CEO Ability, Career Concerns, Firms' Lifecycle and Investments in

International Review of Economics and Finance 75 (2021) 237–251
Contents lists available at ScienceDirect
International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref
CEO ability, career concerns, firms’ lifecycle and investments in

intellectual capital
Muhammad Nadeem a, *, Rashid Zaman b, Tahir Suleman a, Nader Atawnah b
a
Otago Business School, University of Otago, New Zealand
b
School of Business and Law, Edith Cowan University, Australia
A R T I C L E I N F O A B S T R A C T
Keywords: We argue that the managerial ability of CEOs facing different career concerns can explain significant
CEO ability variation in firms’ investments in intellectual capital (IC), an important corporate strategic decision,
Intellectual capital and the driver of competitive advantage. Under the umbrella of Resource Based Theory, using a
Career concerns
large sample of US firms, we find that CEOs’ managerial ability has a significant positive relation
Resource-based view
Firm lifecycle
with investments in human, innovation and relational capital. This relationship is weaker when
CEOs actually face lower career concerns. Furthermore, the relationship is less (more) pronounced in
firms at the introduction (decline) stage of their lifecycle. Our results are robust to a range of sub-
samples, alternative variable definitions and model specifications. The findings are important for
firms embarking on building IC stocks, essential for firm’s survival in the knowledge-economy era.
1. Introduction
The consequences/outcomes of intellectual capital (IC) are well established in the existing IC literature, however, what is less known
are its “antecedents”. Knowledge of these antecedents is equally as important as the outcomes of IC. Firms’ continuous commitment to
invest in and to tolerate early failures of long-term and uncertain-payoff projects, such as research and development (R&D), is para-
mount to the accumulation of IC stocks. To date, a handful of studies in the literature have investigated the determinants of investments
in IC. These studies, however, either focus only on firm-level determinants (see Arrighetti, Landini, and Lasagni (2014), among others),
or one component of IC (for example, Brown, Fazzari, and Petersen (2009) for the case of R&D; Gourio and Rudanko (2014), for
customer capital). The personal attributes of top management, in general, and CEOs in particular, involved in allocating corporate
resources have been less investigated in the literature. CEO’s personal characteristics, apart from demographic attributes, also play an
important role in firms’ strategic investment decisions (Korkeam€aki, Liljeblom and Pasternack, 2017). The only study looking at CEO
characteristics and IC investments is by Barker III and Mueller (2002), who also focus only on (1) CEO demographic attributes, such as
age, education and tenure, and (2) single IC component, that is, R&D. Therefore, CEO managerial ability, an important executive
characteristic, and other components of IC, such as human and relational capital, have been largely overlooked in prior studies – given
the fact that IC builds competitive advantage for firms.1
* Corresponding author
E-mail address: Muhammad.Nadeem@otago.ac.nz (M. Nadeem).
1
It is important here to distinguish between the two streams of literature: (a) studies looking at the consequences/outcomes of IC, and (b) studies
looking at antecedents/determinants of IC. Most of the prior studies focus on the former – even studies that focus on CEO managerial ability. For
example, Chen et al. (2015) investigate the relationship between CEO ability and corporate innovation (a consequence of IC). The focus of our study
is on the latter, as we argue that knowing what leads firms to invest in IC is paramount to the accumulation of IC stocks, that then yields fruits for
firms.
https://doi.org/10.1016/j.iref.2021.04.023
Received 25 November 2019; Received in revised form 7 December 2020; Accepted 12 April 2021
Available online 16 April 2021
1059-0560/© 2021 Elsevier Inc. All rights reserved.
M. Nadeem et al. International Review of Economics and Finance 75 (2021) 237–251
We examine the relation between CEOs’ managerial ability and firms’ propensity to invest in IC. We posit that corporate executives,
facing different career concerns, have significant influence over a firm’s strategic decisions (Yuan, Tian, Lu, & Yu, 2017), and they could
also affect the firms’ decisions concerning IC investments. Previous literature has established that there exists heterogeneity in the ways
CEOs react to different situations based on their managerial ability. For example, Koester, Shevlin, and Wangerin (2016) find that CEOs
of higher managerial ability are involved more in tax avoidance,2 whereas Demerjian, Lev, Lewis, and McVay (2012) associate higher
managerial ability with higher earnings quality. Yuan et al. (2017) report that higher-ability CEOs tend to make higher investments in
corporate social responsibility (CSR).3 Further, Cheung, Naidu, Navissi, and Ranjeeni (2017) find that higher managerial ability results
in improved firm performance in the presence of effective monitoring mechanisms.4
In line with the aforementioned discussion, we posit that firms, run by CEOs of varying managerial ability and facing different career
concerns, will show strong heterogeneity concerning their propensity to invest in IC. The rationale behind is that, since investments in IC
are uncertain and yield benefits in the long run, CEOs with varying competency levels (and facing dissimilar career concerns) will show
different patterns with regards to investments in IC. For example, investments in IC are uncertain because a firm cannot retain a certain
type of IC, such as human capital (we define and explain different types of IC in the following section), when individuals leave the firm.
Investments in R&D might be uncertain, as the new product or design may not achieve the desired level of success in the market.
Similarly, investments towards building a strong customer base is vital for firms, yet the uncertainty cannot be fully avoided in the
presence of strong competition and ever-changing consumer preferences. Therefore, we expect that CEOs with different competency
levels and varying objectives will have different strategies for investments in IC components. However, since IC has become the major
source of innovation and competitive advantage for firms in the recent past (Nadeem, Dumay, & Massaro, 2019), it is therefore
indispensable for firms to develop and accumulate IC capital stocks.
Using a large sample of US firms, and employing the CEO ABILITY measure by Demerjian, Lev, and McVay (2012), we find that CEO
ABILITY has a significant positive relation with investments in all three components of IC, namely human (HC), innovation (INVC) and
relational (RC) capital. This relationship is weaker (stronger) when CEOs face higher (lower) career concerns. Furthermore, the rela-
tionship is less (more) pronounced in firms at the introduction (decline) stage of their lifecycle. Our results still stand when we exclude
the knowledge-based industries (KBIs), as well as when we drop Silicon Valley firms from our sample. Finally, the results are robust to
alternative variable definitions and model specifications.
We make at least three contributions to the literature. First, we concur that CEO managerial ability explains significant variations in
firm-level policies concerning IC investments. Furthermore, this ability-IC investment relationship is moderated by varying CEO career
concerns. This could be an important implication for firms while formulating IC investment policies. Second, we find that the ability-IC
investment relationship varies at different stages of firms’ lifecycle. Firms at the introduction and decline/shakeout stages could
particularly focus on the managerial capabilities and career concerns during the CEO appointment process. Third, unlike prior studies,
we expand our understanding of this field by focusing on CEO ability, along with other CEO attributes, and all three components of IC,
thereby providing a comprehensive study in the area of CEO attributes and firms’ propensity concerning IC investments.
The remainder of the paper is as follows. We explain the importance of IC, establish the CEO ability and IC link and present our
hypotheses in section 2. The methodology, data and variable measures are presented in section 3. Section 4 presents the discussion of
our main results, and section 5 presents conclusions and directions for future research.
2. Literature and hypotheses
In this section, we discuss the concept, importance, definitions and different components of IC. We then discuss CEO managerial
ability and the link between CEO ability and investments in IC.
2.1. Intellectual capital: Importance and concept
The emergence of the knowledge-based economy has been attributed to the predominance of what is known as “intellectual capital”
as a key source of competitive advantage for modern firms (Dean & Kretschmer, 2007; Lin, Lee, Chao, & Liu, 2015; Nadeem, Gan, &
Nguyen, 2018a). In fact, under the resource-based view, IC has become an important factor of production – replacing the traditional
land, labour and capital (Barney, 2001). The seminal work by Edvinsson (1997) highlights the existence of IC through the gap between
the market and book value of US firms. Other contemporary works (Bontis, 1996; Edvinsson & Malone, 1997; Teece, 1998) equally
contributed towards realizing the concept of IC and developing IC measurement tools. The first decade of the 21st century saw some
remarkable breakthroughs in the IC field in the growth of specialized journals, such as the Journal of Intellectual Capital and R&D
Management.5
2
The underlying assumption is that executives with greater ability to manage resources efficiently can (a) minimize cost, (b) identify and exploit
tax planning opportunities and (c) can invest in tax crediting activities such as R&D to save money on taxes (Koester et al., 2016).
3
The underlying assumption is that, since CSR activities benefit firms in the long run and higher-ability CEOs are not worried about the short-run
outcomes, higher-ability CEOs can afford to invest in uncertain and long-term activities.
4
CEOs’ managerial ability also has risk and return implications for investors. For example, Mishra (2014) finds that investors require higher
returns from firms run by higher-capability CEOs due to their different risk-taking abilities.
5
Abeysekera and Guthrie (2004) provide an in-depth commentary on the evolutionary stages of IC, and Dean and Kretschmer (2007) provide a
comprehensive review of prominent articles on IC published in leading journals.
238
The resource-based view of firms is considered to be among the pioneers that highlighted the importance of IC along with tangible
assets necessary for firms’ competitive advantage. Since then, however, the balance between tangible and intangible assets has moved
towards IC (Reed, Lubatkin, & Srinivasan, 2006). The rationale behind this is that since physical assets, such as plant, machinery and
financial assets, are generic and can be substituted at any time by any firm, firms’ competitiveness rather should be built upon rare and
inimitable intellectual resources. Moreover, unlike physical assets that depreciate over time, IC is a firm’s only appreciable asset (Ulrich,
1998). A similar argument is presented by Youndt, Subramaniam, and Snell (2004), that it is only IC that contributes significantly
towards value creation and hence builds a sustainable competitive advantage for the firms in the knowledge economy era. In sum, these
studies emphasize the importance of the accumulation and exploitation of intellectual capital which is necessary for long-term survival.
Despite the importance of and the groundbreaking developments in the IC field, there exists heterogeneity among leading scholars
on the way IC is defined. Brooking and Motta (1996) for example, define IC as the combination of intangibles that allow firms to operate.
According to Bontis (1996), the difference between the market value and book value of the firm is known as IC. IC is also the knowledge,
information, intellectual property and expertise, etc., which can be used to create wealth by the organisation (Stewart & Ruckdeschel,
1998).
Similar to its different definitions, IC is divided into different components by different authors. For example, Edvinsson and Malone
(1997) divide IC into two components, namely human (HC) and structural capital (SC), where former is the sum of knowledge created by
the employees and the latter consists of a unique production process and other supportive infrastructure. They later divide SC into two
sub-components, namely organizational capital (knowledge created and stored in a firm’s information technology) and customer capital
(a firm’s relationship with its customers). Teece (2000) extends the scope of IC to include other intangibles, such as brands, reputation
and customer relationships. Moreover, multiple methods to measure IC have evolved over time, and scholars are yet to reach a consensus
on which method is better and why. Nonetheless, in this study, we follow the prominent IC scholars Youndt et al. (2004) to define and
categorize IC into three components, namely human, innovation and relational capital. We provide a brief explanation, definition and
measure around each of these three IC components in Appendix A.
2.2. Determinants of intellectual capital
It is widely accepted that intellectual capital forms the basis for firms’ competitive advantage and innovation (Nadeem, 2020);
however, what is less-known are its “antecedents”. The latter is particularly important because firms demonstrate strong heterogeneity
in their investments in intangibles (Arrighettiet al., 2014). Although it is well documented that IC is becoming a critical source of
competitive advantage (Barney, 2001) and that firms’ value creation focus is transferred from physical-asset-based to knowledge-based
factors of production (Tsai & Ghoshal, 1998), only a little attention is paid to what actually leads firms to make investments in IC
(Arrighettiet al., 2014). One possible reason is that studies in the field of IC consider the levels of IC as an explanatory variable rather
than as a variable to be explained. For example, a strand of literature relates IC with firm performance; more precisely, it tries to
highlight the importance of IC for firm performance and competitive advantage (see for example, Nahapiet and Ghoshal (1998)).
However, from the viewpoint of owners/investors and policy makers, it is crucial to understand what determines a firms’ propensity to
invest in intangibles.
To date, only a handful of studies have investigated the determinants of IC, and these too focus mainly on firm-level financial de-
terminants. For example, Arrighetti et al. (2014) study the factors affecting firms’ propensity to invest in intangibles in Italian firms and
find that firm size and historical intangible base are important factors that determine firms’ investments in IC. Firms’ industrial clas-
sification also plays an important role in determining its IC levels. Klock and Megna (2000), for example, find that the market of the firm,
capturing the importance of IC, is more pronounced in innovative industries compared with traditional industries. Therefore, the role of
top-management characteristics in general, and CEO ability in particular, in determining investments in IC have been largely over-
looked. The study closest to ours is by Barker III and Mueller (2002), who investigate the impact of CEO characteristics on firms’ R&D
spending. Their study is also different from ours in at least two ways: first, Barker III and Mueller (2002) focus on CEOs’ demographic
characteristics, such as age, tenure, education, etc., whereas we focus on CEOs’ managerial ability6 alongside CEO demographic
characteristics. Second, Barker III and Mueller (2002) focus only on R&D as their dependent variable and hence do not capture other,
equally important, dimensions of IC, such as human and relational capital. Nonetheless, their results show that younger CEOs and CEOs
with significant experience in marketing and engineering invest more in R&D and so do CEOs with longer tenure; education had no
impact on R&D spending. Chen, Podolski, and Veeraraghavan (2015) investigate the impact of CEO managerial ability on firms’
innovative success – a consequence/output of IC. They found a positive relationship between CEO managerial ability and firms’
innovative output, but this relationship is weaker for older and longer-tenured CEOs. Nonetheless, the CEO ability and IC link is missing
in the literature.
We next explain the potential influence CEO ability may have on firms’ propensity to invest in IC.
2.3. CEO Ability–IC investments link: Hypotheses development
