Unveiling the Dual Role of Intellectual Capital in Value Creation and Financial Distress: Underlying Critical Moderators

Abstract

This study examines the extent to which intellectual capital (IC) supports firms' value generation and financial resilience, and how these effects are conditioned by profitability. IC is quantified using the “modified value-added intellectual coefficient (MVAIC)” for a panel of 103 manufacturing firms listed on the Pakistan Stock Exchange over the period 2014–2023. Value creation is captured through economic value added (EVA), while financial distress risk is measured via the Altman Z-score. Profitability's moderating influence is modeled using return on assets (ROA) and return on equity (ROE). Empirical results indicate that higher MVAIC is associated with greater EVA and higher Z-scores. Among the IC components, “capital employed efficiency (CEE)” and “human capital efficiency (HCE)” exhibit significant positive relationships with both EVA and the Z-score. ROA moderates the effects of CEE, HCE, and “relational capital efficiency (RCE)” on EVA, whereas ROE moderates the influence of “structural capital efficiency (SCE)” and RCE on EVA. In the distress models, both ROA and ROE reinforce the positive association between core IC elements (CEE, HCE, RCE) and the Z-score. The findings offer valuable guidance to policymakers, emphasizing the critical role of IC in driving value creation and reducing financial distress in manufacturing firms, especially in an uncertain political environment.