Moderating role of intellectual capital on the relationship between

corporate social responsibility and firm performance: An

empirical study of Pakistani firms.
Introduction
Basic objective of business is to earn profit and uncover ways how to maximize
earnings day by day, some indirect expenses that has no direct relation with
profits firms are pressurized to do for survival in market competition or capture
new markets.one of that expense is corporate social responsibility. For survival
companies do different mergers, expand globally, focus on research and
development (R&D) and discover ways through which value of the shareholders
increased. But for achieving so, the gap between economic and social values
must be filled. Due to major corporate disasters regarding the community,
environment and human resource: Corporate social responsibility (CSR) and its
disclosure demands in the business community has increased (Waller and
Lanis,2009). Now corporate sector has more pressure for CSR from customer
side to survive in the market. Corporate social responsibility concept has been
originated from the years. Different authors describe different dimensions. One
of the earliest definitions of CSR is; Managing the business organizations, its
social activities and performance so that it has positive impact on society; by
(Elias Epstein 1975).

Another famous definition of CSR given by (Carrrol,1979) is; the social

responsibility of a business which includes the economic, legal, ethical, and
discretionary expectations that society has from organizations at given point in
time. This definition is the clearest conceptualization of CSR because, in
addition to identifying the firm’s obligations toward society. For compete the
competition of Chinese industry in Pakistan in terms of cost control and
Company performance improving economic and strategic policies, CSR should
adopt by Pakistani firms to retain the long term customers and maximize profit
without consideration the short period of cost incurred due to CSR and
intellectual capital. For compete the competition of Chinese industry in Pakistan
in terms of cost control and Company performance can be improved through
various strategies that can increase legitimacy and maintain good relationships
with stakeholders. The current social and environmental issues have led to
public demand for companies considered responsible for environmental
damage. Corporate responsibility is known as Corporate Social Responsibility
(CSR). There are various concerns related to the role of social and
environmental activities, and business role in these activities in any country. For
the purposes of this study, we see firm performance as relating to overall
organizational achievements reflected in the functions and outcome so fits
operations, effectiveness of employees and CSR activities.
We also know from the literature and prior studies that financial performance,
or the measure of how well a firm uses its assets and business model to generate
revenues reflecting financial health over a given period. The focus of much of
the literature, and this study involves financial performance. For the purpose of
providing some boundaries, financial performance for the purpose of this study
involves traditional attributes of market share, profit growth, sales, return on
assets, return on investments, and performance relative to competitors. Here we
see traditional performance frontiers being pushed out by calls to better
understand relationships of social and financial performance (Cochran and
Wood, 1984) and the opportunity to expand research into the social
responsibilities of firms received the attention of both businesses and scholars.
Over 8,000 firms from more than 160 countries were reported to have spent
over 4 trillion dollars on CSR (Social Investment Forum, 2014). The proportion
of Standard & Poor's 500 companies that have released CSR reports increased
from about 20% in 2011 to over 70% in 2013 (Wang, Hsieh, & Sarkis, 2018).
Many scholars have investigated how companies “do well by doing good” (e.g.,
Kang, Germann, & Grewal, 2016; Orlitzky, Schmidt, & Rynes, 2003), but the
empirical findings on the relationship between CSR and firms' economic
outcomes are complex. Some research shows that their relationship is positive,
which enables them to gain a competitive advantage (Bernal‐Conesa, de Nieves
Nieto, & Briones‐Peñalver, 2017; Farooq, Rupp, & Farooq, 2017; Mishra &
Modi, 2016), whereas others suggest that the financial and agency costs
incurred by CSR can damage a company's performance (Di Giulia &
Kostovetsky, 2014; Ting & Yin, 2018). To address the discrepancy in the
conclusions of these studies, researchers have increasingly taken a contingency
perspective to examine the link between CSR and firm performance (e.g., Kim,
Kim, & Qian, 2018; Ting & Yin, 2018). Kim et al. (2018) suggested that
competitive action moderates the relationship between CSR and firm
performance. Ting and Yin (2018) found that the excess control rights of
controlling shareholders moderate the link between CSR and firm performance.