CEOs demonstrate robust heterogeneous abilities, and firm performance provides a strong signal of CEOs’ managerial ability
(Bertrand & Schoar, 2003; Gabaix & Landier, 2008). Bertrand and Schoar (2003) study the corporate strategic implications of CEOs’
6
We explain in the following section how the measure of CEO managerial ability is different and more useful compared with CEO personal
characteristics.
239
education and find that CEOs with an MBA degree appear to be more aggressive in corporate strategies; that is, they engage more in
capital expenditures, hold higher debt levels and pay fewer dividends. Similarly, Chemmanur and Paeglis (2005) report that
higher-calibre managers perform better during and after initial public offerings (IPO), suggesting that managers that are more
competent convey to the market the intrinsic value of the firm more credibly compared with their less-competent counterparts. Kaplan,
Klebanov, and Sorensen (2012) study post-merger performance implications of CEOs’ general ability and find that subsequent per-
formance is significantly and positively related to CEOs’ general ability. Koester et al. (2016) find that CEOs of higher managerial ability
are involved more in tax avoidance. The underlying assumption is that executives with a higher ability to manage resources efficiently
can (a) minimize cost; (b) identify and exploit tax planning opportunities; and (c) can invest in tax crediting activities, such as R&D, to
save money on taxes (Koester et al., 2016). CEOs’ managerial ability also has risk and return implications for investors. For example,
Mishra (2014) finds that investors require higher returns from firms run by higher-capability CEOs due to their different risk-taking
abilities.
The existing literature suggests that a CEO’s managerial ability represents the most valuable ability of a CEO in affecting firm
performance (Kor& Mesko, 2013; Milbourn, 2003; Rajgopal, Shevlin, & Zamora, 2006), post-issue performance on IPOs (Gounopoulos
and Pham, 2018), and is also closely associated with a CEO’s career prospects. For example, CEOs with greater managerial ability
generally have fewer career concerns because (a) they are well demanded by other firms, (b) more likely to receive higher wages, (c)
obtain a better labour market assessment and (d) gain a better reputation for effectively running firms’ operations (Ali & Zhang, 2015;
Fee & Hadlock, 2003). Conversely, a negative labour market assessment of a CEO’s managerial ability can adversely affect his or her
career prospects, future compensation and, at worst, cause dismissal (Fama, 1980). For example, Fee and Hadlock (2003) posit that
CEOs in firms with higher returns have higher chances of being hired away by other firms and, perhaps, at higher wages, whereas CEOs
with poor performance are more likely to be replaced (Hermalin& Weisbach, 2012; Zhang, 2008) and are less likely to be selected as
outside board directors (Kaplan & Reishus, 1990).
Studies also posit that managers’ career concerns can have a strong influence on corporate investment decisions; that is, career-
concerned CEOs tend to prefer short-term projects with immediate payoffs over long-term investments with uncertain payoffs, as
this can send a quick signal of their superior skills to the market (Jin & Kogan, 2008; Narayanan, 1985). The underlying assumption is
that CEOs are concerned about how they are assessed in the labour market, and this pressure could make them short-term focused, more
risk-averse and less willing to invest in long-term projects with uncertain payoffs. In this regard, Graham, Harvey, and Rajgopal (2005)
survey reports that executives do care deeply about their career prospects and that the fear of negative market assessment, if they fail to
meet short-term targets, makes them cut long-term investments, especially if the investments come with uncertain payoffs. Porter
(1992) argues that managers may cut long-term investments, R&D, advertising and employee expenditures to meet short-term per-
formance targets. More recently, He and Tian (2014) concluded that the pressure of meeting short-term goals leads to lower firm in-
vestments in innovation.
The foregoing discussion leads us to posit that CEO ability could be an important determinant of firms’ investments in IC resources.
The underlying assumption of our argument is that since investments in intellectual resources are both long-term and uncertain, CEOs
may show heterogeneity in their strategic decisions regarding investing in IC. Spending in intellectual resources is an investment that the
top executives have discretion to control in firms, as argued by Barker III and Mueller (2002), and, therefore, CEOs can exercise these
options opportunistically. In other words, career-concerned CEOs with low managerial ability can divert these funds towards short-term
and less risky investments to avoid future scrutiny of their performance. Furthermore, IC investments are typically long-term in nature
with uncertain payoffs (Nam, Ottoo, & Thornton Jr, 2003). For example, spending on human capital may take a longer time to develop
their skills and knowledge, but they may leave the firm at any time and choose other firms with competitive packages (Harrison &
Wicks, 2013), taking the skills and knowledge with them. Similarly, R&D (INVC) spending is a long-term investment with high failure
rates (Bertrand & Mullainathan, 2003). In this regard, Nam, Ottoo, and Thornton (2003) argue that since R&D projects are often
firm-specific investments with uncertain payoffs, and are more costly for external investors to monitor, risk-averse executives might cut,
or at least delay, these investments. Finally, spending on relational capital, particularly on customers, can take a long time to show
results, and building a firm’s image still has uncertain payoffs given the high competition in the market (Harrison & Wicks, 2013). Taken
together, career-concerned CEOs with low managerial ability would avoid or at least delay IC investments, whereas CEO with high
managerial ability would be less hesitant about these investments, as they are both less career-concerned and have higher ability to
convert investments into returns. Thus, the afore-mentioned arguments lead us to hypothesize the following relationship:
Hypothesis 1. The CEO ability is positively associated with IC investments.
One of our basic arguments is that more-able CEOs would make higher investments in intellectual capital, as higher-ability reduces
career concerns. If this argument is reasonable, we can expect that when CEO career concerns are actually low (due to other factors) then
the link between CEO ability and IC investments will be less strong since then also low ability CEOs may behave in the same way i.e.,
make higher IC investments. This is consistent with prior studies (e.g., Yuan et al., 2017) that document a weak link between CEO ability
and investment decisions when CEOs actually face fewer concerns i.e., (1) when a CEO is also the chairperson, (2) when CEOs are close
to retirement, and (3) when CEOs serve longer in their positions with the same organisation. The rationale behind is that a CEO
dual-leadership increases CEO power which allows them to have greater influence on strategic decision-making (Chao, Hu, Munir, & Li,
2017; Krause, Semadeni, & Cannella Jr, 2014). Similarly, CEOs close to their retirement have less appetite for convincing the market of
their superior ability in quicker time. This is also consistent with Li, Low and Makhija (2017) who report that younger CEOs are more
likely to enter new lines of businesses, undertake bolder expansions and prefer to grow through acquisitions. Taken together, we expect
that when CEOs face fewer career concerns then the link between CEO ability and IC investments is less strong. Thus, our next hy-
pothesis is as follows:
240
Hypothesis 2. The CEO ability-IC investments relationship is less pronounced when CEOs face fewer career concerns.
2.4. Firm lifecycle perspective
It is well established in the literature that a firm’s financial policies follow an expected pattern over the different stages of the firm’s
lifecycle (Faff, Kwok, Podolski, & Wong, 2016; Porter, 2008), due to distinct capacities and resources. For example, Porter (2008) argues
that firms move from one phase to another of the lifecycle following their distinct structures, strengths and weaknesses. As a result, a
firm’s policies, such as dividend payout, equity offering, merger and acquisition, cash flow patterns and financial policies, follow this
lifecycle (DeAngelo, DeAngelo, & Stulz, 2006; Dickinson, 2011; Faff et al., 2016; Owen & Yawson, 2010). For example, Richardson
(2006) argues that firms in the introduction and growth stages of their lifecycle make higher investments, whereas mature firms focus on
maintaining their assets. Faff et al. (2016) argue that younger firms face limited access to the capital market owing to a lack of reputation
among fund providers. In a most recent study, Hasan (2018) conclude that firms making higher (lower) investments in organisational
capital are more likely to be in the introduction and decline (growth and maturity) stages of their lifecycle.
The foregoing discussion suggest that the CEO ability and IC investments relation will vary significantly among firms at different
stages of their lifecycle for at least two reasons. First, as CEOs would face different career concerns at the different stages of firms’
lifecycle, more-able CEOs would behave differently compared to their less-able counterparts. For instance, CEOs in younger firms are
more likely to be concerned about their career prospects; thus, the managerial ability of CEOs is more likely to play a significant role in
their decisions regarding IC investments. Second, as discussed above, firms at different stages of their lifecycle face varying levels of
access to the capital market, more-able CEOs will behave differently compared with their less-able counterparts when firms face limited
access to financial resources. Thus, in light of the above-mentioned arguments, our next hypothesis is as follows:
Hypothesis 3. The CEO ability and IC investments relation varies with a firm’s lifecycle.
3. Methodology
To examine the hypotheses of this study concerning CEO ability and other characteristics and firms’ IC investments, we rely on US
firms for the period between 2000 and 2015. Our sample was drawn from multiple databases. We obtained firms’ financial data from the
Compustat and World Scope databases.7 The CEO-related data come from ExecuComp offering data on executive compensation. We also
employed the Thomson Reuter Asset4 database for board-level data. Since we rely on multiple sources, to be sampled in our study each
firm had to be present in all the databases used in the study. Therefore, we started off our screening process with all firms present in
Thomson Reuter Asset4. We merged this data, coming from multiple sources, using a combination of CUSIPs and GVKEY (security
identifiers). After deleting firms with missing values on IC components and financial firms, we were left with 6171 firm-years as the final
sample of this study.
3.1. Dependent variables
In line with the purpose of this study and the discussion around IC definitions in the preceding sections, our dependent variables are
three components of IC, namely human, innovation and relational capital. We now explain the rationale behind each measure. Youndt
et al. (2004) state that “organisations can either make or buy human capital”. That is, firms can make investments in their existing
employees through comprehensive training and the breadth of offerings and the like, to motivate and equip employees with necessary
knowledge and skills to perform the job. Further, paying above-market wages and providing employees with other incentives are
essential in attracting talented individuals from the market. Therefore, Nadeem et al. (2019) and Youndt et al. (2004) term human
resource investments as paramount towards building the human capital of organisations.8 As the scope of our study covers the de-
terminants of firms’ investments in IC, we follow the aforementioned studies and measure human capital (HC) as the total personnel
cost9 scaled by total assets in a given year.
The literature has long recognised R&D spending as the prime source of firms’ innovation/structural capital (Nadeemet al., 2019;
Peters & Taylor, 2017; Youndt et al., 2004). The rationale is that inventing new products, innovating in existing products and improving
techniques and processes of production are all aspects of a complex process, the end result of the R&D development activities of the firm.
Thus, following prior studies (Brown et al., 2009; Nadeem et al., 2019; Peters & Taylor, 2017; Subramaniam & Youndt, 2005; Youndt
et al., 2004), we measure innovation capital (INVC) as the total R&D spending scaled by total assets. Finally, our relational capital (RC)
measure is based on the work by Gourio and Rudanko (2014), who state that “firms spend substantial resources on marketing and
selling: marketing expenditures have recently been estimated to make up as much as 8% of GDP in the US”. The authors examine the
economic implications of selling, general and administration (SG&A) towards building and maintaining customer relationships. Thus,
we measure RC as total SG&A scaled by total assets.
7
We do this to obtain the maximum possible observations on our IC components.
8
See also Ballester, Livnat, and Sinha (2002) for a similar case.
9
This includes wages and salaries, social security, pension costs and other compensation packages and firms’ investments in human health capital
(Holland, 2017).
241
3.2. Independent variables
Our main independent variable is CEO ability (ABILITY). CEO ability is hard to measure, if not impossible, and, therefore, must be
inferred from observable outcomes of their resource allocation. We apply Demerjian, Lev, and McVay (2012b) CEO ability scores
(available online from their website) that capture the ability of an executive to transform corporate resources into revenue efficiently
compared with the firm’s industry competitors.10 This measure overcomes the conventional noise in many prior CEO ability measures
that cannot be attributed to CEO fixed effects (Yuan et al., 2017). Constructing this ABILITY measure is a two-step process. First, inputs
such as property, plant and equipment (PP&E) and inventories are used in data envelopment analysis (DEA) to obtain the optimal
weights of these inputs’ contribution towards the output (revenue) for each firm by industry-year. These weights are then multiplied by
corresponding input and output to obtain a ratio-based efficiency score for each firm in the same industry. This firm efficiency score
measures how efficiently a firm has used available resources compared to its industry peers. The rationale behind is that firms with
higher-ability CEOs would generate higher returns using the same resources compared with firms run by lower-ability CEOs. Since this
firm efficiency scores are attributable to both the CEO and firm-specific characteristics such as firm age, size etc. Demerjian, Lev, and
McVay (2012) then modify this firm efficiency measure by purging it of key firm-specific characteristics. The residual from this esti-
mation is considered as the CEO ability (see Demerjian, Lev, & McVay, 2012 for more details).
3.3. Control and moderating variables
Following previous studies (Baik, Farber, & Lee, 2011; Chen et al., 2015; Yuan et al., 2017), we control for several firm and
board-level variables. We include firm size (FSIZE), as larger firms might have more funds to invest in IC; market-to-book (M/B) ratio, as
it captures growth opportunities in the market; and leverage (LEV), as higher leverage might oppose firms making riskier investments
(Chen et al., 2015). We control for operating cash flows (OCF), as higher OCF might translate into higher investments in IC, and sales
growth (GROWTH). Cash dividend (DIV) is also controlled, as higher dividend payments might translate into lower investments in IC.
We control for board-level variables, namely board size (BSIZE), board independence (BINDE) and existence of compensation committee
(COMPCOMM). We also control for executive compensation components, namely CEO basic salary (CEO_SALARY), cash bonuses
(CEO_BONUS), stock awards (CEO_STOCKS), options awards (CEO_OPTIONS), total compensation (CEO_TOTAL_COMP) and if the CEO
pay is linked to shareholder returns (CEO_PAY_LINK), as the CEO pay structure can be used as an instrument by the shareholder to steer
investments into riskier and uncertain projects, and CEO gender (GENDER). All the variables, definitions and measures are summarized
in.Appendix B.
Our baseline model to examine the impact of ABILITY on investments in HC, INVC and RC is as follows:
IC (HC, INVC, RC) ¼ α0 þ β1ABILITYi,t þ β2CEO_SALARYi,t þ β3CEO_BONUSi,t þ β4CEO_STOCKSi,t þ β5CEO_OPTIONSi,t þβ6

