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Advances in Social Sciences Research Journal – Vol. 10, No. 1
Publication Date: January 25, 2023
DOI:10.14738/assrj.101.13853.
Ofurum, C. O., Oyintonefie, E., Fubara, S., & Azuike, N. (2023). The Effect of Intellectual Capital on the Financial Performance of
Deposit Money Banks in Nigeria. Advances in Social Sciences Research Journal, Vol - 10(1). 312-328.
Services for Science and Education – United Kingdom
The Effect of Intellectual Capital on the Financial
Performance of Deposit Money Banks in Nigeria.
Clifford Obiyo Ofurum
Department of Accounting, University of Port Harcourt
Etonye Oyintonefie
Department of Accounting, University of Port Harcourt, Nigeria
Siminalayi Fubara
Ministry of Finance, Rivers State Secretariate, Port Harcourt
Ngozi Azuike
Department of Accounting,
Ignatius Ajuru University of Education, Port Harcourt
ABSTRACT
This study evaluates the relationship between intellectual capital and Nigerian
deposit money banks' financial performance. Specifically, it aims to establish nexus
between two proxies of intellectual capital, structural and human capital, and two
facets of financial performance, return on assets and earnings per share. All the
deposit money banks registered in the Nigerian stock exchange constitute the study
population; however, only eight banks that published the required data between
2012 and 2020 were sampled. The study adopted Pulic's (2004) method of
measuring intellectual capital and Hamdan's (2018) and Ozkan et al. (2016) model
specifications. The model and collected data were analysed using simple regression
analysis. The research revealed a significant relationship between structural
capital and return on asset (ROA). It also found a significant association between
human capital and earnings per share (EPS). Based on the result, we recommend
that Nigerian bank managers and policymakers integrate intellectual capital into
their decision-making process and pay more attention to this alternative source of
capital to enhance their financial performance. Also, the management of banks
should provide a conducive work environment, improve the welfare packages of
their staff and ensure an excellent in-house training program.
Keywords: Value Added Intellectual Capital, Intellectual Capital; Financial Performance,
Structural Capital Efficiency and Human Capital Efficiency
INTRODUCTION
Intellectual capital is the knowledge, experience, skills, and good relationships that give
businesses a competitive advantage (Zehri et al., 2012). Because intellectual capital is both
intangible and intangible, traditional metrics cannot adequately measure its worth (Rastogi,
2000; Erickson & Rothberg, 2009). Intellectual capital includes human and structural capital.
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Ofurum, C. O., Oyintonefie, E., Fubara, S. & Azuike, N. (2023). The Effect of Intellectual Capital on the Financial Performance of Deposit Money Banks
in Nigeria. Advances in Social Sciences Research Journal, Vol - 10(1). 312-328.
URL: http://dx.doi.org/10.14738/assrj.101.13853
Customers, processes, databases, brands, and systems constitute structural capital (Nafukho et
al., 2004). According to Nadeem et al. (2017), Intellectual capital improves firms' financial
performance regardless of geographical location. The organisation's knowledge becomes a
competitive advantage that distinguishes it from rivals. Consequently, numerous organisations
are now aware of a fundamental truth: their actual worth is reflected in their physical and
intellectual capital. This intellectual capital includes patents, customer relations, workers'
innovations, skills, and the organisation's mastery. On the other hand, the rapid change and
development of the modern environment necessitate constant innovation in all aspects of
economic, social, and technological life (Duho & Onumah, 2019). Therefore, innovation as a
strategic input into the work and activities of the organisation at all levels has become essential.
Due to the urgent need for increased performance and innovation, businesses are shifting their
attention to their intangible assets, such as intellectual capital. According to Petty and Guthrie
(2000), developing two primary knowledge management missions is underway. They
represent an ongoing effort to establish a more effective system for creating, capturing, and
disseminating organisational knowledge. The second is that an increasing number of people
recognise that expertise significantly increases the value of a business and, in most cases, is the
entirety of that value.
