The effect of intellectual capital on firms' financial performance: an empirical investigation in India

This study empirically examines the effect of the intellectual capital efficiency on firms' financial performance in selected Bombay Stock Exchange listed and permitted Indian companies. Using Pulic's (1998) value added intellectual coefficient (VAIC™) as the efficiency measure of capital employed and intellectual capital, the authors fit panel models to examine the effect of intellectual capital efficiency on firms' financial performance. The result suggests that the component based intellectual capital models explain better than the composite VAIC models. However comparing across the models, it is observed that the physical capital (VACA) positively influences the firms' ROA, which suggests that the physical capital has no doubt remained a key driving force for competitive business performance for firms' in India. The innovative capital efficiency captures additional information on structural capital which positively influences firms' financial performance. The results extend the understanding of the role of intellectual capital in creating corporate value and building sustainable advantages and financial performance for companies in emerging economies, where different technological advancements may bring different implications for the valuation of intellectual capital.