Int. J. Learning and Intellectual Capital, Vol. 14, No.

4, 2017 295

The moderating role of corporate governance on the

relationship between intellectual capital efficiency
and firm’s performance: evidence from Saudi Arabia

Allam Mohammed Hamdan*

Accounting and Economics Department,
Ahlia University,
Manama,
Kingdom of Bahrain
Email: allamh3@hotmail.com
*Corresponding author

Amina Mohammed Buallay

Business School,
Brunel University - London,
London, UK

and

Business and Finance College,

Ahlia University,
Manama,
Kingdom of Bahrain
Email: ameena.buallay.87@gmail.com

Bahaaeddin Ahmed Alareeni

Accounting and Economics Department,
Ahlia University,
Manama,
Kingdom of Bahrain

and

Accounting Department,
University College of Applied Sciences,
Gaza, Palestine
Email: bahaaedu@hotmail.com

Abstract: This study examined the moderating role of corporate governance

on the interaction between intellectual capital efficiency and financial,
operational and market performance. The study used a pooled data of 171 firms
listed on the Saudi Stock Exchange during the period from 2012 to 2014.
Multiple regression approach was incorporated under fixed-effect method. The
findings revealed that the inclusion of corporate governance as a moderating

Copyright © 2017 Inderscience Enterprises Ltd.

296 A.M. Hamdan et al.

variable has influenced positively the relationship between intellectual capital

components and financial, operational and market performance. In addition,
only capital employed efficiency positively affects financial performance,
while structural capital efficiency and capital employed efficiency positively
affect the operational performance. As for market performance, it was affected
positively by all the Intellectual capital components. Further, the findings
showed that the larger firms, the higher level of human capital efficiency, and
smaller firms, the higher level of structural capital and capital employed
efficiency.

Keywords: agency theory; corporate governance; firm performance;

intellectual capital; Saudi Arabia.

Reference to this paper should be made as follows: Hamdan, A.M.,

Buallay, A.M. and Alareeni, B.A. (2017) ‘The moderating role of corporate
governance on the relationship between intellectual capital efficiency and
firm’s performance: evidence from Saudi Arabia’, Int. J. Learning and
Intellectual Capital, Vol. 14, No. 4, pp.295–318.

Biographical notes: Allam Hamdan is Associate Professor, Chairperson of

Accounting and Economics Department, Ahlia University. He has many papers
published in regional and international journals that discussed several
accounting, financial and economic issues concerning the Arab world.
In addition, he has interests in educational related issues in the Arab world
universities like educational governance, investment in education and its
relation with economic growth. He was awarded the first prize of Al-Owais
Creative Award, UAE, 2017; the second prize of Rashid bin Humaid Award
for culture and science, UAE, 2016; the third prize of Arab Prize for the social
sciences and humanities, Qatar, 2015, and the first prize of ‘Durrat Watan’,
UAE, 2013.

Amina Mohamed Buallay is a Head of Administration and Financial Services

at Ministry of Education since 2014, with over 5 years of academic experience
as commercial studies teacher at high school. She holds different qualifications
in business such as: Master in Business Administration degree from Ahlia
University, Post Graduate Diploma in Business Education from the University
of Bahrain and Bachelor degree in Accounting from the University of Bahrain.
Recently she has been accepted to study PhD in Management Studies Research
at Brunel University - London. She conducted researches in the area of
accounting, corporate governance and intellectual capital.

Bahaaeddin Ahmed Alareeni is an Assistant Professor of Accounting and

Auditing in the Department of Accounting and Economics at Ahlia University,
Bahrain. He has many papers in Accounting, Auditing and Finance in
international refereed journals. His main research interests are in the areas of
bankruptcy prediction, earnings management, IFRS, corporate governance,
using meta-analysis in the field of accounting, auditing and finance. He has a
good experience at developing bankruptcy prediction models.

1 Introduction

By the beginning of 21st century in a competitive world, the aphorism that “knowledge is
power” has a rising significance than before (Rechberg and Syed, 2013). Nowadays, one
serious research line consecrates attention to intangible assets which are consisted of
The moderating role of corporate governance on the relationship 297

knowledge and experience of manpower, database and systems, business networking,

goodwill and alliance (Saunders and Brynjolfsson, 2016).
Development of knowledge in all over the world has changed the firm’s value from
tangible assets to intangible asset. intellectual capital (IC) is an invaluable intangible
asset, which could provide significant value to firms. IC management is equally vital in a
firm that exert as a systematic way to use organisational resources such as knowledge,
skills, expertise, innovations, customer relationships and networking (Earnest and Sofian,
2013). IC is frequently associated as a value, which is vital to achieve firms’ goals due to
difficulties in intangibles.
Therefore, IC is essential to increase firm’s performance, which eventually affects the
whole economy. In this regard, Tayles et al. (2007) indicated that it is critically important
for firms to acknowledge, appreciate and manage their IC to achieve superior
performance query. In addition, firm’s knowledge management strategy should be
adjusted to include IC Efficiency as a main component. This, of course, may lead to
better attain firm’s goals and objectives (Wang et al., 2016).
Some prior studies have addressed the IC Efficiency and its relationship with
the firm’s performance (Celenza and Rossi, 2014; Inkinen, 2015; Singh et al., 2016).
The studies showed that firms still suffer from inefficient utilisation of IC. However, to
the best of our knowledge, there are few studies measuring the relationship among IC and
firms’ performance in developing countries. And these studies did not test if the
relationship among IC and firm performance is moderated by other variables (e.g.
corporate governance). Therefore, this study aims to determine whether the corporate
governance (CG) moderates the relationship between IC Efficiency and the firms’
performance for listed firms in Saudi Arabia as an example of a developing country.
We selected Saudi Arabia as our research object for data availability and ease of
accessibility of the financial and non-financial information in the database of the
electronic websites (Saudi Stock Exchange). In addition, Saudi Stock Exchange is the
biggest in the Gulf Cooperation Council (GCC) countries, and GCC countries share most
of their environmental factors with Saudi Arabia.
The study used a pooled data of 171 firms listed in Saudi Stock Exchange. The data
was collected from Saudi Arabia Exchange through the period from 2012 to 2014. The
study used intellectual capital efficiency components; human capital efficiency (HCE),
structural capital efficiency (SCE) and capital employed efficiency (CEE) as independent
variables. The study’s dependent variable was firm’s performance measured using Return
on Assets (ROA), Return on Equity (ROE) and Tobin’s Q. The study incorporated also
CG Index as a moderating variable in addition to other four control variables to examine
their influences on the relation between intellectual capital efficiency and firm
performance proxies.
This study contributes to IC literature in different directions. First, it sheds the light
on the rare prior IC studies in Saudi context. It measures IC efficiency considering all
sectors in Saudi Exchange. Second, it provides empirical evidence on the relationship
between IC and firms’ performance and shows whether CG moderates this relationship,
which has not been sufficiently examined in relation to this topic earlier. Third, the study
results can be generalised to other GCC countries or the research approaches might be
exported to other GCC countries, e.g. those belonging to oil-producing countries, the
same language and religion and a similar business landscape (e.g. Bahrain and Qatar).
Fourth, this study employs the value-added intellectual coefficient (VAIC) Model which
could be an important tool for many parties to integrate IC in their decision process.
298 A.M. Hamdan et al.

