Does intellectual capital help predict bankruptcy?
| Pages | 321-337 |
| Date | 12 March 2018 |
| Published date | 12 March 2018 |
| DOI | https://doi.org/10.1108/JIC-03-2017-0047 |
| Author | Velia Gabriella Cenciarelli,Giulio Greco,Marco Allegrini |
| Subject Matter | Information & knowledge management,Knowledge management,HR & organizational behaviour,Organizational structure/dynamics,Accounting & Finance,Accounting/accountancy,Behavioural accounting |
Does intellectual capital help
predict bankruptcy?
Velia Gabriella Cenciarelli, Giulio Greco and Marco Allegrini
Department of Economics and Management,
University of Pisa, Pisa, Italy
Abstract
Purpose –The purpose of this paper is to explore whether intellectual capital affects the probability that a
particular firm will default. The authors also test whether including intellectual capital performance in
bankruptcy prediction models improves their predictive ability.
Design/methodology/approach –Using a sample of US public companies from the period
stretching from 1985 to 2015, the authors test whether intellectual capital performance reduces the
probability of bankruptcy. The authors use the VAIC as an aggregate measure of corporate intellectual
capital performance.
Findings –The findings show that the intellectual capital performance is negatively associated with the
probability of default. The findings also indicate that the bankruptcy prediction models that include
intellectual capital have a superior predictive ability over the standard models.
Research limitations/implications –This paper contributes to prior research on intellectual capital and
firm performance. To the best of the knowledge, this is the first study to show that the benefits of intellectual
capital extend from superior performance to long-term financial stability. The research can also contribute to
bankruptcy studies. By using a time frame covering decades, the findings suggest that intellectual capital
performance measures can be included in bankruptcy prediction models and can effectively complement
traditional performance measures.
Originality/value –This paper highlights that intellectual capital is associated with long-term financial
stability and a lower bankruptcy risk. Firms realising the potential of their intellectual capital can produce a
virtuous circle between higher performance and greater financial stability.
Keywords Performance, VAIC, Intellectual capital, Bankruptcy prediction
Paper type Research paper
1. Introduction
This paper explores whether a firm’s intellectual capital performance reduces the
probability of default and can help to predict bankruptcy. In a knowledge-based economy,
intellectual capital plays a crucial role when it comes to increasing a firm’s competitiveness
and performance (Lev, 2000; Seetharaman et al., 2002; Massaro et al., 2015). Several studies
show that intellectual capital has a positive impact on a firm’s financial performance and
market value and that they could be considered an indicator of future financial performance
(e.g. Bontis, 1998; Pew Tan et al., 2007; Cabrita and Bontis, 2008; Zéghal and Maaloul, 2010;
Clarke et al., 2011; Dženopoljac et al., 2016).
Recent research suggests that intellectual capital can also have a relevant impact on a
firm’s long-term financial health and credit rating (Guimón, 2005). In this respect,
bankruptcy studies acknowledge but do not investigate the relevance of intellectual capital.
Most of the accounting-based bankruptcy prediction models have not been changed since
decades. Recent studies suggest that these models can be improved to properly take into
account the intellectual capital, which is crucial to nowadays economy (Beaver et al., 2005;
Lev and Gu, 2016).
Nonetheless, to the best of the authors’knowledge, no prior studies have investigated
whether intellectual capital affects a firm’s long-term financial stability or its probability of
default. This paper aims to fill this research gap. Filling this gap through this investigation
is relevant in the management’s perspective. Proper management of intellectual capital
could help firms to achieve a higher credit rating, lower the cost of debt, boost performance
and increase market value (Dumay and Tull, 2007).
Journal of Intellectual Capital
Vol. 19 No. 2, 2018
pp. 321-337
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-03-2017-0047
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
321
Intellectual
capital
More broadly, the use of intellectual capital indicators to predict default could help to
reduce the likelihood of misclassifying bankrupt firms as ones that are healthy. This error
causes the misallocation of financial resources, economic value destruction, job losses and
overall negative social consequences (Berk et al., 2010). Considering intellectual capital in
bankruptcy prediction can help to allocate financial resources to firms that manage their
intellectual capital and invest it properly. Such firms drive economic and social growth in
contemporaneous knowledge-based economies.
This research uses a sample of US public companies from the period stretching from
1985 to 2015 and make use of the VAIC as an aggregate measure of corporate intellectual
capital performance (Pulic, 2000). The VAIC can be calculated using publicly available
financial statements. It is built on measures that are based on commonly accepted
accounting standards and audited by external auditors for every company. Thus, it is
suitable for studies about bankruptcy, requiring very large samples and comparable data.
The authors hypothesise and find that the intellectual capital performance is
negatively associated with the probability of default, measured using Ohlson’s(1980)
model and Altman’sZ-score. Therefore, firms with lower intellectual capital performance
display a higher probability of bankruptcy. The authors also evaluate the model in terms
of accuracy using a table classification approach and an ROC (receiver operating
characteristic) curve to assess whether the intellectual capital indicator improves the
model’s predictive ability. The findings support the hypothesis that the bankruptcy
prediction model with intellectual capital proxy has a superior predictive ability over
other standard bankruptcy prediction models.
This paper contributes to prior research on intellectual capital and firm performance.
To the best of the authors’knowledge, this is the first study to show how intellectual
capital can play a key role in the assessment of a firm’s future solvency and long-lasting
value creation. This research suggests that firms realising the potential of their
intellectual capital can produce a virtuous circle between higher performance and greater
financial stability. Besides its theoretical implications, this paper provides an empirical
contribution to the literature on intellectual capital and firm performance and value.
Unlike prior research using shorter periods, this paper uses 30 years of US data covering
the entire time frame starting from when firms began attempting to manage intellectual
capital for value creation (Sveiby and Risling, 1986; Zambon, 2003). This long time frame
also allows significantly robust bankruptcy prediction (Altman et al., 2010).
This research can also contribute to bankruptcy studies. Measures of intellectual capital
are often neglected in financial analysis and credit scoring. The findings suggest that
intellectual capital performance measures effectively complement traditional performance
measures and improve bankruptcy prediction models.
This study can have relevant practical implications for banks, investors and analysts
interested in bankruptcy prediction. New explanatory variables related to a firm’s
intellectual capital help to avoid the misclassification of bankruptcy firms as “healthy.”
Improving bankruptcy prediction helps to allocate financial resources and rewards healthy
and profitable firms for properly managing and investing their intellectual capital.
The remainder of the paper is organised as follows: Section 2 includes the literature
review, while Section 3 develops the research hypotheses. Section 4 explains the research
methodology, and Section 5 shows the empirical findings. Section 6 discusses the findings
and present the conclusions.
2. Literature review
2.1 Intellectual capital literature
The resource-based theory of the firm suggests that firms can be seen as a unique bundle of
dynamic, complex, and intangible resources (Penrose, 1959; Wernerfelt, 1984; Barney, 1991).
322
JIC
19,2
To continue reading
Request your trial