
410 control variables. The firm size was computed by taking the natural logarithm of the firm's
total assets. Previous studies indicate that firm size is one of the main determinants
influencing the firm's financial distress According to Dong et al. (2014) and Chakraborty et
al. (2018), large firms tend to be less risky due to their ability to diversify risks. Moreover,
Chung et al. (2010) argued that firm size also affects governance quality because of investor
interests and scrutiny. As a result, the corporate size is expected to be negatively associated
with corporate financial distress risk. The leverage was defined as the ratio of total debt to
total assets. Following Shahwan (2015), in an emerging market like Egypt where the capital
structure of Egyptian firms heavily depends on debt financing, it is expected in the current
study that leverage is positively associated with the corporate financial distress risk.
The ROA was calculated as the ratio of net income to total assets. Based on the pecking
order theory, Myers and Majluf (1984) argue that highly profitable firms heavily depend on
their internally generated cash flows rather than on debt as a source of funds. Thus, it is
expected that ROA is negatively associated with the firm's risks. The industry type was
defined as a dichotomous variable. The value of “1” was given when the firm belonged to the
sector and “0” otherwise.
4. Data collection and methodology 4.1

Data collection and sample selection
Table I, Panel A gives the sample size. Our initial sample consists of 84 firms listed on the
Egyptian Exchange from 2014 to 2016. The main sources of data were based on the annual
reports of the selected firms and their websites. These firms' annual reports were obtained
from Egypt for Information and Dissemination Company (EGID). Following Shahwan and
Hassan (2013) and Portela et al. (2004), the existence of negative values would hinder the
ability of the DEA model to conduct efficiency analysis, particularly under the assumption of
constant returns to scale. As a result, 33 companies were excluded for lack of financial data
or because of some variables with negative values. Accordingly, the final sample consists of
51 firms.
Table I, Panel B summarizes the various categories of the data set, which were derived
from eight different industries. The final sample was also divided into two groups: distressed
and nondistressed firms. From the 51 firms in the sample, 17 firms (33.3 percent), 19 firms
(37.3 percent), and 16 firms (31.4 percent) – based on their Altman Z00 Score – were
classified as distressed firms in 2014, 2015, and 2016, respectively.
This study tests the internal and external validity of the selected sample size to ensure
that it is properly represented in the Egyptian Exchange, as follows: first, following Wahba
(2015), the study sample included most of the companies listed on the Egyptian Exchange.
Second, the size of the data set equaled the sample size used in similar studies in the context
of Egypt (see Wahba, 2008; Kamel and Shahwan, 2014; Wahba, 2015; Shahwan, 2015).
Out of 222 firms listed on the Egyptian Exchange at the end of 2016, the present data set
represents 23 percent. Finally, Table II reports the 2 statistics of the Kruskal–Wallis
nonparametric test for exploring the significant variation among different categories of the
final sample. The 2 statistic of the 17 variables analyzed (ACGINX, DTINX, BODINX, SRINK,
OWINX, VAIC, CEE, HCE, SCE, Tobin's Q, earnings per share (EPS), payout ratio, OE, Z-score, firm size
Number of firms Percent

Economic
Panel A: Description
convergence of
Initial samples 84 140%
With negative values (24) (40%)
club output
Intermediate samples 60 100%
Companies with unavailable annual reports and (9) (15%)
insufficient data from 2014 to 2016
Final sample 51 85% 411
Panel B: Decomposition of the final sample
Number of Firms Percent
2014 2015 2016
1. Food and beverage (Sec1) 11 21.6%
2. Construction (Sec2) 8 15.7%
3. Real estate (Sec3) 12 23.6%
4. Industrial goods and services (Sec4) 5 9.8%
5. Healthcare and pharmaceuticals (Sec5) 4 7.8%
6. Chemicals (Sec6) 5 9.8%
7. Personal and household products (Sec7) 4 7.8%
8. Basic resources (Sec8) 2 3.9%
Final total of sample firms 51 100%
2014 2015 2016
a) Distressed firms 17* (33.3%) 19* (37.3%) 16* (31.4%) Table I.
b) Nondistressed firms 34** (66.7%) 32** (62.7%) 35** (68.6%) Sample size and
Note(s): Based on the Z-score as an inverse proxy of financial distress, * and ** represent the distressed and industry
nondistressed firms, respectively representation
leverage, and ROA) indicated a significant difference between the selected sectors at a
significance level of 0.05 or less.
Table III shows the descriptive statistics of the study variables. In the sample, the average
ACGINX was about 4,585 with a range of 2.75–6.50. The DTINX average was about 2003
with a range of 1.25–2.50. The BODINX average was about 0.892 with a range of 0.00–2.25.
The SRINX average was about 1.059 with a range of 0.75–1.25. The OWINX average was
about 0.631 with a range of 0.00–1.00. The VAIC average was about 8,513 with a range of
1,446–109.99. The CEE average was about 0.235 with a range of 0.003–0.931. The HCE
average was about 7,613 with a range of 1,082–108,926. The SCE average was about 0.666
with a range of 0.076–0.991. Tobin's Q average was about 1.092 with a range of 0.42–6.97.
The EPS average was about 3.28 with a range of 0.017–6 29,519. The Payout ratio average
was about 0.381 with a range of 0.00–4.626. The OE average was about 1.304 with a range of
0.00–37,277. The Altman Z00 Score as an indicator for financial distress average was about
0.34 with a range of 0.00–1.00. The mean of firm size was about 20,662 with a range of 17,319–
24,375. The leverage average was about 0.463 with a range of 0.059–0.844. Hence, it can be
inferred that these Egyptian firms depend heavily on debt for financing their activities. The
ROA average was about 0.083 with a range of 0.003–0.341.
4.2 Estimation methods and the testing of hypotheses