Finally, the study results will be helpful to firms’ stakeholders, investors, decision maker,
regulators, policy makers and scholars to improve their awareness of IC and the
importance of incorporating CG and increasing its adaption level. Furthermore, it will be
useful for firms to place their priorities and financial plans for effective and efficient use
of IC.
Section 1 being introduction, further part of this study is divided into five sections.
Section 2 discusses literature review and developing hypotheses. Section 3 presents the
design and research methodology. Section 4 shows the descriptive statistics. Section 5
presents regression analysis results. Section 6 presents the study’s conclusion,
recommendations and the scope for further research.

2 Literature review and developing hypotheses

Over the last few decades, IC literature has exposed the importance of IC efficiency to
firms’ performance. The confession of IC has been approved as an academic discipline to
be considered all over the world (Serenko and Bontis, 2013). And it has become a
significant factor of firms in enhancing their competitive advantage and achieving better
performance (Wang and Chang, 2005).
Intellectual capital efficiency is difficult to be identified and disclosed in the firms’
financial reporting. This may be due to the influence of IFRS adaption. According to the
International Accounting Standard (IAS 38) addressed intangible assets issue, it is not
easy to measure IC components of firms by adopting the current traditional accounting
practice. This highlights a gap between firms’ value as reported in financial reporting and
actual market value (Rahman, 2012).
However, the need for IC efficiency valuation has increased. And there are different
methods followed to calculate the value of IC and its efficiency such as Skandia IC report
method (Edvinsson and Malone, 1997), intangible asset monitor approach (Sveiby,
1997), VAIC model (Pulic, 1998) and VAIC which is the trademark of Ante Pulic of the
Austrian intellectual capital research. Among IC valuation methods, VAIC model is
widely used in calculating the IC efficiency.
Most of the IC studies have been done in developed countries, and a limited number
of studies are done in developing countries. More specifically, the studies on the
relationship between IC and firm’s performance are rare, especially in Saudi Arabia.
In this regard, Bassi and van Buren (1999) have the earliest study done in the US that
measured the relationship between IC and performance. They selected a sample of 500
US listed firms and found a positive relationship between IC and financial performance.
Mavridis (2004) used VAIC model to test the Japanese banks’ performance and found it
useful to evaluate differences in HCE and SCE performance among different banks in
Japan. Laing et al. (2010) showed that VAIC model is a robust tool in assessing the value
addition of IC in service industry successfully. They reported that VAIC Model can be
utilised by firms to evaluate their own performance. Zéghal and Maaloul (2010) aimed to
test the role of value-added (VA) as a measure of IC, and its impact on the firm’s
economic, financial and stock market performance. They used the VAIC method on 300
UK listed firms. The results showed that firms’ IC has a positive impact on economic and
financial performance. The results also indicated that CEE remains a major determinant
of financial performance. Celenza and Rossi (2014) examined the relationship between
VAIC as a measure of IC and firm’s performance and market value for 23 Italian listed
The moderating role of corporate governance on the relationship 299

firms by using eight regression models. The findings showed insignificant relationship
between VAIC and firms’ financial performance. In addition, Maria Morariu (2014)
tested IC performance of the Romanian companies to empirically examine the
association between IC and performance and to analyse the relative importance of
various components of IC on the company’s performance. The study used VAIC to
measure IC performance. It was concluded that firms create value from their IC. Further
CEE has an insignificant role in both value creation and in reducing company’s
production costs. HCE also plays a major role in productivity variation. While Pitelli
Britto et al. (2014) pointed out a significant negative relationship between IC components
and market value in Brazilian real estate firms except for CEE.
Shifting to ASEAN countries, Singh et al. (2016) measured the IC performance of
Indian banks and the relationship between IC and ROA as a measure of performance.
They compared the IC performance of banking sector. They selected ten banks from each
of the public and private sectors. The study used the VAIC model and revealed that
private sector has performed relatively better regarding the creation of total information
coefficient IC. Nimtrakoon (2015) explored and compared the extent of IC among five
ASEAN countries, and examined the relationship between IC, market value and financial
performance. The study sample was of 213 firms from technology sector. The results
showed that there is no significant difference in VAIC across those countries, but there is
a positive relationship between IC and the market value and financial performance. In
addition, it was shown that CEE and HCE are more significant than SCE in the study
sample. Razafindrambinina and Anggreni (2011) examined the association between IC
and performance of listed firms in Indonesia. The study used data from consumer goods
firms listed on the Jakarta Stock Exchange. The study used VAIC Model as a measure of
IC efficiency. The findings revealed that IC contributed to the financial performance,
with the exception of revenue growth. The findings confirmed that future performance is
affected by the level of IC. It also showed that capital of physical, financial and structural
nature is the most significant underlying driver of performance. Phusavat et al. (2011)
tested the relationship between IC and large manufacturing firms’ performance in
Thailand. The findings showed that the IC has a significant positive relationship with
ROE, ROA, revenue growth and employee productivity. Pew Tan et al. (2007) applied
VAIC Model to 150 Singaporean listed firms to examine the relationship between IC of
firms and their performance. They showed that there is a positive association between IC
and performance. The firms’ IC is correlated to future performance of companies and the
rate of growth of the firms’ IC is positively associated to firms’ performance.
As for GCC and other Arab countries, Al-Musalli and Ismail (2012) examined the
level IC performance of 74 listed banks in the GCC countries using VAIC Model. They
tested impact of several CG variables, bank-specific characteristics and banking industry
characteristics on IC performance. They found that board size, number of independent
directors, family ownership and domestic strategic institutional ownership have a
significant relationship with IC performance. In Kuwait, Abdulsalam et al. (2011)
measured IC of banking sector. They used HCE, CEE and VAIC as indicators of IC
efficiency. The findings showed that for VAIC the top two performers were the
Commercial Bank of Kuwait followed by the Gulf Bank, while the worst performer was
Kuwait Real Estate Bank. In addition, the ranking based on HCE showed similar results
as that of VAIC. Moreover, the ranking based on CEE showed that National Bank of
Kuwait and the Gulf Bank are the top two performers, respectively, and the worst
performer was also the Kuwait Real Estate Bank. In Bahrain, Ismail and Karem (2011)
300 A.M. Hamdan et al.

