Intellectual Capital, Financial Performance, and the Mediating Role of Financial Vulnerability

Abstract

This study investigates the contribution of intellectual capital in enhancing firms' financial vulnerability and performance in Pakistan's emerging economy. This research considered ten years of data from 2011 to 2020 of non-financial firms listed on the stock exchange of Pakistan (PSX) and falls in the KSE-100 index. This research successfully applied a previously defined regression methodology to test the hypothesis investigating the significance of intellectual capital. Empirical investigation successfully reveals IC's significance in improving firms' financial vulnerability and performance using an aggregate measure of IC called value-added intellectual coefficient (VAIC) and its components human capital, structural capital, and capital employed efficiency. Financial Vulnerability mediates between intellectual capital and financial performance. The results of this study prove VAIC significance in developing countries like Pakistan. The study also shows that Pakistani investors and firms give IC weight in their investment decisions and must focus on IC for success in a competitive world. Accounting bodies should also focus on developing standards that incorporate IC as an asset. This study considered firms of multiple sectors to examine the significance of IC in Pakistani firms successfully. Along with enhancing IC literature, the VAIC model is significant in measuring IC in developing economies. This study also tried to extend IC literature in the context of the financial Vulnerability of firms and its indirect impact on financial performance.