4.2.1 Assessing the efficiency of corporate governance and intellectual capital. Assessing the
relative efficiency of DMUs via the DEA has been first developed by Charnes et al. (1978). A
crucial improvement in the DEA model has been further conducted by Banker in 1984. DEA
has been considered one of the most powerful tools to evaluate the efficiency of a DMU
against the best performance of a set of peer DMUs using a correlated set of inputs and
outputs (Charnes et al., 1978). According to Van der Meer et al. (2005), DEA as a boundary
JIC Variables Kruskal–Wallis H asymp. Sig.

21.3
ACGINX 17,358 0.015*
DTINX 23,556 0.001**
BODINX 15,686 0.028*
SRINX 54,152 0.000***
OWINX 23,186 0.000***
412 VAIC 56,184 0.000***
CEE 82,571 0.000***
HCE 61,760 0.000***
SCE 61,760 0.000***
Tobin's Q 21,921 0.003**
EPS 29,197 0.000***
Payout ratio 39,457 0.000***
OE 56,003 0.000***
Z-score 34,025 0.000***
Firm size 28,960 0.000***
Leverage 26,805 0.000***
ROA 22,089 0.002**
Note(s): *p < 0.05; **p < 0.01; ***p < 0.001. ACGINX represents the aggregate score on the corporate
governance index, measured as an average score of the four subindices. DTINX represents the score of
disclosure and transparency subindex; BODINXis the score of the board of directors subindex; SRINXrefers to
the score of total shareholders' rights and investor relations subindex; OWINX is the score of total ownership
and control subindex; VAIC is the value-added intellectual coefficient model for assessing the intellectual
capital; CEE is a proxy of the capital employed efficiency; HCE refers to human capital efficiency; SCE refers to
structural capital efficiency; Tobin's Q is used as a proxy for firms' financial performance; EPS refers to
earnings per share; payout ratio is measured as dividends per share divided by earnings per share; OE refers to
Table II. operational efficiency as measured by the ratio of operating expenses to net sales; Z-score is an indicator of the
Kruskal–Wallis rank firm's financial distress; firm size is measured as the natural algorithm of the firm's total assets; leverage is
test of variables across measured as the ratio of total debt to total assets; and ROA refers to the return on assets as a proxy for firm
industrial sectors profitability
Variables mean Std Dev Minimum Maximum
ACGINX 4,585 1.035 2.75 6.50

DTINX 2,003 0.318 1.25 2.50
BODINX 0.892 0.631 0.00 2.25
SRINX 1,059 0.174 0.75 1.25
OWINX 0.631 0.184 0.00 1.00
VAIC 8,513 15,024 1.446 109.99
CEE 0.235 0.170 0.003 0.931
HCE 7,613 14,961 1.082 108.926
SCE 0.666 0.195 0.076 0.991
Tobin's Q 1,092 0.763 0.42 6.97
EPS 3.28 4.887 0.017 29,519
Payout ratio 0.381 0.577 0.00 4.626
Operation efficiency 1,304 3.677 0.00 37,277
Z-score 0.34 0.475 0.00 1.00
Table III. Firm size 20,662 1.387 17.319 24,375
Descriptive summary Leverage 0.463 0.205 0.059 0.844
statistics ROA 0.083 0.061 0.003 0.341
method estimates the production frontier on the basis of the best technical efficient units among the Economic
DMUs.
It was decided to adopt the DEA in this study because it has several distinguishing features, as
convergence of
follows. First, as argued by Abbott and Doucouliagos (2003), Percin and Ayan (2006), and Shahwan output club
and Hassan (2013), using DEA as nonparametric linear programming, it requires no prior assumptions
regarding the underlying functional form or the residuals.
Second, DEA is better than other traditional productivity ratios since it does not require any prior
information about the weight to give the various input and output factors (Zhu, 2000; Colbert et al.,
413
2000; Guan et al., 2006; Shahwan and Hassan, 2013; Shahwan and Kaba, 2013; Zhu, 2014). Finally,
the relative efficiency rating using DEA depends on the concept of best performance rather than the
concept of average performance (the central tendency) adopted in the regression analysis (Cooper
et al., 2000). However, the estimate of efficiency scores and the ranking of DMUs are highly affected
by the choice of the input and output factors to use in building the DEA model (Colbert et al., 2000).
In addition, DEA requires the variables of input and output to be positive (Charnes et al., 1978). As
pointed in Stancheva and Angelova (2004), DEA can be successfully applied to nonprofits and for-
profit business organizations. However, the DEA as a deterministic model could be affected by
measurement errors. Thus, as noted by Ruggiero (2006), the use of the aggregate data with DEA
would minimize such measurement errors through a reliable estimate of DMU performance.
Accordingly, among numerous tools for assessing efficiency, DEA, particularly Malmquist's DEA
seemed best for assessing the efficiency level of CG practices and IC in the Egyptian context and
best for exploring whether such practices had improved, using panel data for the three years from
2014 to 2016. Following Coelli (1996) and Desta (2016), the Malmquist DEA method was adopted
for assessing the efficiency changes between period t and period t1 since the observed characteristics
of the data set are panel data. These efficiency changes can be revealed in five efficiency indicators,
namely, technical efficiency change (effch), technological change (techch), pure technical efficiency
change (pech), scale efficiency change (sech), and total factor productivity change (tfpch).
The productivity change as an output of the Malmquist DEA can be mathematically

defined as follows (Fare et al., 1994; Coelli, 1996; Ng, 2008; Desta, 2016):
dt 0ðXtþ1; Ytþ1Þ dtþ1