examined whether IC affects the banks’ performance in Bahrain during the period
2005–2007. They used VAIC Model as a measure of IC. They found that IC has a
positive impact on banks’ financial performance. In addition, they found that financial
performance is positively associated with CEE and HCE. The findings failed to find any
significant association between SCE and financial performance of the banks. In Iran,
Alipour (2012) analysed the relationship between IC and its financial performance of 39
Iranian insurance companies during the period from 2005 to 2007. The results showed
that VAIC and its components have a significant positive relationship with companies’
ROA as a measure of companies’ performance. In Jordan, Sharabati et al. (2010)
examined the relationship between IC and performance within the pharmaceutical sector
of Jordan. They used a survey distributed to 132 top- and middle‐level managers from all
15 members of the Jordanian Association of Pharmaceutical Manufacturers. The findings
confirmed that the intellectual capital components have a substantive and significant
relationship with business performance.
Past years, a set of studies was done in Saudi Arabian context. For example,
Al-Musali and Ismail (2014) examined the effect of IC on Saudi banks’ performance
using VAIC Model for the period from 2008 to 2010. They showed that IC performance
is low and has a positive association with ROA and ROE. Another study conducted by
Razak et al. (2016) tested the association between IC and performance of commercial
banks. The study used VAIC Model for 12 commercial banks listed on Saudi Stock
Exchange at the year 2014. They found that the Saudi banks have a higher HCE than
SCE and CEE.
However, one line of studies above have found positive relationships between the IC
and companies’ performance, while others found a little or no relationships which is
contrary to expectations. In addition, studies showed that VAIC as a measure of IC and
its components varied across countries and across subsectors as well. It is worthy to
report also that a very limited number of studies tested whether the association between
the IC and firms’ performance is moderated by other factors as CG. In addition, many
researchers and practitioners associated companies’ collapse with the absence of good
CG as what happened with Enron and General Motors in the last few decades. Gramling
and Hermanson (2006) and O'Leary and Stewart (2007) stated that CG found to show
how companies are directed to carry out their activities in order to achieve a high
performance. It is about also how companies are managed in a proper and acceptable
manner to gain higher confidence in the marketplace and then achieve the expectations of
financial statements users. Gramling et al. (2004) stated that “effective and good CG
would eventually enhance corporate performance (financial or non-financial). And it is
important to help firm to achieve its goal by means of conducting business activities
ethically and in acceptable manner to remain substantial in the industry thus achieve
superior business performance.” Holland (2001) reported that CG is much related to IC
components that drives the firms’ performance. The study confirmed that intangibles as
IC does influence the CG of managers, and human capital is specifically referred to be
the most noteworthy IC component. Therefore, as confirmed in the literature, all these
good governance qualities may eventually influence firms’ performance. This was also
addressed by Agency Theory which explained the vital role of CG on IC and firms’
performance.
As aforementioned, arguments on IC, firms’ performance and the moderating effect
of CG on its relationship is an important issue. Therefore, it is interesting to further
explore the effect of CG on the relationship between IC and performance of listed firms
The moderating role of corporate governance on the relationship 301

in Saudi Arabia. Therefore, our three main hypotheses can be divided into three sub-
hypotheses as the following:
H1: CG positively moderates the relationship between IC and ROA of Saudi listed
firms.
H1a: CG positively moderates the relationship between HCE and ROA of Saudi listed
firms.
H1b: CG positively moderates the relationship between SCE and ROA of Saudi listed
firms.
H1c: CG positively moderates the relationship between CEE and ROA of Saudi listed
firms.
H2: CG positively moderates the relationship between IC and ROE of Saudi listed
firms.
H2a: CG positively moderates the relationship between HCE and ROE of Saudi listed
firms.
H2b: CG positively moderates the relationship between SCE and ROE of Saudi listed
firms.
H2c: CG positively moderates the relationship between CEE and ROE of Saudi listed
firms.
H3: CG positively moderates the relationship between IC and TQ of Saudi listed
firms.
H3a: CG positively moderates the relationship between HCE and TQ of Saudi listed
firms.
H3b: CG positively moderates the relationship between SCE and TQ of Saudi listed
firms.
H3c: CG positively moderates the relationship between CEE and TQ of Saudi listed
firms.

3 Research design and methodology

3.1 The study sample and data source

The study sample consisted of all firms listed on Saudi Stock Exchange during the period
from 2012 to 2014. The sample was selected on the basis of the following main
conditions; availability of all necessary data; never been merged or delisted through the
study period and their shares must have been publicly traded. The study used a pooled
data collected through the period from 2012 to 2014. This selection approach resulted in
a sample of 171 listed companies out of 489 observations. The study excluded 24
observations, therefore the final sample consisted of 489 observations from fifteen
sectors as presented in Table 1.
302 A.M. Hamdan et al.

Table 1 Sample selection

Listed Total Excluded Study

Sector companies observations observations sample
Agriculture and food industries 16 48 3 45
Banks and financial services 12 36 0 36
Building and construction 17 51 1 50
Cement 14 42 5 37
Energy and utilities 2 6 0 6
Hotel and tourism 4 12 0 12
Industrial investment 15 45 4 41
Insurance 35 105 8 97
Media and publishing 3 9 3 6
Multi-investment 7 21 0 21
Petrochemical industries 14 42 0 42
Real estate development 8 24 0 24
Retail 15 45 0 45
Telecommunication and information technology 4 12 0 12
Transport 5 15 0 15
Total 171 513 24 489

3.2 Study methodology

The study used the VAIC Model developed by Pulic (1998) to measure the relationship
between IC efficiency and firm’s operational, financial and market performance. More
interestingly, the study used CG as a moderating variable in addition to other four control
variables to examine their influences on the relationship between IC Efficiency and
firm’s performance. In addition, to reach accurate results and to avoid different
measurement problems on the relationship between IC and performance, we used the
longitudinal data models (panel regression). These models were based on the fixed-effect
(FE) method.