Other scholars have considered the contingent effect of advertising and research
and development (R&D) expenditures, two functions that are fundamental in
determining firm value appropriation and value creation (Mizik & Jacobson,
2003), on the relationship between CSR and firm performance. For example,
Hull and Rothenberg (2008) utilized R&D spending to measure firm innovation
nnovation firms. Servaes and Tamayo (2013) suggested that CSR and firm
value are positively related for firms with higher advertising expenditures (an
indicator of customer awareness). Taylor, Vithayathil, and Yim (2018)
examined the moderating effect of advertising intensity on the link between
CSR initiatives and firm value. However, the extent to which advertising and
R&D expenditure are interrelated, and their influence on the relationship
between CSR and firm performance has not been extensively investigated. Both
advertising and R&D activities play a critical role in generating valuable
market‐based assets (Luo & Bhattacharya, 2009), and engaging in only one of
these aspects may be insufficient to ensure financial success (Mizik & Jacobson,
2003).

Research such as that conducted by Oeyono et al. (2011), Adeneye and Ahmed
(2015), and Cornett et al. (2016). The findings indicate that companies that
conduct CSR activities will improve the performance of the company. However,
contradictory results are found by Aupperle et al. (1985), Smith et al. (2007),
and Crisóstomo et al. (2011) that empirically proves that CSR actually
negatively affect the company's performance. why CSR can affect company
performance. First, resource-based focus on performance as the outcome
measure. Second, resource-based explicitly considers intangible assets such as
knowledge, corporate culture, and company reputation. Intangible assets such as
intellectual capital become one of the company's resources that can create the
competitive advantage of the company. Therefore, intellectual capital is one of
the assets that companies need to consider in creating their competitive strategy.
This research has several contributions. First, theoretically, this study examines
the theory of legitimacy and stakeholder theory that is widely used for research
that aims to examine the relationship between CSR and corporate performance.
By adding intellectual capital as a moderating variable, this study also tries to
prove resource-based views that require a combination of corporate resources
including tangible assets, intangible assets, and capabilities. Secondly, this
study provides empirical evidence that in corporate practice, when wanting CSR
is done to improve the performance of the company, it increases the intangible
assets such as intellectual capital into the need of the company.

This research uses intellectual capital as moderation variable. A variable that are
included in the model because they have a contingency effect from the
relationship between the independent and dependent variables The moderation
variables are added in the study because of conflicting results of previous
studies, so there may be other variables that can moderate the causal
relationship between the variables studied (Hartono, 2014:171). Using
resource-based views, Russo and Fouts (1997) mention there are two reasons
Intellectual capital is truly a new emerging concept. Every organization now
finds logic in measuring, valuing and reporting its intangibles, as they also have
become one of the vital performance indicators and a strategy to gain
competitive advantage. The present accounting system does not support the
measurement and reporting of intellectual capital in most developing countries.
Therefore, there is an immediate need to develop a new accounting standard
that takes into account the growing trends of Intellectual capital. These changes
are more compelling in some sectors with particular reference to service sectors
like banks and financial institutions, Hotels, Tourism sector, Information and
Technology Industry, Education etc., where the role of Human capital is much
more prominent among the other components of intellectual capital.

Efficiency in utilizing of resources plays a key role in determining the strength

of the organization. An organization may be small or big, what is more
important is whether it is using its limited resources in a best possible manner so
as to increase the long-term sustainability in a competitive market. Intellectual
Capital (IC) can be broadly called as any creation of human mind, which
provides some value to the organization. Generally intellectual capital is
classified into Human capital, structural capital and customer capital (Sveiby,
1989). Capital mainly consists of all the aspects related to the employees in the
organization, their training, development, their contributions to the
organizational development and also value creation. Thus, just by having a large
work force with mere qualification and experience does not amount to being
efficient. Value creation Efficiency mainly depends on the contribution of these
employees towards value creation of the organization (Edvinsson, 1997). The
Structural Capital refers to the organizational structure, its vision, mission,
infrastructure, Intellectual property that the firm owns and the like. The role and
importance of high-tech organizations in a knowledge-based economy is
significantly recognized. Researchers in developing countries have carried out
studies to identify the role of intellectual capital towards the innovations and the
performance of organizations for example Mexico (Trevinyo-Rodríguez &
Bontis, 2007), Malaysia (Bontis, Keow, & Richardson, 2000), Egypt (Seleim,
Ashour, & Bontis, 2004), Pakistan ; (Muhammad Khalique, Nassir Shaari, Isa,
& Ageel, 2011); and Iran (Mahmoodsalehi & Jahanyan, 2009).