0 Xtþ1; Ytþ1Þ
M0ðXtþ1; Ytþ1; xt; Yt _ 3 (3)
s 0ðXt ; Yt dtþ1
0 Xt; Yt !1 2
where the value of m refers to the productivity change between two production points at time t and
tþ1. Xt and Yt refer to the input and the output at time t, Xtþ1 and Ytþ1 refer respectively to the input
and the output at time tþ1, and dt is the distance function assessing
0 Y atthe efficiency
time of obtaining
t in the light output
of the input X
available at time t.
We should note that, as documented by Fare et al. (1994), the computed score of >1 refers to an
efficiency increase, whereas the computed score of <1 is a signal of performance deterioration
(inefficiency), while the computed score of 5 1 reflects no change in the efficiency.
According to Desta (2016), this productivity change can be further divided into two subtypes of
efficiency: technical efficiency change and technological change. Mathematically, this can be rewritten
as follows:
dtþ1
0 Xtþ1; Ytþ1Þ dt 0ðXtþ1; Ytþ1Þ ss1
0ðXt ; YtÞ 3
M0ðXtþ1; Ytþ1; xt; Yt _ s1 Xtþ1;
(4)
Ytþ1Þ
0 0
dt 0ðXt; Yt ! 3 Xt; Yt !1 2
JIC dtþ1 Xtþ1;Ytþ1Þ dt

where 0
Xt ;YtÞ ! denotes the technical efficiency change. s 0ðXtþ1;Ytþ1Þ s 0ðXt ;YtÞ 3 s1 s1
Xtþ1;Ytþ1Þ Xt;YtÞ !1 2
21.3 0 0 0
definition of the technological change.

In order to assess the efficiency score of CG practices in the data set during the period of 2014–
2016, the CG literature shows a significant positive association between different dimensions of CG and
the corporation's efficiency (Khiari et al., 2007; Wang et al . ., 2007; Nanka-Bruce, 2011; Lee et al.,
414
2013). As a result, the aggregate scores of the four subindices, namely BODINX, DTINKS, SRINX, and
OWINX, were used as four variables (inputs) with the Malmquist DEA. Moreover, the five variables, that
is, the aggregate score of CG index (AGCINX), Tobin's Q, EPS, the payout ratio, and the operational
efficiency ratio (OE) were used as outputs with the output-oriented approach of DEA analysis.
Similarly, the empirical findings related to IC reveal the association between human capital investment
and business performance (Mention and Bontis, 2013; Chen et al., 2014; Sydleret al., 2014; Rafiki et al.,
2014; Nawaz, 2017). Accordingly, the efficiency scores related to the IC practices of the data set have
been assessed by using three inputs, that is, capital employed efficiency (CEE), HCE, and SCE. Five
output variables, that is, the IC score as measured by the VAIC approach, Tobin's Q, EPS, the payout
ratio, and the OE were selected. It should be noted that the efficiencies of CG and IC were assessed
using the DEAP software program (Version 2.1).
4.2.2 The impact of corporate governance and intellectual capital efficiency on a firm's financial
distress. The logistic regression with panel data was used to test the impact of the efficiency of CG and
IC on financial distress assuming the CRS-DEA model (Shahwan, 2015).
Accordingly, this model, named Model 1, can be described as follows:
Z Scoreit ÿ0 1ðCGECRSÞit 2ðICECRSÞit ÿ3ðSIZEÞit ÿ4ðLEVÞit _ _ _ _

þ 5ðROAÞit ÿ6ðSec1Þit 7ðSec2Þit ÿ8ðSec3Þit 9ðSec4Þit (5)
ÿ10ðSec5Þit ÿ11ðSec6Þit ÿ12ðSec7Þit ÿ13ðSec8Þ _ _ _ _ _ _ _ _ _ _
where Z-Scoreit represents the financial distress as measured by a dummy variable, that is, 1 refers to
a financially distressed firm and 0 otherwise in denoting firm i at time t. CGECRS is the score of corporate
governance efficiency (CGE) using the CRS-DEA model for each company (i) at time t; ICECRS is the
score of intellectual capital efficiency (ICE) using the CRS DEA model for each company (i) at time t;
SIZE refers to firm size; LEV refers to leverage; ROA refers to return on assets; Sec1 refers to the food
and beverage sector; Sec2 refers to the construction sector; Sec3 refers to the real estate sector; Sec4
refers to the industrial goods and services sector; Sec5 refers to the healthcare and pharmaceuticals
sector; Sec6 refers to the chemicals sector; Sec7 refers to the personal and household products sector;
Sec8 refers to the basic resources sector. 0 is a constant; i represents the logistic regression coefficients
of the independent variables; and it is the error term.
Similarly, the impact of the efficiency of CG and IC on the likelihood of a firm's financial distress was
retested using the aforementioned logistic regression model but assuming VRS DEA. Accordingly, this
model, named Model 2, can be described as follows:
Z Scoreit 0 1ðCGEVRSÞit ÿ2ðICEVRSÞit 3ðSIZEÞit 4ðLEVÞit _ _ _ _