3.3 The study variables

According to the VAIC Model, the IC efficiency components are divided into three main
components (HCE, SCE and CEE). Based on this, the study used IC efficiency
components mentioned by this VAIC Model as independent variables. This is in order to
measure the value of IC efficiency and then testing their impact on the firms’
performance using CG as a moderating variable. This method was followed by many
prior studies (Celenza and Rossi, 2014; Singh et al., 2016; Inkinen, 2015; Nimtrakoon,
2015; Sarea and Alansari, 2016). Methods of the independent variables to calculate
values of each components of the VAIC Model (HCE, SCE and CEE) are presented in
Table 2.
The moderating role of corporate governance on the relationship 303

Table 2 Measuring of variables and validity

J-B
Variables Labels Measurements Mean (p-value) ADF VIF
Dependent variables
Operational ROA Net income divided by total 0.0315 0.000 −21.670***
performance assets
Financial ROE Net income divided by 0.0615 0.000 −20.813***
performance shareholder’s equity
Market Tobin’s The (Market value of equity 1.915 0.000 −8.922***
performance Q + book value of short-term
liabilities) ÷ book value of
total assets
Independent variables
Human capital HCE The ratio of value-added 4.084 0.000 −8.347*** 1.026
efficiency divided by HCE. Where:
Value-added = operating
profit + employee cost +
depreciation. Where: The
HCE = total costs invested
on employees
Structural capital SCE The ratio of SCE divided by 5.211 0.000 −3.744*** 1.013
efficiency value-added. Where: The
SCE = value-added − HCE
Capital employed CEE The ratio of value-added 0.144 0.000 −7.886*** 1.085
efficiency divided by CE. Where: CE
= equity + long-term
liabilities
Moderator variable
Corporate CG The governance level 0.658 0.000 −6.415*** 1.225
governance index
Control variables
Firm size Size The total assets of the 20,133,508 0.000 −4.798*** 1.387
company
Firm age Age The number of years since 20.783 0.000 −5.998*** 1.105
the company was
established
Auditing quality Audit The company’s external 0.662 1.230
auditor one of the big four
audit firms (KPMG, E&Y,
PWC and Deloitte)
Industrial dummy Sector Dummy variable that equals 2.712
one for industrial
companies, otherwise 0
Models ROA ROE model Tobin’s Q
model model
Durbin-Watson 1.971 1.908 1.162
(D-W) test
White test (p-value) 0.860 0.806 0.441

*10%; **5% and ***1% levels.

ADF, augmented Dicky-Fuller; VIF, variance inflation factor
304 A.M. Hamdan et al.

In addition, as shown in Table 2, the study used firm’s operational, financial and market
performance measured using ROA, ROE and Tobin’s Q as a dependent variable.
Following Singh et al. (2016), the firm operational performance was measured using
ROA. The firm operational performance was measured using ROE (Celenza and Rossi,
2014), and the firm market performance was measured using Tobin’s Q (Hejazi et al.,
2016). These three performance aspects were used as dependent variables in three
different regression models. This is to determine the best model evaluating the
relationship between the dependent and independents variables.
However, Table 2 presents the four control variables utilised in this study. The
variables used are as the following: Firm Size measured by total assets (Komnenic and
Pokrajčić, 2012); firm age (Fan et al., 2011), audit quality (Gan et al., 2013) and the
sectors (Firer and Mitchell Williams, 2003).

3.4 Testing data validity

The study used general linear model (GLM) to test the moderating effect of IC efficacy
on firms’ performance. We, therefore, run several tests to check whether data of this
study could meet the conditions of the general linear model.
As presented in Table 2, to secure approximation of data to normal distribution,
Jarque Bera parametric test was used. The decision basis of this test is to accept the null
hypothesis that the data is normally distributed (Gujarati, 2003). As shown in Table 2, we
noticed that the (J-B) value for all variables was less than 0.05. This ascertains that the
study data are not normally distributed. To overcome this problem, natural logarithm of
these variables was considered. And the size of the sample was big and not distributing
the data normally may not influence credibility of the study.
However, empirical research that uses time series, like the case of this study,
presupposes stability of these series. Autocorrelation might occur in the model because
time series on which this study is based is non-stationary (Gujarati, 2003). To check
stationarity of time series, Unit Root test, which includes the parametric augmented
Dicky-Fuller (ADF) test, was used. As is presented in Table 2, we can notice that the
(ADF) test is statistically significant at the level of 1% which meant that the data of time
series (2012–2014) was stationary.
As for the strength of the GLM basically depends on the hypothesis that every
variable from the independent ones is by itself independent. If this condition is not
realised, the GLM will then be inapplicable. It can never be considered good for
parameters’ evaluation. To actualise this, collinearity diagnostics standard used incessant
tolerance quotient for every variable of the independent ones. Variance inflation factor
(VIF) has to be found afterwards. This test is the standard that measures the effect of
independent variables. Gujarati (2003) stated that getting a (VIF) higher than (10)
indicates that there is a multicollinearity problem for the independent variable of concern.
As presented in Table 2, it can be noticed that the (VIF) values for all independent
variables is less than (10) which means that we do not have any collinearity problems in
the study models.
To test the autocorrelation problem in the study models, we used Durbin Watson
(D-W) test. Table 2 shows that the (D-W) values of the Tobin’s Q Model is beyond the
(1.5–2.5) range. This indicates the presence of a positive autocorrelation in this model.
To overcome this problem (Lag1) has to be considered when testing Tobin’s Q Model.
The moderating role of corporate governance on the relationship 305

Finally, one of the significant assumptions of the regression models is the presence of
homoscedasticity. Its mean should be equal to zero. If the heteroscedasticity is present in
the model, then some statistical methods will be used to overcome this problem, like
using (White) test. As shown in Table 2, we find that p-value of the three models are
more than (0.05) which indicates admitting the null hypothesis; these models suffer from
actual heteroscedasticity, but the problem was overcome by using (White).

3.5 Study models

The moderator variable - governance - in fact acts like the second independent variable.
When moderator variable is launched, the CG has to maintain a causal relationship with
performance and plays the same function as IC.
In order to measure the moderating role of CG on the relationship between IC
efficiency and firms’ performance, the study created an interaction variable (CG
Index*ICIndex) which was included as independent variable. Hence, the study regression
model is presented as the following:
Perf it = β 0 + β1 HCE it + β 2SCE it + β 3 CEE it + β 4 (CGIndex*ICIndex) it
+ β 5 Age it + β 6 Sizeit + β 7 Audit it + β 8 Sector it +ε it

where Perfit: is a continuous variable; the dependent variable is the firms’ performance
measured by three models (e.g. ROA model, ROE model and Tobin’s Q model). ROA is
the ratio of net income divided by total assets of company (i), in the period (t). ROE is
the ratio of net income divided by shareholders equity of company (i), in the period (t).
Tobin’s Q is the ratio of current liabilities plus market value of share capital divided by
total assets of company (i), in the period (t). β0: is the constant and β1–8: is the slope of the
controls and independent variables. HCEit: the ratio of value-added, divided by Human
capital, of company (i), in the period (t). SCEit: the ratio of structural capital divided by
value-added, for the company (i), in the period (t). CEEit: the ratio of value-added
divided by capital employed, for the company (i), in the period (t). Ageit: the number of
years since the company was established, for the company (i), in the period (t). Sizeit: is a
logarithmic variable, the total assets of the company, for the company (i), in the period
(t). Auditit: is a dummy variable, the company’s external auditor one of the big four audit
firms, for the company (i), in the period (t). Sectorit: is a dummy variable, the area of the
economy in which companies work in the same field or have related product or service,
for the company (i), in the period (t). εit: random error.