CEO_TOTAL_COMPi,t þ β7CEO_PAY_LINKi,t þ β8 GENDERi,t þβ9 BSIZEi,t þβ10 BINDi,t þ β11COMPCOMMi,t þ β12FSIZEi,t þ β13LEVi,t þ
β14GROWTHi,t þ β15MBi,t þ β16OCFi,t þ β17DIVi,t þ YEAR þ INDUSTRY þ εi,t …. . (1)
3.4. Descriptive statistics
Panel A of Table 1 presents the descriptive statistics of our main variables. These statistics include mean, standard deviation, median
and values at the 25th and 75th percentiles. The average ABILITY score is 0.01 with a standard deviation of 0.07 and median of 0.02.
These ABILITY values are consistent with that of Demerjian, Lev, and McVay (2012) and Yuan et al. (2017). The mean (median) values of
HC, INVC and RC capitals (scaled by total assets) are 0.14 (0.08), 0.13 (0.12) and 0.04 (0.01), respectively. The descriptive statistics for
the other variables appear to be in reasonable ranges and are consistent with prior similar studies (Chen et al., 2015; Yuan et al., 2017).
We also present the univariate Pearson and Spearman correlations in Panel B of Table 1. The significant positive correlations be-
tween ABILITY and HC, INVC and RC motivate us to go for an empirical investigation. It is worth noting here that the correlations
between HC, INVC and RC are significantly higher, but since we include these variables separately in our empirical analysis, this does not
raise any issues whatsoever regarding multicollinearity issues.11
4. Main results
We examine the impact of ABILITY on firms’ propensity to invest in HC, INVC and RC capitals using our baseline model (1). Columns
(1) to (3) of Table 2 show the results of the ordinary least squares (OLS) estimation with control variables, year and industry fixed effects
to avoid any common trends over time and within industries. Columns (4) to (6) of Table 3 show results from fixed-effects (FE)12
estimation to control for unobserved heterogeneity.
10
Demerjian, Lev, and McVay (2012) CEO ability has been used both in accounting and finance research (see for example, Demerjian, Lev, Lewis,
and McVay (2012), Baik et al. (2011) and Andreou, Louca, and Petrou (2017), and in management research (Koester et al., 2016).
11
To rule out multicollinearity issues, we also calculate the variance inflation factors (VIFs) and note that the highest VIF of these (un-tabulated
results) in our data is not above 3.
12
We performed Housman test to decide between random effects and fixed effects estimation.
242
M. Nadeem et al.
Table 1
Descriptive statistics and correlation matrix.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
1
9
Panel A. Descriptive statistics
Mean 0.14 0.13 0.04 0.01 0.19 56.98 11.90 3.15 1.16 1.98 1.13 3.02 0.02 0.02 6.96 2.39 0.03 13.22 2.16 62.81 11.54 47.74 7.16
SD 0.86 0.07 0.87 0.07 0.39 7.94 17.65 3.18 2.50 3.18 2.51 3.88 0.13 0.13 2.22 13.80 0.17 2.09 20.38 95.34 2.05 35.20 4.91
25% 0.01 0.00 0.00 0.10 0.00 52.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.00 0.00 0.00 11.87 0.95 27.95 10.31 1.08 0.00
50% 0.08 0.12 0.01 0.02 0.00 57.00 7.08 3.30 0.00 0.00 0.00 0.00 0.00 0.00 7.01 0.00 0.00 13.05 1.48 84.97 11.42 6.30 9.04
75% 0.12 0.15 0.08 0.06 0.00 61.00 17.88 6.37 0.00 5.12 1.25 7.34 0.00 0.00 12.00 3.06 0.00 14.56 2.38 183.12 12.70 18.30 10.77
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Panel B. Correlation matrix
1 HC 0.03 0.60 0.25 0.08 0.11 0.07 0.13 0.03 0.11 0.10 0.14 0.09 0.05 0.15 0.14 0.14 0.26 0.19 ¡0.36 0.11 0.06 ¡0.17
2 INVC 0.01 0.30 0.03 0.03 ¡0.04 ¡0.04 ¡0.03 0.01 ¡0.03 0.02 ¡0.04 0.26 0.02 0.29 0.29 0.03 0.01 0.15 ¡0.18 0.01 0.04 ¡0.14
3 RC 0.97 0.10 0.22 0.09 0.13 0.10 0.14 0.05 0.12 0.11 0.16 0.13 0.02 0.19 0.19 0.19 0.31 0.22 ¡0.39 0.18 0.13 ¡0.18
4 ABILITY 0.13 0.05 0.03 0.02 ¡0.09 ¡0.08 ¡0.11 ¡0.06 ¡0.05 ¡0.06 ¡0.05 ¡0.05 0.00 ¡0.09 ¡0.08 ¡0.09 ¡0.12 ¡0.06 0.05 ¡0.05 0.01 0.13
5 DUALITY 0.01 0.02 0.00 0.05 0.37 0.26 0.43 0.09 0.38 0.30 0.20 0.20 0.01 0.25 0.24 0.24 0.09 0.16 0.03 0.13 ¡0.06 0.25
6 AGE 0.01 ¡0.06 0.01 0.00 0.35 0.46 0.34 0.34 0.06 0.44 0.42 0.12 0.08 0.16 0.15 0.16 0.27 0.19 ¡0.05 0.05 ¡0.07 0.35
7 TENURE 0.01 ¡0.04 0.00 0.03 0.14 0.46 0.08 0.34 0.35 0.30 0.05 0.06 0.01 0.10 0.09 0.10 0.40 0.24 0.01 0.37 0.01 0.28
¡0.06 0.02 0.36 0.90 0.42 0.40 0.20 0.47 0.08 0.16 0.09 0.21 0.21 0.21 0.22 0.21 0.01 0.06 ¡0.09 0.04
243
8 CEO_SALARY 0.02 0.00