Significance of the study

Firms are sportively working for the benefits of the stakeholders; they are
integrated well when they are rewarded and compensated. Therefore, among
them the role of the shareholders is motivational and value added to respond to
the financial well-being of the firm and shareholders. The purpose of this study
manifests the moderating role of intellectual capital between corporate social
responsibility and the Firm Performance in the presence of growth
opportunities. Secondly, corporate social responsibility is used as independent
variables and it is hypothesized that this variable can effect this relationship.
This study will encompass all major 300 Non-Financial Firms listed on Pakistan
Stock Exchange covering period’s w. e. f 2011 to 2020, adding more literature
in this field.
 Problem statement
The role of Intellectual Capital and corporate social responsibility are sound and
effective from financial policy point of view when shareholders are interested
primarily for their investment decisions to raise the capital in form of cash of
the firm. In addition, financial policies influence investment decisions to retain
capital and attract financially sound investors in current and future times. This
research is supportive to understand the moderating role of intellectual capital
on the relationship between corporate social responsibility and performance of
the firm and whether it can affect this relationship in either way.
This study has utilized the secondary data published by State Bank of Pakistan
in the shape of Balance Sheet, Analysis of financial sectors for the period of
2011 to 2020 with the sample size consisting of 300 companies. Panel data
models have been applied to examine the impact of Intellectual capital on firm
performance in the presence of corporate social responsibilities ’activities.
Mainly it has focused on using three performance measures i.e. Tobin’s Q,
Return on Asset and Return on Equity as dependent variables while the
moderating Variable is intellectual capital and the control variable includes
Financial Leverage, firm size, Age and Liquidity.
Objectives of the study
This study focused on the following main objectives;

1. To observe the Impact of corporate social responsibility on Firm Performance.

2. To examine the moderating role of intellectual capital between corporate social
responsibility and firms’ performance.
3. To investigate the impact of Financial Leverage, Firm size, Firm Age and
Liquidity with Firm Performance.

Therefore, the objectives this study are three folds: Firstly, this study examines
the moderating effect of intellectual capital between corporate social
responsibility and Firm Performance. Secondly, impact of Intellectual Capital
on firm’s performance at the presence or absence of growth opportunities.
Thirdly, this study also seeks to examine whether or not the other factors like
size, Age and Liquidity provide any additional explanation for firm’s
performance for similar scenario beyond traditional belief
 Theoretical Framework

Independent
Variables:
Dependent
Corporate social
responsibility Variable

Control Firm
Variables: Performance

Size ROA

Age Intellectual capital ROE

Liquidity Tobin’s Q
(Moderator)

Research Methodology

Data and Sample

The purpose of this study is to examine the effect of corporate social
responsibility on performance of the firms with moderating role of Intellectual
capital. In this study, we have collected data of 300 non-financial firms listed in
PSX during 2011-2020. We have selected these observations from year 2011
because data of year 2009-2010 show non normalized results due to worldwide
financial crisis of year 2008-09 on economy. The data utilized in this study is
secondary data .We have gathered data of all non-financial firms listed in PSX
but we exclude firms during sample periods as (1) firms delisted, (2) firms
merged and demerged, (3) firms notified as defaulters and suspended by PSX,
(4) new listing of initial public offerings (IPOs), and (5) firms having
incomplete information of all required variables. We have collected variable
data by studying annual reports, financial reports of each company. The data
was also collected from Pakistan stock exchange data stream.
Variables Measurement

The variables used in this research are classified into four parts as (1) dependent
variables, (2) independent variables, and (3) control variables (4) Moderator.
Dependent variables
Firm Performance
Firm performance (FP) has been taken as dependent variable and is measured
through two methods. One is market based called as Tobin’s Q and the second
one is accounting based measures called as return on assets and return on
equity.
Tobin’s Q (TQ):
It is calculated through formula (Market value of Equity+ book value of Debt) /
(Book value of total asset). Return on assets (ROA) was calculated as net
income divided by total assets.