4 Descriptive statistics

4.1 IC level and performance

In this section, we used the descriptive statistics to achieve the study aims and prove
hypotheses. Thus, we divided IC level into two categories; firms with a high IC level and
firms with a low IC level (Table 3).
306 A.M. Hamdan et al.

Table 3 Descriptive analysis (IC level and performance)

IC level
With: Difference tests
Independent Samples t- Mann-Whitney Test
Performance High IC Low IC statistic (Sig.) z-statistic (Sig.)
ROA 0.138 0.023 2.787 (0.371) −5.951*** (0.000)
ROE 0.194 0.054 3.508** (0. 025) −6.172*** (0.000)
Tobin’s Q −0.0325 −0.627 −2.180** (0.003) −1.479 (0.139)
The t-statistic is based on parametric test two-independent sample t test, and
z-statistic is based on non-parametric test Kolmogorov-Smirnov Z. The
difference significance at: *10%; **5% and ***1% levels
The study used path analysis based on the value of IC index median. And to identify the
variance between the means of the two samples, t- and z-statistic tests were used. The
analysis using t-statistic test showed that the three performance indicators namely, ROA,
ROE and Tobin’s Q tend to be higher with firms that have higher IC efficiency. ROA
was found to be insignificant in the variance between the means of ROA in the two
samples, whereas the results found that the variance between the means of the two
samples for Tobin’s Q and ROE are insignificant. Further, the path analysis using the
z-statistic showed that ROA is significant in the variance between the means of the two
samples for operational (ROA), financial (ROE), however, was insignificant with market
performance (TQ).

4.2 Intellectual capital, sector and performance

In this section, we divided the study sample based on IC components and performance
indicators into fifteen sectors as shown in Table 5. We run the path analysis based on the
value of the calculated mean of IC and performance to identify the difference among the
sectors.

Table 4 The intellectual capital and firms’ performance based on firm’s size and age

Firm size Firm age

Mean
difference by Mean difference
firm size Difference tests by firm age Difference tests
Big Small Older Younger t-
Variables firms firms t-Statistic z-Statistic firms firms Statistic z-Statistic
Intellectual capital components
Human 6.868 3.673 3.848*** −7.490*** 4.647 5.906 −1.500 −0.751
capital (0.000) 0.000) (0.134) (0.453)
efficiency
Structural 0.729 0.798 −0.613 −3.067*** 0.754 0.771 −0.152 −3.294***
capital (0.540) (0.002) (0.879) (0.001)
efficiency
The moderating role of corporate governance on the relationship 307

Table 4 The intellectual capital and firms’ performance based on firm’s size and age
(continued)

Firm size Firm age

Mean
difference by Mean difference
firm size Difference tests by firm age Difference tests
Big Small Older Younger t-
Variables firms firms t-Statistic z-Statistic firms firms Statistic z-Statistic
Capital 0.111 0.190 −2.784*** −2.222** 0.217 0.080 4.903*** −7.775***
employed (0.006) (0.026) (0.000) (0.000)
efficiency
Corporate 0.690 0.626 3.259*** −3.038*** 0.678 0.637 2.062** −2.167**
governance (0.001) (0.000) (0.040) (0.030)
Firm performance
Return on 0.062 0.001 2.199 −3.627*** 0.036 0.026 0.356 −5.597***
assets (0.280) (0.000) (0.722) (0.000)
Return on 0.118 0.005 3.318*** −4.454*** 0.088 0.034 1.583 −5.249***
equity (0.001) (0.000) (0.114) (0.000)
Tobin’s Q 1.446 2.384 −6.624*** −8.134*** 2.034 1.773 1.773* −3.590***
(0.000) (0.000) (0.077) (0.000)
The t-statistic is based on parametric test two-independent sample t test, and
z-statistic is based on non-parametric test Mann-Whitney Z. The upper value is
for t/z-statistic test and the lower value in brackets (p-value) is the probability
value for this test. The difference significance at: *10%; **5% and ***1%
levels
As shown in Table 5, cement sector ranked the highest HCE among all sectors while
Telecommunication and IT has the biggest SCE and transport sector is found to be the
most efficient in CEE. On other hand, Insurance sector is found to be the least efficient
among the three IC components (HCE, SCE and CEE). Retail sector has the highest TQ
ratio among all other sectors, but it was found that it has the lowest ROA ratio. The ROE
ratio found to be the highest in Hotel and Tourism sector however ranked the lowest in
Insurance sector. The banks and financial services tend to be the greater TQ among all
sectors while cement sector has the greatest ratio of ROA.

Table 5 Advanced descriptive analysis (intellectual capital, sector and performance)

Intellectual capital Performance

Sector HCE SCE CEE ROA ROE TQ
Banks and 5.984 0.827 0.045 0.019 0.139 0.933
financial services
Petrochemical 7.291 0.747 0.091 0.055 0.101 1.045
industries
Cement 11.214 0.863 0.213 0.125 0.156 2.102
Retail 2.815 0.556 0.258 −0.037 0.051 3.256
Energy and 6.146 0.794 0.080 0.054 0.092 0.953
utilities
308 A.M. Hamdan et al.

