A Systematic Review of Literature on Reverse-Causality Relationship between Intellectual Capital and Firm’s Financial Performance: Dynamic Panel Approach.

Abstract

Intellectual capital (IC) is considered a valuable asset for the company's wealth creation and sustainable development; however, the findings regarding its impact on the company's financial performance and intellectual capital are limited and mixed. This paper aims to investigate the endogeneity problem on intellectual capital and firm's performance. In addition, past studies on this particular matter has been using static panel model. Though, the static model may not be able to resolve the reverse causality and endogeneity related to the relationship. Dynamic panel data approach is the best in estimating endogeneity and reverse-causality problems. Therefore, this study suggesting that in the future, researchers should use dynamic models to study these relationships. In order to control the endogenous effect, GMM model is used as it is appropriate for panel data, and it provides consistent results in the presence of endogeneity. This is due to the fact that, GMM estimator can produce consistent results in the presence of heteroscedasticity and resolve autocorrelation by differencing. Dynamic model is recommended as intellectual capital and firm performance is endogenous so the relationship between both of this variable and the regressor may also be correlated with error term.