Should bankers be concerned with Intellectual capital? A study of the Thai banking sector
| Pages | 897-914 |
| DOI | https://doi.org/10.1108/JIC-12-2017-0185 |
| Published date | 24 August 2018 |
| Date | 24 August 2018 |
| Author | Dai Binh Tran,Duc Hong Vo |
| Subject Matter | HR & organizational behaviour,Behavioural accounting,Accounting/accountancy,Knowledge management |
Should bankers be concerned
with Intellectual capital? A study
of the Thai banking sector
Dai Binh Tran and Duc Hong Vo
Business and Economics Research Group, Ho Chi Minh City Open University,
Ho Chi Minh City, Vietnam
Abstract
Purpose –The purpose of this paper is to examine the causal effect of intellectual capital (IC) performance on
financial performance at Thai listed banks.
Design/methodology/approach –Data are collected from 16 listed banks in Thailand for the period
1997–2016. This paper uses the value-added intellectual coefficient methodology suggested by Pulic (1998,
2004) to measure IC. This study employs a fixed-effects and random-effects model and generalized method of
moments (GMM) estimator to investigate the causal effect of IC on financial performance.
Findings –The results show that bank profitability is driven mainly by capitalemployed efficiency to make
a profit. However, human capital efficiency marginally reduces bank profitability in the current period but
has positive effects on future profitability.
Research limitations/implications –First, this study does not cover data on foreign banks, which
reduces the generalizability of the results. Second, financial statements can be manipulated through
accounting adjustments. Lastly, subsequent research should control for more bank characteristics, such as
bank ownership, the non-performing loan ratio and R&D expenditure.
Practical implications –To achieve higher future profitability, banks should not only manage their
physical and financial capital effectively but also improve employee efficiency.
Originality/value –This paper contributes to the literature on IC in the banking sector in emerging
countries. Moreover, this paper is the first to employ the GMM method in the banking context to address
possible endogeneity problems.
Keywords Financial performance, VAIC, Thailand, Intellectual capital, Banking sector
Paper type Research paper
1. Introduction
Before the advent of the information society, people traditionally focused on input factors,
such as labor, capital and raw materials, and other, intangible factors were gradually added
and gained priority in companies’operations and survival. Now, knowledge, information
technology and intellectual skills are the principal resources that organizations need to be
effective and to gain a sustainable competitive advantage (Gogan et al., 2016).
Despite the emerging recognition of intellectual capital (IC), the accounting profession
has not addressed the problem of how to measure and report the results of knowledge-based
firms (Eckstein, 2004). In this knowledge era, in which IC is considered a significant part of
the value of products manufactured by companies, the regular reporting systems show only
a portion of IC, such as the value of intangible assets (royalty fees, licenses and trademarks).
It is widely understood that financial statements do not attempt to represent the actual value
of companies and thus underestimate the value of intangible factors. Moreover, the current
accounting standards rarely recognize intangible investment (Zéghal and Maaloul, 2010).
Therefore, stakeholders have clamored for the introduction of comprehensive information
on IC in company reports.
To satisfy this demand, many methods have been developed to measure the impact of IC on
creating value and increasing firm financial performance (Edvinsson, 1997; Edvinsson and
Sullivan, 1996; Kaplan and Norton, 1996; Roos et al., 1997). Pulic (1998, 2004) developed a model
to analyze the value-added intellectual coefficient (VAIC) in order to measure the efficiency of IC.
Journal of Intellectual Capital
Vol. 19 No. 5, 2018
pp. 897-914
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-12-2017-0185
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
897
Intellectual
capital
In general, VAIC is an analytical procedure designed to enable management, shareholders and
other relevant stakeholders to effectively monitor and evaluate the efficiency of value added by
afirm’s total resources and each major resource component (Firer and Williams, 2003, p. 352).
Most recent studies use this model to measure the relationship between IC and financial
performance (e.g. Al-Musali and Ku Ismail, 2014; Meles et al., 2016; Ozkan et al., 2017).
The banking system is an ideal environment in which to perform research about IC
because it is one of the most knowledge-intensive industries (Firer and Williams, 2003).
First, banking operations are highly dependent on customers to create competitive
advantages. Second, bank products are not manufactured goods but, rather, services whose
value is based on IC. Finally, to provide clients with the best services, banks have to invest
in human resources, brand names, systems and processes. Thus, it is essential for banks to
manage their IC as efficiently as possible.
The Thai banking system is an interesting subject for IC research. Young et al. (2009)
compares the IC performance of commercial banks in eight Asian economies from 1996 to
2001. Using the VAICmethod, they indicate that Thailandhas the greatest improvement in IC
performance.However, Thailand was the firstcountry to suffer from the Asianfinancial crisis
in 1997. Although it happened a long time ago, research on the Thailand banking system is
still needed to clarify the importance of IC and maintaining its sustainability. Moreover,
because of globalization, competition in the banking industry has become fiercer than ever,
increasingpressure on bank performance. Beforethe 2008 financial crisis, most banksmade a
profit throughrisky investments,but this precipitated a globalcrisis. Afterward, governments
tried to control thebanking sector through greater regulation of mergers andacquisitions as
well as the adoption of policies such as the Basel framework. Therefore, banks now seek to
establish effective and sustainable operations and increase profitability.
This paper aims to fill these gaps in the literature on the existing debates, with mixed
findings on the causal effects between VAIC, its components and financial performance.
First, we adopt the VAIC model developed by Pulic (1998, 2004) to measure the IC
performance of 16 listed banks in Thailand over the period 1997–2016. Then, we investigate
the relationship between IC and financial performance to determine which components
contribute most to profitability in Thailand.
This study contributes to the literature in that it provides understanding on how to
evaluate IC performance in the Thai banking sector. Moreover, it also identifies the potential
role of IC in bank financial performance in Thailand. This paper also contributes to the
ongoing literature on the determinants of banking profitability (e.g. Garcia and Guerreiro,
2016; Menicucci and Paolucci, 2016; Petria et al., 2015). It not only helps banks to improve
their profitability but also supports policy makers in reaching their financial stability goals.
Finally, in consideration of possible endogeneity problems and the dynamic characteristics
of banking profitability, we employ the generalized method of moments (GMM) model,
which has not been widely used before, to ensure that our estimation results are robust.
The results provide evidence of a relationship between IC’s components and financial
performance. In particular, the efficiency of physical and financial capital significantly
drives bank profitability. Human capital efficiency (HCE) slightly reduces the return on
assets (ROA) in the same period but increases profitability after three quarters on average.
In this sense, it is necessary to pay special attention to the capital employed by managing it
effectively. Moreover, this suggests that, to improve future profitability, banks should
consider employee efficiency.
The remainder of this study is structured as follows. Following this introduction,
Section 2 provides the theoretical basis for our research. In Section 3, we present the data,
definitions of the variables and methodology used to analyze the mechanism by which IC
improves profitability. Section 4 offers empirical results, related discussion and a robustness
check, followed by concluding remarks in Section 5.
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