Table 5 Advanced descriptive analysis (intellectual capital, sector and performance)

(Continued)

Intellectual capital Performance

Sector HCE SCE CEE ROA ROE TQ
Agriculture and 1.503 −3.189 0.174 0.060 0.119 3.110
food industries
Telecommunication 2.457 1.453 0.152 0.002 −0.020 1.249
and IT
Insurance 0.992 −24.927 0.005 −0.018 −0.069 2.016
Multi-investment 1.531 0.779 0.018 0.007 −0.035 1.411
Industrial 2.532 0.498 0.133 0.065 0.115 1.668
Investment
Building and 2.721 0.146 0.218 0.039 0.104 1.557
construction
Real estate 8.743 0.674 0.114 0.051 0.064 1.269
development
Transport 5.301 0.721 0.620 0.079 0.113 2.083
Media and 1.172 0.235 0.361 −0.001 −0.032 1.506
publishing
Hotel and tourism 4.272 0.724 0.291 0.097 0.200 2.394
ANOVA F-statistic 1.740 0.285 5.968 0.757 1.638 7.953
(p-value) (0.045) (0.995) (0.000) (0.716) (0.066) (0.000)

However, the significant level is determined at 5%, where if F-statistic is less than the
significant level the model is assumed to be correct. For the IC component, the HCE and
CEE results of ANOVA test show that the whole model is relevant, (F) value was 1.740
at 0.045, which means that there is significant impact for sector type on HCE and CEE.
However, there is insignificant impact for sector type on SCE as the significant level of
F-statistic was greater than 5%.
Regarding performance measures, the ROA and ROE results of ANOVA test show
that the two models are irrelevant, significant level of F values were greater than 5%
which means that there is no significant impact for sector type on ROA and ROE.
However, there is significant impact for sector type on TQ, since the significant level of
F value was 0.00 which is less than 5%.

4.3 The IC and performance based on firm’s size and age

4.3.1 Firm size

The IC and performance were divided into two categories; firms with big size of assets
and firms with small assets as shown in Table 4. We used the path analysis, which is
based on the value of the calculated median of firm size. This is to identify the variance
between the means of the parametric test two samples t-statistic test and the non-
parametric test z-statistic tests were used.
For the dependent variables (performance) using the t-statistic, the path analysis of
ROA was found to be insignificant in the variance between the means of firm size,
The moderating role of corporate governance on the relationship 309

whereas the results found that the variance between the means of the two samples for
Tobin’s Q and ROE are significant. Different results were found by using the z-statistic,
the three performance indicators namely, ROA, ROE and TQ were highly significant to
firm size. The ROA and ROE were found to be higher with firms that have large assets.
However, TQ was found to be higher with firms that have small asset size.
For the independent variables (IC) using the t-statistic, the path analysis of SCE was
found to be insignificant in the variance between the means of firm size, whereas, the
results found that the variance between the means of the two samples for HCE and CEE
are significant. Different results were found by using the z-statistic, the three components
of IC namely, HCE, SCE and CEE were highly significant to firm size. The HCE was
found to be higher with firms that have large assets. However, SCE and CEE were found
to be higher with firms that have small asset size.

4.3.2 Firm age

We here, divided the IC and Performance into two categories; older firms and younger
firms as shown in Table 4. To identify the significance in the variance between the means
of the two samples, t- and z-statistic tests were used. The results showed that the
t-statistic of TQ was found to be significant at 10% level in the variance between the
means of firm age, whereas the results found that the variance between the means of the
two samples for ROA and ROE are insignificant. Different results were found by using
the z-statistic, the three performance indicators namely, ROA, ROE and TQ were highly
significant to firm age. In addition, all performance indicators were found to be higher
with older firms.
For the independent variables (IC) using the t-statistic, the path analysis of CEE was
found to be significant in the variance between the means of firm age, whereas the results
found that the variance between the means of the two samples for HCE and SCE are
significant. Different results were found by using the z-statistic, the HCE was found to be
significant in the variance between the means of firm age, whereas, the results showed
that the variance between the means of the two samples for CEE and SCE is significant.
The HCE and SCE were found to be higher with younger firms. However, the CEE
was found to be higher with older firms.

5 Regression analysis

Like most empirical corporate finance research, the analysis of the relationship between
IC and firm performance faces the challenge of Endogeneity, which can arise from
unobserved heterogeneity, simultaneity and reverse causality. In the context of the IC and
performance relationship, the problem of unobserved heterogeneity arises when one or
more latent variables drive the observed relationship between IC and firm performance.
As mentioned in Section 3.4, we checked the validity of the study models and data,
and several tests were performed like normal distribution test, time series Stationarity
test, autocorrelation and Multicollinearity. And the models were checked for not having
homoscedasticity.
However, when time-series and cross-sectional data are merged, we get longitudinal
data that gives more data information with more disparity, less internal correlation
between variables, more degrees of freedom and more efficiency (Gujarat, 2013).
310 A.M. Hamdan et al.

Longitudinal regression models are divided into fixed-effect approach (FE) and random-
effect approach (RE). The trade-off between the two approaches depends on the
assumptions set on possible correlation between cross-sectional units (firms), amount of
ε i error (other factors affecting firms’ performance) and regressed variables X’s
(intellectual capital). If assumed that εi and X’s are not correlated, a random-effect
approach is the best, otherwise fixed-effect approach is the best.
Our study can only assume a correlation between error and independent variables of
the study sample, which makes the application of fixed-effect approach more appropriate
to the nature of the study. This was confirmed by ‘Hausman test’, where a null
hypothesis assumes that capabilities of fixed-effect approach (FE) and random-effects
approach (EF) are same, but if a null hypothesis is rejected, then this indicates that
random-effect approach is inappropriate, and it is therefore preferable to use fixed-effect
approach. ‘Houseman’ ‘chi-squared’ three models shown in Table 6 are statistically
significant. This means that capabilities of fixed-effect model (FE) is best representing
the relationship, confirming our assumption that ε i and X’s are correlated.

Table 6 Fixed-effect results

ROA model ROE model Tobin’s Q model

Variables β t-Statistic β t-Statistic β t-Statistic
Constant 0.148 2.383** (0.017) 0.342 4.571*** 7.602 26.403***
(0.000) (0.000)
Intellectual capital components
Human 0.001 0.395 (0.693) 0.024 0.113 0.125 3.154***
capital (0.910) (0.000)
efficiency
(HCE)
Structural -0.009 −1.510 (0.131) 0.020 2.718*** 0.208 2.743***
capital (0.007) (0.005)
efficiency
(SCE)
Capital 0.055 2.332** (0.020) 0.066 2.350** 0.523 4.804***
employed (0.019) (0.000)
efficiency
(CEE)
CG 0.018 2.093** (0.037) 0.025 2.338** 0.425 2.804***
Index*IC (0.020) (0.032)
Control variables
Firm age 0.001 2.106** (0.035) 0.003 5.081*** 0.004 1.680*
(0.000) (0.093)
Firm size 0.009 2.040** (0.042) 0.019 3.623*** -0.405 −19.781***
(0.000) (0.000)
Audit 0.001 −0.070 (0.944) 0.038 1.931* 0.171 2.244**
quality (0.054) (0.025)
Sector 0.235 2.718** (0.011) 0.297 2.118** 0.123 1.894*
(0.022) (0.061)
The moderating role of corporate governance on the relationship 311

Table 6 Fixed-effect results (continued)