9 CEO_BONUS 0.00 ¡0.03 0.01 ¡0.03 0.12 0.36 0.26 0.45 0.04 0.05 0.07 ¡0.03 0.01 ¡0.03 ¡0.03 ¡0.03 0.25 0.13 0.01 0.22 0.05 0.15
10 CEO_STOCKS 0.02 ¡0.04 0.01 0.01 0.39 0.63 0.18 0.33 0.04 0.24 0.09 0.16 0.13 0.18 0.18 0.17 0.04 0.08 ¡0.05 0.18 ¡0.08 0.27
11 CEO_OPTIONS 0.01 0.00 0.01 0.03 0.33 0.45 0.15 0.46 0.04 0.25 0.06 0.20 0.02 0.24 0.24 0.24 0.03 0.11 0.02 0.31 0.02 0.19
12 CEO_TOTAL_COMP 0.02 ¡0.04 0.01 0.03 0.39 0.09 0.26 0.17 0.07 0.42 0.06 0.18 0.12 0.23 0.23 0.23 0.05 0.11 ¡0.06 0.05 ¡0.08 0.29
13 CEO_PAY_LINK 0.02 0.04 0.02 0.05 0.20 0.12 0.02 0.13 ¡0.03 0.16 0.22 0.17 0.01 0.21 0.26 0.03 0.15 0.12 0.00 0.14 0.01 0.05
14 GENDER 0.01 0.02 0.00 0.00 0.01 0.10 ¡0.03 0.12 0.00 0.13 0.02 0.13 0.01 0.02 0.02 0.02 0.04 0.02 ¡0.04 0.03 0.01 0.01
15 BSIZE 0.03 0.06 0.03 0.01 0.25 0.15 0.04 0.17 ¡0.03 0.18 0.25 0.21 0.29 0.01 0.09 0.09 0.20 0.11 0.01 0.17 0.00 0.00
International Review of Economics and Finance 75 (2021) 237–251