þ 5ðROAÞit ÿ6ðSec1Þit 7ðSec2Þit ÿ8ðSec3Þit 9ðSec4Þit ÿ10ðSec5Þit (6)
ÿ11ðSec6Þit ÿ12ðSec7Þit ÿ13ðSec8Þ _ _ _ _ _ _ _ _ _ _
where CGEVRS represents the score of CGE using the VRS-DEA model for each company (i) at time t.
ICEVRS represents the score of ICE using the VRS-DEA model for each company (i) at time t, and the
other variables are as previously defined.
Table IV, Panels A and B each give the Pearson correlation matrix among the proposed Economic
explanatory variables defined in Equations (5) and (6). As proposed by Anderson et al. (2000),
the correlation coefficients show no possibility that multicollinearity is in the model since the
convergence of
correlation coefficients are less than 0.7. output club
5. Results and analyzes 5.1

415
The efficiency of corporate governance practices
Table V, Panel A reveals the Malmquist index summary of the annual mean of the efficiency
changes in respect to CG practices for 2015, 2016, and the period from 2014 to 2016. We
should note that there is no Malmquist index for year 1 (2014) because it was used as the
base year for year 2 (2015). The Malmquist index annual means for year 2 (2014/2015)
indicates that technological progress was the main source of the increasing efficiency of the
total factor productivity index of the selected firms. However, reducing the efficiency of total
factor productivity (TFP) during year 3 (2015/2016) can be attributed to either technological
retrogression or scale inefficiency. The overall findings during the three-year period of 2014–
2016 indicate that firms were facing deterioration in their TFP. Such deterioration can be
attributed to a lessening of technical efficiency (managerial inefficiency) and scale efficiency.
The results are consistent with the previous empirical evidence (eg Peixoto et al., 2011;
Ferreira et al., 2013; Oteng-Abayie et al., 2018). They point out that “on average” DMUs do
not operate at the optimum level of technical efficiency. For instance, Peixoto et al. (2011)
referred that the average efficiency of CG in 2007 was 0.848, which decreased to 0.699 in
2009. Ferreira et al. (2013) indicated a 16 percent decrease in the efficiency average of CG
during the study period. Oteng-Abayie et al. (2018) showed a fall in overall average technical
efficiency during the study period.
Table V, Panel B also shows the top nine firms as regards CG practices with tfpch < 1 over
the period of 2014–2016. The Alexandria Pharmaceuticals and Chemical Industries firm
(AXPH) achieved the best results in terms of improvement (1,433), followed by Nozha
International Hospital SAE (NINH) organization (1,262), with the firm Egypt Aluminum (EGAL)
(1,242). The increases in the TFP of these top nine firms can be linked to technological
changes rather than technical efficiency. Only four firms, namely AXPH, Acro Misr for
scaffolding and formwork (ACRO), South Valley Co SAE (SVCE), and Elsewedy Electric Co
SAE (SWDY), improved their technical efficiency as a reflection of managerial efficiency in
converting their inputs to outputs .
In untabulated results regarding the Malmquist index summary of firm means, of the
selected 51 firms, only 22 increased their total productivity index (tfpch < 1). Four firms
showed no change in their total productivity factor (tfpch 5 1), and the total productivity index
((tfpch < 1) of 25 firms declined. The increase in the total productivity index within the 22
successful firms was due to technological progress; 21 of these experienced technological
change. At the same time, only five firms succeeded in improving their technical efficiency. Of
the 25 firms whose TFP deteriorated, 12 showed reduced technical efficiency, 10 firms were
negatively affected by technological regress, and three firms suffered both technical inefficiency
and technological regress. Regarding the changes in pure technical efficiency in the sample
of 51 firms, 11 firms increased their efficiency, 28 firms remained constant, and 12 firms were
more inefficient. In reference to scale efficiency changes, four firms increased theirs, 27 firms
did not change, and 20 firms reduced theirs.
5.2 Intellectual capital efficiency