ROA model ROE model Tobin’s Q model

Variables β t-Statistic β t-Statistic β t-Statistic
R Square 0.207 0.217 0.554
Adjusted R 0.171 0.214 0.520
square
F-statistic 5.818*** (0.000) 16.150*** (0.000) 76.239*** 0.000
p-value
(F-statistic)
Hausman test
χ2 statistic 18.470** (0.030) 22.169*** (0.001) 34.115*** (0.000)
p-value (χ2)
This table reports the regression results using the ordinary-least-squares with
firm and year fixed-effects (FE). All regressions are estimated with robust
standard errors clustered at the firm level. t-Critical: at df 513, and confidence
level of 99% is 2.326 and level of 95% is 1.645 and level of 90% is 1.282.
F-Critical (df for denominator n-β-1 = 513-8-1 = 504) and (df for numerator =
β = 8 and confidence level of 99% is 2.79 and confidence level of 95% is 2.09
and confidence level of 10% is 1.77. The upper value is for t-statistic test and
the lower value in brackets (p-value) is the probability value for this test.
Symbols mean significance at: *10%; **5% and ***1% levels.
Table 6 shows the fixed-effect regression results of the three Models. The results reveal
that all the models have a high statistical significance and high explanatory power.
However, when compared with the results of using components of IC (Models 1, 2 and
3), the explanatory power showed a substantial increase, suggesting that stakeholders and
managers may have different emphases on the three components of VAIC (Chen et al.,
2005).
Value-added intellectual coefficient is further split into its three components, and put
into the regression equation to predict ROA, ROE and TQ. Each of these three models is
divided into sub-models. The first explains the moderating role of CG in the relationship
between the ROA and IC components. The second highlights the moderating role of CG
in the relationship between the ROE with the IC components. The last model tests
moderating role of CG in the relationship between TQ and IC components.

5.1 ROA model results

As shown in Table 6, the slop coefficient of interaction term 0.018 indicates that the
moderating impact of CG Index is significant and has a positive impact on ROA as
evident from the coefficient and P-value (0.037).
However, the results specify that the inclusion of CG Index as a moderating variable
has not influenced the relationship between HCE and ROA, which is not significant at
5% (0.693). Therefore, H1a is rejected. This indicates that managers of Saudi firms are
not able to realise the full potential of the firm’s human capitals to maximise their ROA.
This result is in contra to study adopted by Ismail et al. (2011) which found that HCE is
positively and significantly affect the ROA in Bahraini firms.
To clarify the results, Saudi Arabian firms greatly depend on foreign labour; most
Saudis refuse to take unskilled or menial jobs as these are often considered socially
312 A.M. Hamdan et al.

unsuitable. The policy of ‘Saudisation’ aims to raise the share of skilled and educated
Saudi nationals employed in the domestic economy which in return will have a great
impact on asset utilisation. Job creation for the young and a rapidly growing population
constitutes the most serious stress points in the labour market. The issue of labour market
rigidity also needs to be addressed. The most necessary reforms should include the
liberalisation of regulations governing the hiring and firing of Saudis. At present, these
include archaic regulations restricting the hiring of women (although these are gradually
being relaxed), lengthy dismissal procedures and high mandatory severance pay in the
public and private sectors. Another issue is that Saudi market consists of large merchant
families with strong connections to the family dominate the private sector, which has
benefited extensively from the business environment. That said, some within the private
sector, mostly the young and Western-educated, acknowledge the need for reform and
change (Country insight report: Saudi Arabia, 2017). The BOD and managers of Saudi
firms should consider the human capital to structure relevant strategies and policies on
how to obtain; best utilise, develop and retain their employees for better return on asset.
In addition, the results in Table 6 also show that the inclusion of CG Index as a
moderating variable has not influenced the relationship between SCE and ROA, which is
insignificant at 5% (0.131). Thus, we cannot accept H1b. The result was in line with
Ismail et al. (2011) who found same result in Saudi for the period from 2005 to 2007.
With the passage of years, it was noticed that there are no improve in the structural
capital in relation to assets efficiency. This gives us an indicator that most of Saudi firms
pay less attention on its intangible assets such as patents, trademarks and databases as a
source that contribute towards assets efficiency. This is due to lack of awareness on the
importance of structured capital as an indicator in measuring the return on assets.
As for CEE, Table 6 shows that the inclusion of CG Index as a moderating variable
has influenced positively the relationship between SCE and ROA, which is significant at
5% (0.020). Hence, we accept H1c. This evidences that firm’s profitability of Saudi firms
has been created more by CEE (physical and financial) rather than HCE or SCE. This
result is consistent with studies reported by Al-Musali and Ismail (2014). Based on these
results, firms in Saudi increase their ROA by concentrating more on tangible and
financial assets and invest in their capital not the employees or the systems. To explain
that, Saudi Arabia possesses the second largest reserves of oil in the world (after
Venezuela) and it ranked the second largest producer of oil after the US. While this has
brought wealth to some sectors of society and lead the firms to concentrate significantly
on further investment in their physical and financial assets (D&B Country Report, 2016).

5.2 ROE model results

As shown in Table 6, the slop coefficient of interaction term 0.025 indicates that the
moderating impact of CG Index is significant and has positive impact on ROE as P-value
is less than 0.05 (0.020).
However, inclusion of CG Index as a moderating variable has not influenced the
relationship between HCE and ROE, which is not significant at 5% (0.910). Therefore,
H2a is rejected. This result, of course, shows that HCE has insignificant relationship with
ROE. The results are not in line with the study adopted by Al-Musali and Ismail (2014)
in Saudi who examines the effect of intellectual capital for the period from 2008 to 2010,
they found a positive association with ROE. The confliction in the results can be
explained by the unrest of the Arab Spring that was between 2012 and 2014, Saudi
The moderating role of corporate governance on the relationship 313