16 BINDE 0.03 0.06 0.03 0.02 0.24 0.16 0.04 0.18 ¡0.03 0.19 0.27 0.21 0.28 0.02 0.06 0.08 0.20 0.11 0.01 0.17 0.00 0.00
17 COMPCOMM 0.03 0.06 0.04 0.01 0.24 0.15 0.04 0.18 ¡0.03 0.18 0.26 0.21 0.03 0.02 0.10 0.20 0.20 0.10 0.02 0.17 0.00 0.01
18 FSIZE 0.03 ¡0.28 0.00 0.01 0.48 0.48 0.20 0.26 0.27 0.41 0.34 0.04 0.15 0.04 0.20 0.19 0.19 0.19 0.07 0.09 ¡0.05 0.05
19 M/B 0.02 0.03 0.01 0.01 0.03 0.02 0.01 0.02 0.00 0.02 0.01 0.01 0.02 0.00 0.02 0.03 0.02 0.02 0.04 0.18 0.12 0.21
20 LEV 0.01 0.00 0.00 0.01 0.01 0.01 0.00 0.01 0.01 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.09 0.13 ¡0.07 0.24
21 OCF 0.01 ¡0.06 0.01 0.00 0.49 0.45 0.17 0.48 0.25 0.40 0.32 0.41 0.13 0.03 0.16 0.14 0.14 0.08 0.02 0.01 ¡0.07 0.26
22 GROWTH 0.00 0.00 0.00 0.00 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.01 ¡0.15
23 DIV ¡0.08 ¡0.16 ¡0.09 0.08 0.32 0.22 0.16 0.21 0.13 0.18 0.12 0.17 0.02 0.01 0.02 ¡0.04 ¡0.04 0.24 0.01 0.02 0.39 0.02
Pearson (Spearman) correlations are included below (above) the diagonal. Bold text indicates statistical significance at 5% level (two-sided) or lower.
Consistent with our prediction, we find a significant positive relationship between ABILITY and all three components of IC, namely
HC, INVC and RC, under both OLS and FE estimations. The coefficients on HC, INVC and RC are 0.666, 0.042 and 0.776, respectively,
and are significant at the 1% level, in OLS estimation. These results show that an increase in CEO ABILITY significantly increases in-
vestments in HC, INVC and RC capital, and it supports our main Hypothesis 1. We also run a quantile regression and (untabulated
results) note that increasing CEO ABILITY from the 25th percentile (0.10) to the 75th percentile (0.06) increases the values of HC,
INVC and RC capitals by 5%, 8% and 4% from their mean, respectively.13
The coefficients on control variables are also in line with our prediction and consistent with prior literature, except for an insig-
nificant relationship between sales GROWTH and RC capital. CEO_SALARY is negatively significant with HC and RC but positively
significant with INVC capital. Notably, CEO_STOCKS and CEO_OPTIONS are positively significant with INVC and RC capital. This is
consistent with recent CEO compensation legislation (Say on Pay) that shareholders might link CEO compensation to risks – alignment
of CEO interests to that of shareholders. In other words, when CEO compensation is linked to equity components (CEO_STOCKS and
CEO_OPTIONS), they tend to make higher investments in riskier projects to maximize their own wealth – and ultimately shareholders’
wealth.
To control for omitted variable bias, we re-run our baseline model using an FE estimator and the results are presented in columns (4)
to (6) of Table 2. Once again, our main variable CEO ABILITY is significant with HC (1%), INVC (10%) and RC (1%) capital. This suggests
that the findings reported previously are unlikely to be driven by omitted variables. Overall, the results in Table 2 support our main
hypothesis that higher-ability CEOs are associated with higher investments in IC.
4.1. CEO career concerns and IC investments
We have hypothesized earlier that if more-able CEOs, faced by low career concerns, are to make higher investments in IC then the
ability and IC relationship will be weaker when career concerns are low. We have also developed earlier that older, longer-serving CEOs
and CEOs who are chairs of the boards face lower career concerns. In this section, we test our Hypothesis 2 by including the moderating
role of CEO characteristics, namely DUALITY, AGE and TENURE by including the interaction terms (ABILITY*DUALITY, ABILITY*AGE
and ABILITY*TENURE). The results are presented in Table 3. Table 3 shows that all three interaction terms are negative for all three
components of IC, and significant with HC (at 1%, 1% and 10%, respectively) and RC (at 1%, 1% and 5%, respectively). These results
support our Hypothesis 2 that the ability and IC investment relationship is less strong when CEOs’ career concerns are low. This finding
further strengthen our main argument that the CEO ability is an important determinant of IC investments.
From the above results, we note that CEO characteristics have a significant impact on our dependent variables, and it is reasonable to
argue that ignoring these important control variables in our main results (Table 2) might create omitted variable bias. Furthermore, CEO
ABILITY by Demerjian, Lev, and McVay (2012), used in our baseline model (1), is a residual from a Tobit model which identifies the
firm-specific components of firm performance (Chen et al., 2015). As a residual, the ABILITY measure is subject to criticism that it may
also capture factors such as CEO characteristics and corporate culture that might affect firms’ investments in IC. Although we have
estimated our baseline model (1) using an FE estimator to control for omitted variable bias, we re-run our baseline model (1) after
including CEO characteristics (DUALITY, AGE and TENURE) as control variables. The results are presented in Table 4. The coefficients
on ABILITY for all three IC components HC, INVC and RC remain positive and significant (at 5% or less), meaning that our main results
(in Table 2) are not driven by omitted variable bias.
4.2. Ability and IC investments: Firm lifecycle perspective
We have established earlier that firms follow different (financial) policies at different stages of their lifecycle. We now examine the
moderating role of firm lifecycle on the relationship between ABILITY and IC investments. It is also pertinent to mention that due to
contrasting arguments in the hypotheses section, our Hypothesis 3 predicted that the relationship between CEO ABILITY and IC in-
vestments varies with a firm lifecycle. We follow Dickinson (2011) to classify our firms into different stages of a firm’s lifecycle.
Dickinson’s method of classification is based on net cash flow patterns, that is, cash flows from operations (OCF), cash flows from
investing activities (ICF) and cash flows from financing activities (FCF). Firms are classified into four stages of the lifecycle as follows:
Introduction: if OCF<0, ICF<0 and FCF>0
Growth: if OCF>0, ICF<0 and FCF>0
Maturity: if OCF>0, ICF<0 and FCF<0
Decline/Shakeout: if OCF<0, ICF>0 and FCF0 or 0
We use the interaction terms of ABILITY and each of these stages, that is, ABILITY*INTRODUCTION, ABILITY*GROWTH, ABIL-
ITY*MATURITY and ABILITY*DECLINE in our regression estimations. The results are reported in Table 5. In Table 5, the coefficients on
interaction terms between ABILITY and INTRODUCTION are negative (positive) for INVC and RC (HC) but significant (5%) only for
INVC. Similarly, the coefficients on ABILITY*DECLINE are positive for all three IC components but significant for HC (1%) and RC (1%).
13
We also ran our baseline model (1) by combining all three components of IC as a composite measure, and our results (untabulated) were
qualitatively the same as with individual components.
244
Table 2
The impact of CEO ability on IC investments.
OLS FE
HC INVC RC HC INVC RC
(1) (2) (3) (4) (5) (6)
ABILITY 0.666*** 0.042*** 0.776*** 0.431*** 0.011* 0.491***