Similarly, Table VI, Panel A displays the Malmquist index summary of the annual means of
the efficiency changes in respect to IC practices for 2015, 2016, and the period of 2014–2016.
Correlation matrix
Table IV.
company
(i)
at
time
t using
the
VRS-
DEA
model
for
each
company
(i)
at
time
t;
and
ICEVRS
represents
the
score
of
intellectual
capital
efficiency
(ICE)
using
the
VRS-
DEA
model
for
each score
of
intellectual
capital
efficiency
(ICE)
using
the
CRS-
DEA
model
for
each
company
(i)
at
time
t;
CGEVRS
represents
the
score
of
corporate
governance*p
<
0.05;
efficiencyand
**p
<
0.01.
CGECRS
is
the
score
of
corporate
governance
efficiency
(CGE)
using
the
CRS-
DEA
model
for
each
company
(i)
(CGE) Note(s):at
time
t;
ICECRS
is
the Variables
Z-
Score
CGE-
CRS
ICE-
CRS
Z-
Score
CGE-
VRS
ICE-
VRS
0.091
0.254**
0.617**
0.243**
0.429**
0.196*
0.025
0.097
0.190*
0.055
0.023
CGE-
VRS
0.074
ICE-
VRS
Z-
Score
SIZE
LEV
ROA
SEC1
SEC2
SEC3
SEC4
SEC5
SEC6
SEC7
SEC8 1 0.052
0.254**
0.617**
0.243**
0.429**
0.196*
0.025
0.097
0.190*
0.055
0.003
CGE-
CRS
0.116
ICE-
CRS
Z-
Score
SIZE
LEV
ROA
SEC1
SEC2
SEC3
SEC4
SEC5
SEC6
SEC7
SEC8 1
0.035
0.210**
0.006
0.142
0.151*
0.163*
0.362**
0.091
0.214**
0.081
0.075
0.077 1 0.100
0.178*
0.056
0.179*
0.159*
0.248**
0.332**
0.133
0.250**
0.125
0.020
0.121 1
0.145
0.026
0.032
0.013
0.172*
0.175*
0.036
0.086
0.099
0.070
0.088 1 0.213**
0.122
0.168*
0.021
0.029
0.178*
0.0122
0.082
0.207*
0.048
0.008 1
0.348**
0.084
0.109
0.001
0.103
0.068
0.283**
0.141
0.248**
0.056 1 SIZE 0.348**
0.084
0.109
0.001
0.103
0.068
0.283**
0.141
0.248**
0.006 1 SIZE
0.260**
0.229**
0.059
0.141
0.032
0.272**
0.137
0.195*
0.015 0.260**
0.229**
0.059
0.141
0.032
0.272**
0.137
0.195*
0.024
1 LEV 1 LEV
0.081
0.150
0.118
0.028
0.100
0.404**
0.120
0.144 1 ROA 0.081
0.150
0.118
0.028
0.100
0.404**
0.120
0.135 1 ROA
Model
2 Model
1
0.226**
0.291**
0.173*
0.153
0.096 1 SEC1 0.226**
0.291**
0.173*
0.153
0.106 1 SEC1
0.239**
0.142
0.126
0.079 1 SEC2 0.239**
0.142
0.126
0.087 1 SEC2
SEC3
SEC4
SEC5
SEC6
SEC7
SEC8 SEC3
SEC4
SEC5
SEC6
SEC7
SEC8
0.183*
0.162*
0.102 1 0.183*
0.162*
0.112 1
1 0.109
0.096
0.061 1 0.109
0.096
0.067
1 0.096
0.061 1 0.096
0.067
416
1 0.085
0.054 1 0.085
0.059
0.054 0.059
1 1 21.3
JIC
1 1
Economic
Panel A: Malmquist index summary of annual means convergence of
year Effch techch pech sech tfpch club output
Year 2 (2014–2015) 0.990 1.012 0.994 0.996 0.989 1.002
Year 3 (2015–2016) 0.997 1.004 0.993 1.001 0.999 0.986
Over the period 2014–2016 0.993 0.994 0.994
417
Panel B: Top nine firms with tfpch > 1 in rank sequence
Firm effch techch pech sech tfpch Rank based on
TFP change
Alexandria Pharmaceuticals and Chemical 1.009 1,420 1,005 1,005 1,433 1
Industries (AXPH)
Nozha International Hospital SAE (NINH) 1,000 1,262 1,000 1,000 1,262 1,242 2
Egypt Aluminum (EGAL) 1,000 1,000 1,000 1,242 1,174 1,000 3
Oriental Weavers Carpet (ORWE) 1,000 1,000 1,174 1,128 1,000 1,000 1,128 4
Eastern Co SAE (EAST) 1,000 1,027 1,019 1,009 1,056 1,003 1,011 5
Elsewedy Electric Co SAE (SWDY) 1,028 1,026 1,041 6
Acrow Misr for Scaffolding and Formwork 1,037 7
(ACRO)
Egyptian Starch and Glucose (ESGI) 1000 1,038 1,000 1,000 1,038 1,030 8
Table V.
South Valley Cement Co SAE (SVCE) 1.005 1,005 1,000 1,036 9
The Malmquist index
Note(s): effch 5 Technical efficiency change (relative to a CRS technology); techch 5 Technological change; summary of annual
pech 5 Pure technical efficiency change (relative to a VRS technology); sech 5 Scale efficiency change; and means in terms of CG
tfpch 5 Total factor productivity (TFP) change efficiency changes
The Malmquist index annual means for year 2 (2014/2015) indicates that technological
progress was the main source of the increased efficiency of the total factor productivity index
of the selected firms. However, the reduced efficiency of TFP during year 3 (2015/2016) and
over the period of 2014–2016 is attributable only to technological retrogression. The results
are consistent with the previous empirical evidence (eg Yalama and Coskun, 2007; Campisi
Panel A: Malmquist index summary of annual means

year Effch techch pech sech tfpch
Year 2 (2014–2015) 1,000 1.008 1,000 1,000 0.970 1.008

Year 3 (2015–2016) 1,000 1,000 1,000 0.989 1,000 0.970
Over the period (2014–2016) 1,000 1,000 0.989
Panel B: Top nine firms with tfpch < 1 in rank sequence