Where MVE represents market value of equity, BVD represents the book value
of debt and BVTA represents book value of total assets.
TQ = Firm Value
MVE = Market Value of Equity = Outstanding Shares * Share Price
BVD = Book Value of Debt = Total Debt
BVTA = Book Value of Total Assets = Total assets
Return on Assets (ROA)
Return on assets is the dependent variable that shows the relationship between
firm profit and its assts. It shows how much a firm gain profit from its assets.
The same measure technique uses by (Long, Burton, & Cardinal, 2002) and
(Najam-ul-Arifeen, Kazmi, Mubin, Latif, & Qadri, 2014) on their study. The
ROA ratio is computed as follows:

Return on Equity (ROE)

Another dependent variable return on equity that is used to measure profitability
it also shows the relationship between net profit and the value of shareholder
equity.(William & Beaver, 2012) and (Kabajeh, Al Nu’aimat, & Dahmash,
2012) show that return on equity is important technique to measure company
profitability and same ratio is used in their study. R.O.E is determined as the
income before interest expense for the particular time period divided by total
shareholders’ equity as well as he same time.
ROE = Net Income / Total Shareholder’s Equity

Independent variables
Corporate Social responsibility
Corporate social responsibility has been calculated from following formula by
using financial reports of the firm.

Moderating variable
Intellectual Capital:
The independent variable (Intellectual Capital) have been measured using
Human Capital Efficiency (HCE), Structural Capital Efficiency (SCE) and
Capital Employed Efficiency(CEE) in order to measure the value of intellectual
capital, the efficiency of IC can be measured using VAIC method following
previous studies (Celenza, 2014; Singh et al., 2016; Inkinen, 2015 and
Nimtrakoon, 2015, Sarea & Alansari, 2016)
Variable Formula
Value added (VA) Operating profit + employee cost +
Depreciation + Amortization
Capital employed (CE) Total Asset - Total Current Liabilities
Human capital (HC) Total costs invested on employees
Structural capital (SC) Value added (VA) – human capital (HC)
Human Capital Efficiency HCE = VA / HC
(HCE)
Structural Capital Efficiency SCE = SC / VA
(SCE)
Capital Employed CEE = VA / CE
Efficiency (CEE)
Value Added Intellectual VAIC = HCE + SCE + CEE
Capital (VAIC)

Control variables
Financial Leverage
Debt to Equity Ratio

Debt to equity ratio is very important ratio to measure the financial leverage.
This ratio shows that how much companies use debts to operate its financial
activates. It also shows the relationship of debts and the value of equity. Debt
equity ratio used by (Tugas, 2012), (Opter Tim, 2009) and (Vale, 2011) under
their studies.
The more debt financing is uses by an organization, the more its financial
leverage. Its mean a high amount of financial leverage has a high interest
payment, which negatively impact on the firm performance.

Size
It is equal to the natural logarithm of total company assets at the end of the
fiscal year (Pattiruhu & PAAIS, 2020); (Krisnawati, 2019) and was calculated
by taking log of total assets. Firm size is normally used as a proxy for
competitive position and firms’ advantage within an industry (Johnson et al.,
1997). The size of the company in this study is expressed by total assets, the
greater the total assets of the company will be the greater the size of the
company. The greater the asset, the more capital invested. Company size can be
seen from total assets owned by the company (Suharli, 2006). Company size is
assessed by log of total assets. Log of Total Assets is used to reduce the
significant difference between the size of the company that is too large and the
size of the company that is too small, then the total value of the asset is formed
into natural logarithm, conversion of natural logarithm form aims to make the
data of total assets distributed normally. Company size is measured using the
natural log of total assets.
Age:
It is the difference between the year in which the firm starts and the year in
which the firm exists in the sample (Muritala, 2012); (Hunjra et al., 2014). This
control variable is measured by the natural Logarithm of the year of study
undertaken minus the year the company stands, and is given the AGE symbol.