(3.72) (3.22) (4.25) (5.84) (1.88) (5.96)
CEO_SALARY 0.019** 0.003*** 0.019** 0.018** 0.000 0.021*
(-2.10) (4.29) (-2.13) (-2.54) (0.29) (-1.71)
CEO_BONUS 0.000 0.001 0.002 0.002 0.000 0.002
(0.07) (1.45) (0.36) (0.21) (0.48) (0.26)
CEO_STOCKS 0.002 0.001*** 0.001** 0.002 0.011* 0.003
(0.27) (2.63) (2.12) (-0.28) (1.67) (2.32)**
CEO_OPTIONS 0.004 0.001*** 0.001* 0.004 0.001** 0.000**
(-0.61) (3.00) (1.90) (0.53) (2.13) (2.01)
CEO_TOTAL_COMP 0.001 0.002*** 0.005 0.001 0.000 0.003
(-0.14) (-3.45) (-0.51) (0.13) (0.22) (0.32)
CEO_PAY_LINK 0.002 0.007*** 0.039 0.024 0.004 0.057
(0.01) (2.76) (1.29) (0.14) (0.42) (0.32)
GENDER 0.033** 0.001 0.009 0.056** 0.000 0.049
(2.38) (-0.20) (0.10) (2.50) (0.02) (0.42)
BSIZE 0.006 0.002** 0.009 0.008 0.001 0.002
(0.24) (2.04) (0.36) (0.22) (0.59) (0.06)
BINDE 0.001 0.000 0.004 0.003 0.000 0.002
(-0.39) (-1.36) (-1.02) (-0.64) (-0.09) (-0.40)
COMPCOMM 0.054 0.040* 0.303 0.178 0.025 0.209
(0.17) (1.79) (0.96) (0.46) (1.22) (0.54)
FSIZE 0.013** 0.021*** 0.014* 0.042** 0.007*** 0.049**
(2.50) (3.33) (-1.66) (2.21) (6.58) (-2.54)
M/B 0.003*** 0.000*** 0.001 0.002* 0.000 0.000
(2.65) (4.01) (1.17) (1.82) (0.81) (0.02)
LEV 0.000** 0.000*** 0.000 0.000 0.000 0.000
(-2.50) (-3.42) (-0.96) (-1.57) (-0.76) (0.22)
OCF 0.012 0.014*** 0.007 0.009 0.001* 0.009
(-1.38) (21.22) (0.80) (0.79) (1.82) (0.70)
GROWTH 0.000 0.000 0.000 0.000 0.000 0.000
(-0.16) (-0.52) (-0.23) (-0.05) (-0.01) (-0.05)
DIV 0.006** 0.001*** 0.007*** 0.003 0.000 0.004
(-2.29) (-7.35) (-2.71) (0.55) (0.35) (0.76)
Constant 0.069 0.131*** 0.191* 0.601** 0.078*** 0.666***
(0.70) (18.45) (1.91) (2.55) (6.25) (2.77)
N 6171 6171 6171 6171 6171 6171
adj. R-sq 0.31 0.25 0.24 0.13 0.23 0.13
Industry Yes Yes Yes No No No
Year Yes Yes Yes Yes Yes Yes
This table reports OLS and Fixed-Effects (FE) estimation of the impact of ABILITY on HUMAN, INNOVATION and RELATIONAL capitals. See Appendix B
for variable definitions. Industry and Year effects were included in OLS and Year effects were included in FE estimations, respectively. The t statistics
are reported in parentheses and are based on robust standard errors corrected for heteroscedasticity and autocorrelation. *, **, *** represent sig-
nificance at 1%, 5% and 10% level, respectively.
Thus, consistent with our Hypothesis 3, the results indicate that the effects of CEO ABILITY on IC investments is pronounced differently
at different stages of firm’s lifecycle.
4.3. Robustness checks
In this section, we perform a number of additional analyses to ensure that our main results are robust to sub-samples, alternative
variable measures and model specifications.
4.3.1. Sub-samples
It is reasonable to argue that IC is more important for knowledge-based industries (KBIs), and hence our main results might have
been driven by those firms. We now check the robustness of our main results by dropping KBIs from our sample. We follow the definition
and industry classification for KBIs from the Industry Canada and Business Development Bank of Canada (IC-BDBC).14 According to IC-
BDBC, “Knowledge based firms are considered the backbone of the new economy. They have been considered to be consistently
14
The definition and list of KBIs is available from the website of Statistics Canada at the following direct link: http://www23.statcan.gc.ca/imdb-
bmdi/document/2514_D2_T9_V1-eng.pdf.
245
Table 3
Regression of CEO characteristics and IC investments.
(1) (2) (3) (4) (5) (6) (7) (8) (9)
HC INVC RC HC INVC RC HC INVC RC
ABILITY 1.077*** 0.040** 1.214*** 1.501*** 0.034 1.825*** 0.863*** 0.047*** 0.986***
(4.78) (2.49) (5.29) (4.61) (1.45) (5.50) (4.15) (3.14) (4.66)
DUALITY 0.019 0.017*** 0.034
(-0.53) (6.66) (-0.93)
ABILITY*DUALITY 1.031*** 0.007 1.132***
(-2.98) (-0.26) (-3.21)
AGE 0.001 0.020 0.000**
(-1.32) (-0.11) (-2.49)
ABILITY*AGE 0.020*** 0.000 0.025***
(-3.08) (0.38) (-3.79)
TENURE 0.000 0.000 0.001
(0.14) (-0.26) (0.64)
ABILITY*TENURE 0.023* 0.001 0.025**
(-1.87) (-0.69) (-1.98)
Control variables Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
N 6171 6171 6171 6171 6171 6171 6171 6171 6171
adj. R-sq 0.033 0.211 0.025 0.033 0.205 0.026 0.032 0.205 0.024
This table reports the impact of CEO career concerns on IC investments. See Appendix B for variable definitions. The t statistics are reported in pa-
rentheses and are based on robust standard errors corrected for heteroscedasticity and autocorrelation. *, **, *** represent significance at 1%, 5% and
10% level, respectively.
Table 4
Control for CEO characteristics.
HC INVC RC
ABILITY 0.666*** 0.038** 0.764***

(3.71) (2.93) (4.18)
DUALITY 0.017 0.017*** 0.035
(-0.47) (6.66) (0.98)
AGE 0.001* 0.000** 0.000
(-1.78) (-2.18) (-0.44)
TENURE 0.031** 0.000 0.001
(2.22) (-0.28) (0.52)
Control Variables Yes Yes Yes
Year fixed effects Yes Yes Yes
Industry fixed effects Yes Yes Yes
N 6171 6171 6171
adj. R-sq 0.31 0.21 0.24
This table reports the results of the impact of ABILITY on HUMAN, INNOVATION and RELATIONAL capitals when CEO charac-
teristics (DUALITY, AGE and TENURE) are controlled for. See Appendix B for variable definitions. The t statistics are reported in
parentheses and are based on robust standard errors corrected for heteroscedasticity and autocorrelation. *, **, *** represent
significance at 1%, 5% and 10% level, respectively.
outperforming the total economy in terms of growth and job creation since the 1970s”. The firms are classified into two tiers of in-
dustries that are appropriate to be called KBIs: Tier I – a narrow band of science and technology-based firms, composed of knowledge
producers; and Tier II – a broad band of “high knowledge” firms which, based on measures of research and development and knowledge
worker inputs, could be considered business innovators and high-knowledge users.
IC-BDBC also provides a list of KBIs along with the SIC and NAICS (North American Industrial Classification System) codes.
Nonetheless, we drop KBIs from our sample and the results are presented in Columns (1) to (3) of Table 6. The coefficients on ABILITY
are positive and significant for HC and RC (at 5% or lower), meaning our main results are robust to ex-KBIs.
We further argue that our main results might have been driven by research-intensive (Silicon Valley) firms, for at least the innovation
component of IC, as these firms rely heavily on innovation and hence would need to make higher investments in R&D. Gompers, Lerner,
and Scharfstein (2005) define Silicon Valley firms as those having head offices in Alameda, San Mateo and Santa Clara counties in
California. The results of the ex-Silicon Valley sample are reported in Columns (4) to (6) of Table 6. Once again, these results are
qualitatively indifferent to our main results.
4.3.2. Alternative variable definitions