Firm effch techch pech sech tfpch Rank based on
TFP change
Alexandria Pharmaceuticals and Chemical 1,000 1,419 1,000 1,000 1,419 1
Industries (AXPH)
Elsewedy Electric Co SAE (SWDY) 1,000 1,218 1,000 1,000 1,218 1,163 2
Egypt Aluminum (EGAL) 1,000 1,000 1,000 1,163 1,135 1,000 3
Eastern Co SAE (EAST) 1,000 1,000 1,135 1,092 1,000 0.999 1,091 4
Gharbia Islamic Housing Development 0.999 5 Table VI.
(GIHD) The Malmquist index
Upper Egypt Flour Mills (UEFM) 1,000 North Cairo Mills 1,047 1,000 1,000 1,047 1,023 6
summary of annual
(MILS) 1,000 Paint and Chemicals Industries (PACH) 0.999
Middle 1,000 1,000 1,023 1,019 1,000 7 means in terms of
and West Delta Flour Mills (WCDF) 1,000 1,000 1,018 1,011 1,000 1,000 1,011 8 intellectual capital
9 efficiency
and Costa, 2008; Murale et al., 2011; Costa, 2012; Kalantar, 2013; Kweh et al., 2013; Kweh et al.,
JIC
2015; Venugopal et al., 2018). They point out that “on average” DMUs do not operate at the
21.3 optimum level of technical efficiency. For instance, Murale et al. (2011) indicated a 10.3 percent
decrease in the TFP of IC efficiency during the study period. Kweh et al. (2015) pointed out
that there are only five of 25 DMU that are the best in terms of IC efficiency during the study
period.
Table VI, Panel B also indicates the top nine firms with respect to IC performance with
418 tfpch < 1 over the period of 2014–2016. The Alexandria Pharmaceuticals and Chemical
Industries firm (AXPH) achieved the best results in terms of improvement (1,419), followed by
the firm Elsewedy Electric Co SAE (SWDY) (1.218), with Egypt Aluminum the next firm
inline (EGAL) (1,163). The increases in the TFP of these top nine firms can be linked to
technological changes (technological progress) rather than to technical efficiency.
In the untabulated results regarding the Malmquist index summary of firm means, of the
51 firms selected, only 25 increased their total productivity index (tfpch < 1), the total
productivity factor (tfpch 5 1) of 10 firms did not change, and 16 firms showed a decline in
their total productivity index ((tfpch < 1). The increase of total productivity in these 25 firms
can be attributed to technological progress, given that 16 of them benefited from
technological change. Moreover, only seven firms were able to improve their technical
efficiency.
Regarding the pure technical efficiency changes in the sample, of 51 firms, one improved,
48 firms remained the same, and two firms deteriorated. In reference to scale efficiency
changes, eight firms increased their efficiency, 38 firms showed no change, and nine firms
were more inefficient. This implies that Egyptian listed firms showed almost no improvement
in IC performance over the period of 2014–2016.
After this discussion of the estimate of efficiency changes due to CG and IC over the period
of 2014–2016, attention turns to examining whether the changes count as significant
differences, on average. Do technical efficiency changes, pure technical efficiency changes,
and scale efficiency changes reflect the performance of CG practices and IC over the period of
study? The results of the Wilcoxon signed-rank test shown in Table VIIreveal no statistically
significant evidence regarding the improvement of CG and IC efficiency during the study.
Only the technical efficiency changes regarding the IC are statistically significant at the 10
percent significance level. Accordingly, H1 is not supported. However, the results partially
confirm H2.
5.3 Corporate governance, intellectual capital, and firm financial distress

To investigate the impact of CG and IC efficiency on a firm's financial distress, Table VIII
summarizes the results obtained from logistic regression. The firm financial distress status
Wilcoxon test
Efficiency dimensions Z-statistics p-value
Panel A: Corporate governance efficiency