Arabia (including in neighbouring Bahrain and Yemen) facing growing dissatisfaction in

the country over unemployment, firms bankrupt and corruption which makes the foreign
and Saudi shareholders avoid investing in Saudi firms. This give us an indicator that most
of investors in the period between 2012 and 2014 worried about the human capital such
as employee, managers and BOD as a source that contribute towards equity efficiency.
As for SCE, inclusion of CG Index as a moderating variable has influenced positively
the relationship between HCE and ROE, which is significant at 5% (0.007). Therefore,
H2b is accepted. This shows that SCE has a significant positive impact on the equity.
These results are in line with the study adopted by Al-Musali and Ismail (2014) in Saudi
who found a positive association between SCE and ROE. The results suggest that in
Saudi scenario, the market is underdeveloped and to have such results, it means that the
stakeholders perceive the equity performance of the firm in terms of tangible assets
equally to in terms of intangible assets. Thus, the investors in Saudi firms are considered
the structural capital such as patents, trademarks and databases as a source that
contributes towards equity efficiency. This is a good indicator that Saudi firms are aware
on the importance of SCE as an indicator in measuring the return on equity.
In addition, inclusion of CG Index as a moderating variable has influenced positively
the relationship between CEE and ROE, which is significant at 5% (0.019). Therefore,
H2c is accepted. This shows that CEE has positive significant relationship with ROE.
However, the CEE was less significant than the SCE in relation to ROE. These results are
in contra to Nimtrakoon (2015) who compared the extent of IC among ASEAN countries
and found that CEE and HCE are more significant than SCE. Saudi firms are efficient at
managing their working capital that provides superior returns to shareholders compared
to companies who poorly manage their working capital. Shin and Soenen (1998)
demonstrate that firms with higher returns have better working capital management due
to their greater dominance in the market. Thus, better working capital management may
translate to better shareholder performance because of the association with superior
profitability and market position.

5.3 Tobin’s Q model results

The results of Tobin’s Q Model presents the best adjusted R Square (0.520), thus, as
shown in Table 6, all IC components are significant at 0.01. This means that inclusion of
CG Index as a moderating variable has significantly influenced the relationship between
all IC components (HCE, SCE and CEE) and TQ, which is significant at 5% (0.032).
Table 6 shows that the HCE has a positive impact with TQ at 0.05 (0.000), therefore
H3a is accepted. This is consistent with the available empirical evidence and theoretical
discussions in the literature (Hsu and Wang, 2012; Barczak and Wilemon, 2003). These
results indicate that HCE is significantly contributed to a physical asset's market value
and its replacement value. Considering this result, we believe that HCE has a significance
and usefulness in Saudi market, as the nexus between financial markets and markets for
goods and services.
In addition, the result shows that SCE has a significant impact with TQ at 0.05
(0.005). This indicates that in Saudi market, the SCE is effective as the market is valuing
an asset above its replacement cost. This is largely because firms do not blindly base
fixed investment decisions on movements in the stock price; rather they examine future
interest rates and the present value (including the structural capital) of expected profits.
314 A.M. Hamdan et al.

Further, in line with Hejazi et al. (2016), we found that CEE has a significant impact
with TQ at 0.05 (0.000). This can lead to precious results which imply that a firm’s stock
is more expensive than the replacement cost of its assets, if the Saudi firms have efficient
IC, which implies that the stock is overvalued in firms with higher VAIC. Overall, results
of the regression analysis indicate that CEE can explain the performance of listed firms
in Saudi Arabia demonstrating that an increase in value creation efficiency affects firm`s
performance in the country.
To conclude, in Saudi the IC is a driving factor behind investment decisions and
stock valuation. Firms should motivate the board of directors to strictly adopt the code of
governance for better IC efficiency. This can explain the firms that adapting CG tend to
have a better IC. Thus, Saudi is moving on the right track as the firms have a highly
experienced and educated Board of Directors about the importance of intellectual capital
which is expected to lead to a bright economy in the near future and therefore experience
higher growth and a deep and valued intellectual capital culture.

5.4 Control variables

As shown in Table 6, firm size is found to be significant with the three models. However,
it has a negative relationship with the TQ model, as more tangible assets in a firm it
adversely affects the market value of the firms. In theory, the relationship between firm
size and performance is equivocal, but there is a consensus regarding the effect of firm
size on performance. Large firms may perform better, as they have more resources and
capabilities and higher efficiency. These firms may have higher profitability. This
variable is measured as the natural logarithm of book value of total assets (Alipour, 2012;
Heimeriks and Duysters, 2007).
For firm age, it positively affects the three models. However, there are variations in
the significance level respectively; ROE has greater significance followed by ROE and
TQ. The results are different than the results founded by Buallay et al., (2017) which
found that firm age as control variable is significant to ROA model, while it is not
affected by both ROE and TQ models.
Finally, audit quality does not control the ROA. However, it was significantly
controlled by ROE and TQ model. Not to mention, when comparing the significant level
of the two models we noticed that the audit quality has higher significance in TQ model
than the ROE.

6 Conclusion

This study considers the level of IC efficiency in the firms listed in Saudi stock exchange
and investigates the moderating role of CG on the relationship between IC components
(HCE, SCE and CEE) and firm’s operational, financial and market performance. The
data was collected as a pooled data from Saudi stock exchange database during the
period 2012–2014.
The descriptive analysis results on one hand showed that HCE was found to be higher
with firms that have large assets. However, SCE and CEE were found to be higher with
firms that have smaller asset size. On the other hand, all performance indicators were
found to be higher with older firms.
The moderating role of corporate governance on the relationship 315

The regression models results showed that the CG is significant and has a positive
impact on the relationship between IC and performance (operational, financial and
market performance). This proves that CG has a moderating role on the relationship
between IC and firm’s performance. Based on this, Saudi firms should motivate the
board of directors to strictly adopt the code of governance for better IC efficiency.
In addition, the results showed that HCE and SCE have no significant impact on
ROA, while there is a significant impact for CEE on ROA. The ROE model results also
showed that SCE and CEE have a positive significant impact on firm's financial
performance measured by ROE, while the HCE has not effect on ROE.
The analysis showed that Tobin’s Q Model is the best model in explaining the
moderating role of CG on the relationship between all IC components and performance.
And the Tobin’s Q model was found to be highly significant in the three components of
IC.
Finally, we tested the effect of the control variables on the performance and found
that firm size and firm age are significant in all the three models, whereas, Audit quality
was significant to TQ and ROE models only.
We suggest capital market authority in Saudi to focus more on IAS 38 adoption to
assure that all listed companies in stock exchange are controlling and reporting the IC;
also it should conduct a workshop about the importance of IC. In Saudi, the laws
associated with protecting IC are weak, therefore, we recommend the capital market
authority to pay more attention to IC to avoid the gap between firms’ value as reported in
financial statement and actual market value. In addition, the capital market authority
should have a clear and mandatory law associated with intellectual capital. Added to that,
the stakeholders such as investors, shareholders, creditors and debtors are recommended
to increase their knowledge about the term of IC and its importance in the business to
make better investment choices. Furthermore, we suggest that organisers like capital
market authority, ministry of finance, external auditors and stock exchange organiser to
take the IC into consideration to assure more reliable financial information to all business
parties. Further, we suggest that future research has to be undertaken for sector-specific
investigation of CG impact as a moderating variable on this relationship in the GCC
countries as a whole.

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