For a robustness check, we also employ alternative measures of both our independent and dependent variables. Following Baik et al.
(2011), we employ industry-adjusted return on assets (ROA) as a measure of CEO ability. The industry-adjusted ROA is calculated as
246
Table 5
Firm lifecycle perspective.
HC INVC RC
ABILITY 0.151*** 0.050*** 0.268*

(2.99) (3.72) (1.73)
ABILITY*INTRODUCTION 0.173 0.130** 0.372
(0.23) (-1.98) (-0.49)
ABILITY*GROWTH 0.132 0.092 0.195
(-0.11) (0.89) (-0.16)
ABILITY*MATURITY 0.340 0.059 0.253
(-0.54) (-1.06) (-0.40)
ABILITY*DECLINE 0.900*** 0.017 3.302***
(3.50) (0.08) (3.62)
INTRODUCTION 0.068 0.058*** 0.114
(0.96) (9.20) (1.57)
GROWTH 0.014 0.013 0.019
(0.18) (-1.85) (-0.24)
MATURITY 0.009 0.004 0.009
(0.33) (-1.60) (-0.32)
DECLINE .089*** 0.001 1.089***
(9.49) (0.10) (9.33)
Control variables Yes Yes Yes
Year fixed effects Yes Yes Yes
Industry fixed effects Yes Yes Yes
adj. R-sq 0.36 0.22 0.35
This table reports the relation between ABILITY on HUMAN, INNOVATION and RELATIONAL capital during different phases of a firm
lifecycle. The t statistics are reported in parentheses and are based on robust standard errors corrected for heteroscedasticity and
autocorrelation. *, **, *** represent significance at 1%, 5% and 10% level, respectively.
income before extraordinary items scaled by total assets, minus the average industry ROA for the same two-digit SIC for each firm-year
(Yuan et al., 2017). The results with industry-adjusted ROA are reported in columns (1) to (3) of Table 7. The coefficients on ABILITY
(measured as industry-adjusted ROA) are positive and significant for all the IC components HC, INVC and RC. The results in Table 7
support our main hypothesis that higher-ability CEOs make better investments in IC.
Prior studies on intangible assets also employ different measures. For example, Barker III and Mueller (2002) also use R&D scaled by
total employees instead of total assets/sales. The rationale is that it is employees of the organisation who convert R&D spending into
innovation and unique processes. Therefore, firms with higher/better human resources tend to make higher investments in R&D.
Following Barker III and Mueller (2002), we measure our INVC (HC) as total R&D (personal cost) scaled by total employees. Similarly,
RC (or customer capital) is also measured as SG&A scaled by total sales instead of assets (Gourio& Rudanko, 2014). The reason is that
these investments generate the customer base of the organisation, which is necessary for generating revenues. Thus, following Gourio
and Rudanko (2014), we measure our RC as SG&A scaled by total sales. The results, employing alternative proxies for IC, are presented
in columns (4) to (6) of Table 7. Once again, the coefficients on ABILITY are significant and positive for all three IC components. These
results show that our main results are robust to alternative proxies as well.
4.3.3. Alternative econometric

Our main results might suffer from cross-sectional correlation. The accumulation of IC components in general, INVC and HC in
particular, takes time and requires continuous investments. Therefore, it is reasonable to argue that firm’s previous year’s investment
might be correlated with current/future investments in IC resources. The Fama-MacBeth approach (Fama& MacBeth, 1973) is especially
Table 6
Sub-sample results.
Ex-Knowledge-based industries Ex-Silicon Valley sample
(1) (2) (3) (4) (5) (6)
ABILITY 0.636*** 0.000 1.569** 0.743** 0.051** 0.836***

(2.57) (0.25) (1.99) (3.83) (2.39) (4.23)
Control Variables Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes
N 3014 3014 3014 5098 5098 5098
adj. R-sq 0.63 0.02 0.41 0.30 0.21 0.21
This table reports the results of the impact of ABILITY on HUMAN, INNOVATION and RELATIONAL capitals in non-knowledge based industries and Ex-
Silicon valley firms. See Appendix B for variable definitions. The t statistics are reported in parentheses and are based on robust standard errors
corrected for heteroscedasticity and autocorrelation. *, **, *** represent significance at 1%, 5% and 10% level, respectively.
247
Table 7
Alternative proxy measures.
ABILITY ¼ Industry-Adjusted ROA DVs scaled by employees & sales
ABILITY 0.041*** 0.001*** 0.050*** 0.398** 0.2.454*** 0.230**

(12.23) (3.62) (14.27) (1.98) (3.43) (2.11)
Control Variables Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes
N 6171 6171 6171 6171 6171 6171
adj. R-sq 0.36 0.30 0.40 0.56 0.76 0.29
This table reports the results of alternative measure of ABILITY (Industry-Adjusted ROA) and alternative measures of dependent variables. See
Appendix B for variable definitions. The t statistics are reported in parentheses and are based on robust standard errors corrected for heteroscedasticity
and autocorrelation. *, **, *** represent significance at 1%, 5% and 10% level, respectively.
designed to address concerns about cross-sectional correlation as it takes into account time-series effects (Gow, Ormazabal, & Taylor,
2010). This approach is preferred over ordinary least square when the residuals are not independent. Following Chen et al. (2015), we
re-estimate our main results using a Fama-Macbeth estimator for cross-sectional correlation,15 as this approach offers an alternate way of
adjusting standard errors for within-sample clustering of observations. The results are presented in Table 8. The coefficients on ABILITY
remain positive and significant for all three components of IC, HC, INVC and RC. Thus, these results support our main hypothesis.
5. Conclusions and directions for future research
Intellectual capital has become a major source of innovation and competitive advantage over the past two decades (Nadeem, Gan, &
Nguyen, 2017b). Firms such as Apple, Facebook and Amazon (and many more) are excellent examples of the fact that how traditional
assets, such as land, are being replaced/complemented by intellectual capital for firms’ competitive advantage and survival. Prior
studies in IC have mainly focused on the consequences (outcomes) of IC, such as innovation. Firms’ continuous investments in IC are
paramount to accumulating and exploiting IC resources. To date, a handful of studies in the literature focus on the determinants of IC
investments and those also focus either only on R&D investments or firm-level determinants. We fill this gap by (1) focusing on all three
components of IC, namely human, innovation and relational capital; and (2) by arguing that the managerial ability and other personal
characteristics of CEOs (being the focal point) can explain significant variations in firms’ IC investments. Our results reveal that
higher-managerial-ability CEOs are linked to higher IC investments. This relationship is less strong when CEOs face lower career
concerns, and the relationship is less (more) pronounced in firms at the introduction (decline) stage of their lifecycle.
This study will have important implications for firms as well as academia – given the pivotal role of both IC and CEOs characteristics
in the recent past. First, we concur that CEO ability is relevant to accumulation of IC resources and necessary for innovation and
competitive advantage. Therefore, firms’ high remuneration packages to attract quality CEOs are justified. Second, the findings are also
relevant to firms relying more on IC resources. That is, one way of encouraging IC investments is to structure CEO compensation in a way
that it has high tolerance for early failures of long-term and risky projects. Rewarding CEOs on their long-term success should be equally
important. Third, CEO ability has varying interaction with IC investments at different stages of a firm’s lifecycle. For example, when
firms are at the decline/shakeout stage, higher-ability CEOs pay more attention to IC investments – consistent with a resource-based
view of the firm. Therefore, firms at the decline/shakeout stage of the lifecycle should particularly take into account CEO ability
during the executive appointment process.
5.1. Limitations/directions for future research
This study suffers from some limitations that can also serve as a direction for future research. Our sample is from the US, where the
majority of IC-intensive firms are based. Therefore, a similar study in a different setting could provide more insights into the impact of
managerial ability on IC investments. Although Demerjian, Lev, and McVay (2012) CEO ABILITY measure is considered to be more
reliable in the literature, we still believe that this measure, being a residual of the equations, can still capture some of firms’ other
performance indicators that have not been controlled for.
Author statement
Dr Muhammad Nadeem: Conceptualization; Data curation; Formal analysis; Methodology; Project administration; Roles/Writing -
original draft, Writing – original draft.
Dr Rashid Zaman: Conceptualization; Investigation; Resources; Validation.
Dr Tahir Suleman: Resources; Validation; review & editing Writing – review & editing.
15
We also re-run our main Equation (1) by including one-to five-year lags of HC, INVC and RC and untabulated results remain qualitatively
indifferent from our main results – suggesting that our results are robust to within-firm autocorrelation.
248
Table 8
Fama-Macbeth estimation.
HC INVC RC
ABILITY 0.043*** 0.001*** 0.055***