Technical efficiency change (effch2015 vs effch2016) 0.680 0.497
Pure technical efficiency change (pech2015 vs pech2016) 1.562 0.118
Scale efficiency change (sech2015 vs sech2016) 0.530 0.596
Table VII.
Test results of the Panel B: Intellectual capital efficiency
Technical efficiency change (effch2015 vs effch2016) 1.836 0.066*
difference between
technical and scale Pure technical efficiency change (pech2015 vs pech2016) 0.746 0.456
Scale efficiency change (sech2015 vs sech2016) 1.521 0.128
efficiency changes with
respect to CG and IC Note(s): * significant at the 10% level in all cases
Economic
CRS-DEA output-oriented model VRS-DEA output-oriented model
Independent Standard Z Standard Z convergence of
variables Coefficients error value p-value Coefficients error value p-value club output
CGE 3.1988 13.3200 0.24 0.810 17.0679 14.6233 1.17 0.2430
ICE 951.6778 336.2805 2.83 0.005** 1792.89 579.4984 3.09 0.002**
Size 0.1134 0.3327 28.3993
7.1641 0.34 0.733 3.96 0.0386 0.3409 0.11 0.9100
LEV 42.9857 13.52852.6140
6.7999 0.000*** 3.18 29.4796 7.5608 3.90 0.000*** 419
ROA 4.2979 2.3524 0.6513
2.2572 0.001*** 2.60 45.5614 13.9431 3.27 0.001***
Sec1 0.5845 2.1631 1.6573
2.7959 0.009** 1.83 6.9113 2.4349 2.84 0.005**
sec2 2.4843 2.4375 5.1800
2.8727 0.068* 0.29 0.773 6.7262 2.3938 2.81 0.005**
Sec3 1.5998 2.7118 0.27 0.787 0.59 1.3722 1.9876 0.69 0.4900
Sec4 935.7474 333.1977
0.6933. 0.553 1.02 0.308 1.7470 1.8949 0.92 0.3570
sec5 1.80 0.071* 0.59 1.5719 3.0361 0.52 0.6050
sec6 0.555 2.81 0.005** 3.0202 2.2574 1.34 0.1810
Sec7 5.3685 2.8149 1.91 0.0570
sec8 0.8405 2.5089 0.34 0.7380
Constant 1795.881 583.3851 3.08 0.002**
Table VIII.
Pseudo R2 0.7018
Summary of logistics
2 0.0000*** 137.64 0.0777*
regression results: CG,
N 153
IC, and financial
Note(s): *; **; and *** are significant at the 10, 5, and 1% levels, respectively distress
was regressed on CG efficiency, IC efficiency, and 11 control variables. There are three points
to note under both the CRS and VRS output-oriented models. First, there is an insignificant
association between the efficiency of CG practices and the likelihood of a firm's financial
distress. Accordingly, H3 is not confirmed. The insignificant influence of CG efficiency on the
likelihood of financial distress is in line with the previous empirical evidence (Manzaneque
et al., 2016; Udin et al., 2017). They point out that ownership concentration and ownership
structure do not have an impact on financial distress. However, our finding is inconsistent
with the result shown in the Nasir and Ali (2018) study. This result is more or less what was
expected, where the due CG practices within the selected sample are inefficient. This finding
has critical implications in the Egyptian context revealing the need to improve the efficiency
level of CG practices within Egyptian firms.
Second, the IC efficiency has a significant negative impact on the probability of financial
distress. This is consistent with the results of Lev and Sougiannis (1996), who state that IC
influences the value of a company and reduces the probability of financial distress. Nadeem
et al. (2016) also show that IC indicators are useful in assessing the financial health of a firm.
Ardalan and Askarian (2014) document a significant negative association between IC and the
risk of financial distress. Moreover, Cenciarellie et al. (2018) support the positive relationship
between IC and long-term financial stability, which accordingly reduces the bankruptcy
risk (the likelihood of default). Accordingly, the results partially support H4 in stating that IC
efficiency negatively affects the likelihood of a firm's financial distress.
Third, of the 11 control variables analyzed, five are statistically significant at the 0.10
significance level or less, that is, the leverage (LEV), ROA, and the sector (whether Sec1, food
and beverages; Sec2, the construction sector; or Sec7, personal and household products) .
Under both the CRS and VRS output-oriented models, the LEV, Sec1, and Sec7 have a
significant positive impact on a firm's financial distress. This finding is consistent with Malik
(2013), Fel cio et al. (2018) andVo (2016) where greater leverage leads to higher risk. Both ROA
as a proxy for profitability and Sec2 have a negative impact on the likelihood of financial
distress. This finding is in line with Tasman and Masdupi (2014) and Masdupi et al. (2018)
where profitability is one of the crucial determinants of a firm's financial distress risk. To
JIC assess the quality of the two logistic regression models, pseudo R2 values for the fitted
models, under both the CRS and VRS output-oriented models, equal 0.6968 and 0.7018,
21.3
respectively. This implies that about 70 percent of the dependent variable variance can be
approximated and explained by the two logistic regression models (Model 1 and Model 2).
420 6. Conclusions and implications

