The Relationship Between Intellectual Capital, Financial Stability, Firm Performance, Market Value, and Bankruptcy Risk: Empirical Evidence from Pakistan

Intellectual capital (IC) plays a critical role in determining firm performance (FP), market value (MV), financial stability, and sustainable competitive advantage. The strategic investment in both IC and physical capital allows firms to enhance FP by optimizing resource utilization. However, non-financial firms in Pakistan often encounter a deficiency in tangible and intangible resources, skills, and competencies necessary for FP improvement. Consequently, these firms prioritize acquiring intangible skills, such as human skills and innovative activities, to enhance FP. Effective management of IC is vital for maintaining competitiveness and sustaining a competitive advantage through continued reinvestment in IC. Thus, this study explores the dynamic impact of investment in IC resources and financial stability on FP, MV, and bankruptcy risk. Additionally, the study examines how firm financial stability moderates the IC-FP association. Employing the system generalized method of moments (system-GMM), this study analyzes the dynamic association between IC and FP using an unbalanced panel of Pakistani non-financial firms spanning from 2010 to 2021. The results validate the theoretical prediction of a dynamic association, indicating that both current and past investments in aggregate or components of IC collectively influence FP, MV, and bankruptcy risk. Notably, the findings underscore the more substantial impact of structural capital efficiency (SCE) compared to human capital efficiency (HCE) on FP, MV, and bankruptcy risk. Furthermore, the study reveals that the level of financial stability within firms moderates the relationship between investment in IC and FP, MV, and bankruptcy risk. This study contributes to the IC literature by empirically analyzing the impact of both aggregate and component aspects of IC on FP, MV, and bankruptcy risk within the context of Pakistan, an emerging market. Moreover, it contributes by reaffirming the efficacy of the dynamic association between IC and FP, MV, and bankruptcy risk while also examining the moderating influence of financial stability on this relationship. The findings highlight the potential of IC investment in helping firms navigate financial turbulence during periods of economic instability, thereby holding significant practical and policy implications for firm management, owners, investors, and creditors.