Impact of Intellectual Capital on Financial Performance: Evidence from Banking Sector of Pakistan

Abstract

In knowledge economy, intellectual capital (IC) is widely recognized as a key factor in boosting corporate competitiveness and creating value. This study used the Extended Value Added Intellectual Coefficient model to assess the impact of Intellectual Capital (IC) efficiency on financial performance of banks operating within the boundaries of Pakistan. To fulfill this purpose, study used panel data over the period 2015-2022. Return on asset and Return on equity, two financial measures are used as proxy for dependant variable. Independent variables include VAIC and its components. Data has been collected from financial statements available at State Bank of Pakistan’s website. Our regression study revealed that human capital and innovation capital had the greatest impact on a firm's performance. Capital employed, structural capital and relational capital do not show statistically significant positive relationship with the financial performance as measured by ROA. Study has found no significant relationship between ROE and VAIC. Regression analysis shows that VAIC is not suitable to measure financial performance of banks in case of ROE. Furthermore, it is clear that Pulic (1998)'s initial VAIC model is outperformed by the expanded and updated VAIC model. According to the results, it is advised that bank executives set up a separate division for keeping accurate records of all IC components and that policymaker’s account for structural and relational capital when establishing policies and procedures to avoid having an adverse effect on the financial performance.