The concept of intellectual capital is to develop new models that can measure, record, and
report intellectual capital's value. Traditional accounting practices in finance and management
must now conform to the new paradigm. The Organisation for Economic Cooperation and
Development (OECD) (2000) attributes the rise of intellectual capital as a business and
research topic to the emergence of the new economy, which is driven by information and
knowledge. There appears to be little consensus regarding how businesses utilise intellectual
capital (Guthrie, 2001). However, intellectual capital, in one form or another, is involved in
recent economic, managerial, technological, and sociological development in a previously
unanticipated and largely unanticipated manner. The rise of the modern organisation and the
information economy led to the development of new knowledge-based intangibles,
organisational structures and processes, know-how, and intellectual and problem-solving skills
(Petty & Guthrie, 2000). In a business environment characterised by global competition,
strategic adaptation, rising customer demand, and the explosion of the service industry,
management seeks survival strategies. Intellectual capital is not a novel concept in business
management, but it has taken on an unprecedented new significance. In recent years, it has
become increasingly apparent that a company's inventory of intangible assets contributes to its
ability to sustain a competitive advantage. Notably, it is recognised that knowledge-based
intangibles are essential to value creation. The term "intellectual capital" is increasingly used
to distinguish these intangible assets from financial capital, which has historically served as the
basis for wealth creation. Intellectual capital encompasses a much broader range of assets than
those typically categorised as intangible, such as goodwill, brands, and company reputation.
Accounting principles are required to elucidate the hidden value that capital markets place on
intellectual capital. The difference between the market value and book value of an
organisation's assets is determined by accounting standards. Intellectual capital and intangible
assets must be clearly distinguished so that the accounting treatments for intangible assets do
not need to be modified to accommodate intellectual capital.
Intellectual capital now accounts for the majority of a company's market value rather than
traditional land and equipment. Physical capital, such as land, buildings, and equipment, has
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Advances in Social Sciences Research Journal (ASSRJ) Vol. 10, Issue 1, January-2023
Services for Science and Education – United Kingdom
been regarded as the most influential factor in a company's long-term economic performance.
However, with the emergence of science, technology, and globalisation, this conventional way
of thinking is undergoing a substantial transformation. This new emphasis on intellectual
capital is the impetus for developing this theory. Under the new system, the knowledge,
abilities, skills, experience, and attitudes of employees are intellectual capital and vital
resources for enhancing the performance of businesses. While software, financial, and
pharmaceutical companies rely on their intellectual capital to generate revenue, production or
manufacturing companies combine intellectual capital with physical assets to gain a
competitive advantage (Taje, 2014). According to Bornemann and Alwert (2007), organisations
that effectively manage their intellectual capital have a greater competitive advantage than
those that do not. Their findings suggest that companies that improved their intellectual capital
management outperformed those that did not. Brennan and Connell (2000) assert that the
management of an organisation's intellectual capital is essential to its long-term business
performance. Additionally, it is argued that the inability of financial statements to explain firm
value is due to the fact that monetary value is no longer dependent solely on the production of
physical goods but also on the creation of intellectual capital. Developed nations have also
conducted extensive research on intellectual capital in recent years, particularly in specific
industries. Given the significance of intellectual capital to a company's ability to create value,
accountants must ensure that every business report contains accurate information about the
intellectual capital stock of a company.
The recent global financial crisis and numerous local and international financial scandals have
reignited concerns and sparked debates regarding the connection between intellectual capital
and the performance of deposit money banks. The value of an organisation's intellectual capital
and the role of financial accounting/reporting in corporate governance are additional
arguments and concerns. Globalisation, strategic coalitions, alliances between multinational
corporations, and the transition to a knowledge-based economy have sparked this debate.
Despite the fact that numerous studies have been conducted on the subject, there is a lack of
data describing how intellectual capital components influence the financial performance of
banks in Nigeria during the period under consideration. Scholars of financial and corporate
reporting have theoretically and empirically investigated the impact of intellectual capital on
the valuation of businesses in various studies. Instead of resolving the issues, the results have
been inconsistent and contradictory, prompting this investigation.
The following null hypotheses were developed as guidelines for the research:
H-01: There is no correlation between Nigerian deposit money banks' structural capital and
their return on assets.
H-02: There is no correlation between human capital and earnings per share of deposit money
banks in Nigeria.
The research establishes the following criteria for accepting and rejecting null hypotheses: the
null hypothesis is accepted if the standard error of 1 [S (1) > 1/2 1]. We acknowledge that the
estimate is not statistically significant at a significance level of 5% (0.05). The null hypothesis
is rejected if the standard error is greater than half of 1. We accept that the estimate is