Measures that matter: an empirical investigation of intellectual capital and financial performance of banking firms in Indonesia

Abstract

PurposeThis study aims to investigate the intellectual capital–financial performance relationship using two models, namely the conventional Value-Added Intellectual Coefficient (VAIC) model and the adjusted Value-Added Intellectual Coefficient (A-VAIC) model.Design/methodology/approachThis study is designed as a quantitative research focusing on the relationship between intellectual capital and financial performance of the banking industry in Indonesia. As many as 114 data are derived from the publicly listed banks on the Indonesia Stock Exchange for the period of 2012–2017. The multiple regression analysis is employed to test the hypotheses studied.FindingsIn general, the result confirms that intellectual capital affects financial performance. Although not all hypotheses of the study are supported by either the VAIC model or the A-VAIC model, the results provide a deeper and new insight on how each component of intellectual capital efficiency (human capital, structural capital, capital employed, innovation capital) relates to financial performance (return on asset, return on equity, asset turnover, price to book ratio). The results also justify that further improvements in measuring intellectual capital are still needed in the future.Research limitations/implicationsThis study limits its generalization since the sample is only in the Indonesian banking industry. Notwithstanding the limitation, the results imply that the Indonesian banking managers need to be aware of intellectual capital management because of its strategic role in enhancing financial performance.Practical implicationsThis study contributes to the intellectual capital literature by providing empirical evidence on the use of both models, namely the conventional VAIC and the A-VAIC in the Indonesian banking industry research setting which is never been studied before.Social implicationsThis study has the social implication to the enhancement of the quality life of the society. The higher the quality of intellectual capital in the banking firms, the better the banks serve the needs of the community.Originality/valueThis study contributes to the IC literature by providing empirical research on the use of the VAIC model and the A-VAIC model in the Indonesian banking industry.