There is little literature on assessing the efficiency of CG practices and IC using DEA. The
present study is, as far as could be ascertained, the first to apply the DEA–Malmquist TFP
model for assessing the relative efficiency of CG and IC practices using 51 industrial firms
that traded from 2014 to 2016 on the emerging Egyptian Exchange. Moreover, the impact
of the efficiency of GC and IC on the probability of a firm's financial distress was examined.
The findings of this study contribute to the academic literature and policy implications in
several ways, as follows:
(1) It was found that with respect to corporate governance efficiency, the Malmquist index
summary of annual means in the period of 2014–2016 revealed a deterioration in
the mean of TFP due to technical inefficiency (managerial inefficiency) and scale
inefficiency. Based on the Wilcoxon signed-rank test, no statistically significant
differences exist in either type of efficiency over the period of study. Moreover, the
findings show an insignificant association between CG efficiency and a firm's
financial distress. In view of this, the Egyptian legislative environment should develop
ways of ensuring strict control over the companies' commitment to comply with the
best practices in CG mechanisms. This implies the pressing need to transform the
current voluntary Egyptian code into a mandatory type. The adoption of such
practices would strengthen the mutual trust between investors both domestically and
abroad. If this were done, the problems related to the shortage of funds could easily
be handled, even in a financial crisis. Moreover, compliance with the code of best
practices in regard to these mechanisms might alleviate the adverse impact of
agency problems on investment decisions, the risk to management strategy, and
stakeholders' responses to the firm. Moreover, the insignificant impact of CG
efficiency on firms' financial distress within Egyptian firms is due to the partial
implementation of the best practices related to CG. This might shed light on the
necessity for designing a specialized annual training program for Egyptian managers
in order to enhance the awareness and motivation of managers toward full compliance with these
(2) The overall findings of intellectual capital performance during the period of 2014–
2016 show a decrease in the mean of TFP because of technological regress. In
terms of technical efficiency change, pure technical efficiency change, and scale
efficiency change, the results show that the quality of IC practices in Egyptian listed
firms is mediocre since most firms failed to change their efficiency indices at all over
the period of study. Wilcoxon signed-rank test results provide only statistically
significant evidence of such efficiency improvement in the context of technical
efficiency changes. Moreover, under the CRS and VRS output-oriented models, the
findings reveal a significant negative association between the efficiency of IC and a
firm's financial distress. These results clearly show the need for Egyptian firms to
exert greater effort in developing the three IC elements of human capital, relational
capital, and structural capital. Thus, establishing and adopting systems related to
information technology, knowledge management, ethical standards, and the learning
organization would support the intellectual capital base and hence the firm's
competitive position and financial performance.
(3) Our findings also shed light on the need for disclosure of the firm's IC practices similar Economic
to the conventional financial reports in the Egyptian environment, where traditional
financial measures alone are insufficient in assessing the performance of companies, convergence of
especially the knowledge-based firms. According to Cenciarelli et al. (2018), the output club
inclusion of IC variables with the traditional models of financial distress prediction
would enhance their predictive accuracy. This implies that the existence of good IC
practices within Egyptian firms should be attributed to handling IC as a regulatory
concept rather than a moral one. 421
(4) Our findings will also attract the attention of academic researchers, investors, and
managers to the superiority of DEA over the traditional accounting indices in
assessing firm relative efficiency. Thus, specialized training courses related to the
assessment of efficiency via DEA should be designed and directed to various
organizations' stakeholders for enhancing their skills regarding the use of such a novel approach.
Overall, the empirical findings of the present study shed light on the use of Malmquist's DEA
to evaluate the relative efficiency of Egyptian listed firms in two areas: CG practices and IC.
Our empirical findings show that most Egyptian listed firms achieve only a low level of CG
and IC efficiency. The efficiency of CG practices, on the one hand, has no impact on a firm's
financial distress. On the other, the efficiency of IC has a significant negative impact on a
firm's financial distress. However, the results did not clarify the relationship between the
efficiency of CG and that of IC. Therefore, future studies are recommended to examine this
relationship. Moreover, analyzing the results of DEA via Tobit regression would extend the
current understanding of the efficiency of CG and IC by identifying the causes of inefficiency
and efficiency drivers. Another fruitful extension of the present study would be to investigate
the role of competitive advantage as a mediator of the relationship between CG efficiency
and a firm's financial performance.
Notes
1. The term efficiency could reflect different types of efficiency, namely technical and allocative efficiency.
Following Vitaliano (1998) and Shahwan and Hassan (2013), the allocative efficiency occurs when
the marginal cost equals the marginal benefit during the transformation process of the decision-
making unit's (DMU's) resources into services. However, the technical efficiency as defined by Shim
(2003) indicates the ability of DMU to achieve a specific level of outputs using the minimum inputs.
Moreover, the technical efficiency can be referred to as the ability of DMU to maximize the outputs
using a specific level of inputs. This type of efficiency is mainly adopted in the current study.
2. The superior performance of DEA in assessing the relative performance of decision-making units
against the accounting indices is due to its ability to assess the performance based on multiple
factors (inputs and outputs).
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Corresponding author
Tamer Mohamed Shahwan can be contacted at: tamershahwan74@gmail.com
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Machine Translated by Google

Does the efficiency of corporate Economic

Tamer Mohamed Shahwan Received 19 June 2019

Ahmed Mohamed Habib

2. Literature review and hypotheses development 2.1 The

3.2 The intellectual capital performance (IC)

3.3 The likelihood of corporate financial distress and control variables To

X1 5 working capital/total assets

4. Data collection and methodology 4.1

Number of firms Percent

4.2 Estimation methods and the testing of hypotheses

JIC Variables Kruskal–Wallis H asymp. Sig.

Variables mean Std Dev Minimum Maximum

ACGINX 4,585 1.035 2.75 6.50

The productivity change as an output of the Malmquist DEA can be mathematically

dt 0ðXtþ1; Ytþ1Þ dtþ1

JIC dtþ1 Xtþ1;Ytþ1Þ dt

definition of the technological change.

Z Scoreit ÿ0 1ðCGECRSÞit 2ðICECRSÞit ÿ3ðSIZEÞit ÿ4ðLEVÞit _ _ _ _

ÿ10ðSec5Þit ÿ11ðSec6Þit ÿ12ðSec7Þit ÿ13ðSec8Þ _ _ _ _ _ _ _ _ _ _

Z Scoreit 0 1ðCGEVRSÞit ÿ2ðICEVRSÞit 3ðSIZEÞit 4ðLEVÞit _ _ _ _

ÿ11ðSec6Þit ÿ12ðSec7Þit ÿ13ðSec8Þ _ _ _ _ _ _ _ _ _ _

5. Results and analyzes 5.1

5.2 Intellectual capital efficiency

Panel A: Malmquist index summary of annual means

Year 2 (2014–2015) 1,000 1.008 1,000 1,000 0.970 1.008

Panel B: Top nine firms with tfpch < 1 in rank sequence

5.3 Corporate governance, intellectual capital, and firm financial distress

Panel A: Corporate governance efficiency

420 6. Conclusions and implications

March, JG and Sutton, RI (1997), “Organizational performance as a dependent variable”,

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