Liquidity:
Liquidity of a company typically refers to a company’s ability to use its current
assets to meet its current or short term liabilities. It is determined by Current
Ratio which is calculated by dividing current assets to current liabilities to the
total assets of the company at the end of the fiscal year (Rumasukun, Noch,
Pattiasina, Ikhsan, & Batilmurik, 2020); (Marjohan & Arsid, 2020).

This research study has been an attempt to test that whether Pakistani Financial
firms are in favor of making dividend policy that is either supporting the
payment of dividends to the shareholders or retaining this amount for future
investment and also how it affects the association between Intellectual capital,
financial leverage and firm performance. The moderating role of dividend
policy has been checked to see whether backing and revising dividend policy,
the firms’ performance has been affected or it remained the same.

Mode of Analysis:
The following financial performance ratios are used.
Tabular Summary of Definitions of variables.
Study issue Variables Symbol Definitions References
Firms Return on ROA Net income Afza et al.
‘Financial Assets Available to (2008);
Performance Common Iqbal et al.
Shareholders/Book (2012)
value of assets
(Dependent Return on ROE Net Afza et al.
Variables) Equity income/Shareholders (2008);
equity Iqbal et al.
 (2012)
Tobin’s Q TQ The market value of Wernerfelt
equity plus book (1997);
value of Afza et al.
liabilities divided by (2008)
book value of Assets

Independent Corporate CSR

Variables social
responsibility
Moderating Intellectual IC VAIC=SCE+HCE+C Pulic (1998,
Variable Capital EE: 2000)
(Structural Capital
Efficiency+ Human
capital
Efficiency + Capital
Employed
Efficiently)
Control Financial FL Total Debt / total (Tugas,
variable Leverage equity 2012)
Size SIZE Natural Log of Total Hunjra et al.
Assets (2014)
Age AGE Difference between Muritala
the year in which the (2012);
firm starts Hunjra et al.
and the year in which (2014)
the firm exists in the
sample

Liquidity LIQ Ratio of the Rumasukun

difference between et al., 2020
current assets and
current liabilities to
the total assets

Econometric model
The study used panel data regression analysis by using the data of all 300 Non-
Financial firms listed on PSE for the years 2011 to 2020. This study has
checked for the impact of corporate social responsibility on the performance of
the firm with intellectual capital as a moderating variable. The study uses
corporate social responsibility and Intellectual Capital to describe performance
of the firm through accounting and market base. The control variables consist of
size and Age and Liquidity.
The panel data methodology is used for estimation. We have utilized hierarchal
regression analysis to analyze the regression moderation.
We use the following equations to analyze the results:

Market Based Performance Measure

Accounting Based Performance Measures

Where α, is constant, β1, β2, β3, β4, β5,β6,β7, are coefficients of variables, ε is
error term.

i = is the cross sectional unit

t = is the time period
ROA it = Return on asset
ROE it = Return on Equity
TQ it = stands for Tobin’s Q
HCE it = stands for Human Capital Efficiency
SCE it = stands for Structural Capital Efficiency
CCE it = stands for Capital Employed Efficiency
FL it = refers to Financial Leverage
FR it = refers to Firm Reputation
SIZE it = refers to firm size
AGE it = stands for Age
LIQ it = refers to Liquidity
ε it = is the error term

We use descriptive statistics to check the normality of data and correlation is

used to check the Multi-col linearity. We apply the Generalized Method of
Moments (GMM), as this method performs consistent parameter estimation for
the small time period and for a large cross-section. The GMM estimators enable
asymptotically efficient inferences employing a relatively minimal set of
assumptions (Arellano & Bond, 1991); (Blundell & Bond, 1998). We deal with
the unobserved heterogeneity by applying a fixed effect or by taking the first or
second difference. We have used hierarchal regression model for analyze the
impact of independent variables on dependent variables.