Relationship between intellectual capital and firm performance: evidence from the Indian sugar mill industry

Abstract

PurposeThe aim of the study is to examine the influence of Intellectual Capital (IC) and its components on the financial performance of Indian sugar mill companies.Design/methodology/approachThe present study follows the quantitative research, and uses data from Indian sugar mill companies over the period of recent 10 years. The Modified Value- Added Intellectual Capital (MVAIC) method is employed to evaluate IC. Authors construct panel regression models to test the hypotheses where Return on Equity (RoE) and Return on Asset (RoA) were considered as a representation of financial performance (dependent variable) and IC has been considered as the independent variable along with control variables.FindingsThe findings reveal that IC components show greater explanatory power than aggregate IC and MVAIC has a positive relationship with firm performance. It is evident that Capital Employed Efficiency (CEE) and Relational Capital Efficiency (RCE) have a positive effect on the RoA, while Human Capital Efficiency (HCE) and CEE have a positive impact on RoE. CEE is found to be a highly significant component to explain the financial performance of Indian sugar mill firms.Practical implicationsThe study has practical implications for the policymakers for effective utilization of IC resources for worth enhancement which is essential for the improvement of financial performance.Originality/valueThe research extends the literature of IC by linking it to the financial performance of Indian sugar mill industry.