(15.41) (6.78) (17.69)
Control Variables Yes Yes Yes
Year fixed effects No No No
Industry fixed effects No No No
N 6171 6171 6171
adj. R-sq 0.33 0.223 0.395
This table reports the results of Fama-Macbeth estimation. See Appendix B for variable definitions. The t statistics are reported in
parentheses and are based on standard errors adjusted for within-sample clustering. *, **, *** represent significance at 1%, 5% and
10% level, respectively.
Dr Nader Atawnah: Resources; Validation; review & editing Writing – review & editing.
Data availability
The data sets used and/or analyzed during the current study are available from the corresponding author on reasonable request.
Declaration of competing interest
None.
Acknowledgement of funding
None.
Appendix A. The Three Components of Intellectual Capital
Human capital
Human capital (HC) is one the most important components of IC that forms the basis of sustainable competitive advantage for firms
(Cabrita& Bontis, 2008). Scholars define HC in different ways. For example, HC includes knowledge, skills and innovativeness possessed
by employees (Edvinsson& Malone, 1997). Subramaniam and Youndt (2005) define HC as the knowledge, skills and abilities residing
within and utilized by the employees in an organisation. So, human capital is the sum of knowledge, skills, creativity and personal values
of the employees which (a) contribute towards both the tangible and intangible assets of the firm and (b) can be further improved by
training and other similar seminars. A unique characteristic of HC is that it is possessed by the employees and leaves the firm when
employees leave. In other words, this capital cannot be retained by the firm without retaining their employees.
Innovation capital
Innovation capital (INVC), also referred to as structural capital (SC),16 opposite to HC, is everything that is left behind in the office
when employees go home (Edvinsson& Malone, 1997). INVC is institutionalized knowledge which is saved in the form of databases,
patents, manuals, systems and processes (Subramaniam& Youndt, 2005). Martínez-Torres (2006) defines SC as the property of the
organisation including databases and processes. INVC includes all non-human storehouses of knowledge, including databases, organ-
isational charts, process manuals and all other things whose value is higher than its material value (Wu, Chang, & Chen, 2008). The
above-mentioned authors agree that investments in R&D are major sources of INVC – as these investments help firms to design new
processes, databases and product designs that can then be protected as copyrights/patents. Furthermore, Hsieh and Tsai (2007) term
INVC as technological capital, including technological knowledge, trade secrets, intellectual property and patents that are results of R&D
activities. In nutshell, INVC is capital that enables HC to work but remains with the organisation even when HC leaves.
Relational capital
Relational capital (RC), also known as customer capital (Gourio& Rudanko, 2014), is equally important as the other two components
of IC but is perhaps a less explored one. The recognition of RC is attributed to the seminal work of Kaplan and Norton (1992) in which RC
was termed as firms’ relationships with its customers. The later prominent scholarly work by Edvinsson and Malone (1997) offers the
16
The terms innovation capital and structural capital are used interchangeably in the literature (see for example, Youndt et al. (2004), as firms’ R&D
is the greatest source of innovation in products and services; see, for example, Barker III and Mueller (2002).
249
subset of components of RC as (a) customer typology, (b) customer loyalty, (c) customer support and (d) customer relationship effi-
ciency. In a contemporary work, Brooking and Motta (1996) extend the scope of RC to product/service brand, corporate reputation and
business partnerships, apart from just firms’ relationships with its customers. RC is vital for firms in the sense that it provides firms with
knowledge about customer demands, market needs and opportunities and guides firms on how to improve and develop new knowledge.
Therefore, RC is the sum of shared values, strategic alliances and relationships with all stakeholders which results in an influx of
knowledge that helps better understand the external demands and build long-term relationship with customers.
Appendix B. Variables: Definitions and Measures
Acronym (Full Name) Measure
Dependent Variable
HC (Human Capital) Total personnel cost scaled by total assets
INVC (Innovation Capital) Total R&D spending scaled by total assets
RC (Relational Capital) Total SG&A cost scaled by total assets
Independent Variable
ABILITY Managerial Ability scores based on Demerjian, Lev, and McVay (2012)
Moderating Variables
DUALITY 1 if CEO is also the chair of the board, 0 otherwise
AGE CEO age
TENURE Total number of years since CEO is in this position
Control Variables
CEO_SALARY Natural logarithm of CEO basic salary
CEO_BONUS Natural logarithm of total cash bonuses paid to CEO
CEO_STOCKS Natural logarithm of total stocks awarded to CEO
CEO_OPTIONS Natural logarithm of total options awarded to CEO
CEO_TOTAL_COMP Natural logarithm of total CEO compensation reported to SEC
CEO_PAY_LINK 1 if CEO pay is linked to shareholder return, 0 otherwise
GENDER 1 if CEO is female, 0 otherwise
BSIZE (Board Size) Number of board members
BINDE (Board Independence) Independent directors to total directors ratio
COMPCOMM 1 if compensation committee exists, 0 otherwise
FSIZE (Firm Size) Natural logarithm of total sales
M/B Market to book ratio
LEV Total debt to total equity ratio
OCF Natural logarithm of total cash flows from operations
GROWTH Sales growth rate from previous year to current year
DIV Natural logarithm of total cash dividend paid in a year
YEAR Year dummy to control fixed effects
INDUSTRY Industry dummy to control industry effects
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International Review of Economics and Finance 75 (2021) 237–251

Contents lists available at ScienceDirect

International Review of Economics and Finance

CEO ability, career concerns, ﬁrms’ lifecycle and investments in

2. Literature and hypotheses

2.1. Intellectual capital: Importance and concept

2.2. Determinants of intellectual capital

2.3. CEO Ability–IC investments link: Hypotheses development

2.4. Firm lifecycle perspective

3.1. Dependent variables

3.2. Independent variables

3.3. Control and moderating variables

IC (HC, INVC, RC) ¼ α0 þ β1ABILITYi,t þ β2CEO_SALARYi,t þ β3CEO_BONUSi,t þ β4CEO_STOCKSi,t þ β5CEO_OPTIONSi,t þβ6

3.4. Descriptive statistics

8 CEO_SALARY 0.02 0.00

International Review of Economics and Finance 75 (2021) 237–251

4.1. CEO career concerns and IC investments

4.2. Ability and IC investments: Firm lifecycle perspective

Introduction: if OCF<0, ICF<0 and FCF>0

Growth: if OCF>0, ICF<0 and FCF>0

Maturity: if OCF>0, ICF<0 and FCF<0

Decline/Shakeout: if OCF<0, ICF>0 and FCF0 or 0

(1) (2) (3) (4) (5) (6)

ABILITY 0.666*** 0.042*** 0.776*** 0.431*** 0.011* 0.491***

4.3. Robustness checks

HC INVC RC HC INVC RC HC INVC RC

ABILITY 0.666*** 0.038** 0.764***

4.3.2. Alternative variable deﬁnitions

ABILITY 0.151*** 0.050*** 0.268*

4.3.3. Alternative econometric

(1) (2) (3) (4) (5) (6)

ABILITY 0.636*** 0.000 1.569** 0.743** 0.051** 0.836***

ABILITY ¼ Industry-Adjusted ROA DVs scaled by employees & sales

ABILITY 0.041*** 0.001*** 0.050*** 0.398** 0.2.454*** 0.230**

5. Conclusions and directions for future research

5.1. Limitations/directions for future research

ABILITY 0.043*** 0.001*** 0.055***

Declaration of competing interest

Appendix A. The Three Components of Intellectual Capital

Appendix B. Variables: Deﬁnitions and Measures

Acronym (Full Name) Measure

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ABILITY 0.666* 0.042* 0.776* 0.431* 0.011* 0.491***

ABILITY 0.666* 0.038 0.764***

ABILITY 0.151* 0.050* 0.268*

ABILITY 0.636* 0.000 1.569 0.743 0.051 0.836***

ABILITY 0.041* 0.001* 0.050* 0.398 0.2.454* 0.230

ABILITY 0.043* 0.001* 0.055***