ABSTRACT
The study examined the effect of intellectual capital costs on financial performance of listed commercial banks in Nigeria. Many researchers have carried out research on Intellectual Capital on financial performance but yet financial regulators have not been able to incorporate/disclose Intellectual Capital cost on Companies financial statement. More so, among the factors of production – Land, Labour, capital and Entrepreneurship- (Labour which is intellectual capital) is the only factor of production that is not reported in the financial statement. The study adopted the ex-post facto research design and was conducted using longitudinal/panel data collected from the annual reports and accounts of the selected banks in Nigeria for the period of ten years from 2007 to 2016. The fixed effect, random effect and the diagnostic houseman test was conducted to determine the appropriate regression. The results showed that there is significant relationship between Human capital cost and Structural Capital Costs on Return on Investment while Capital Employed Efficiency showed an insignificant effect on Return on Investment. Return on Assets is insignificantly affected by the three coefficient of intellectual capital costs. It was also established that Human Capital Efficiency is positive and significantly affected by Return on Equity, although Return on Equity is not significant with Structural Capital Efficiency and Capital Employed Efficiency. It was observed that return on investment and return on equity were more significantly affected by intellectual capital costs. To rank the effect of the relationship, Return on Equity ranks first judging from the F statistic and R squared, while Return on Investment ranks second from the criteria. It was therefore recommended that Human Capital Efficiency, Structural Capital Efficiency and Capital Employed Efficiency make up the intellectual capital which implies jointly that, intellectual capital has a positive and significant effects of on financial performance of listed commercial banks in Nigeria. Banks should invest vigorously in the development of their human capital as the key driver of firms’ performance. It is also expected that Management and stakeholders of the bank should provide the infrastructure needed to achieve a virile intellectual capital in the system and also do well to provide an enabling and conducive working environment for its employees and an attractive environment for its customers which are the reason they are in business.
TABLE OF CONTENTS
Page
Title
page
i
Declaration ii
Certification
iii
Dedication iv
Acknowledgements
v
Table
of contents
viii
List of
tables
xiii
List of
figures
xiv
Abstract
xv
CHAPTER 1: INTRODUCTION
1.1 Background to the Study
1
1.2 Statement of the Problem 3
1.3 Objectives of Study
5
1.4 Research Questions
5
1.5 Research Hypotheses
5
1.6 Significance of Study
6
1.7 Scope of Study
7
1.8 Limitation
of the Study
8
1.9 Operational
Definition of Terms 8
CHAPTER
2: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 10
2.1.1 Intellectual capital as knowledge
assets
10
2.1.2 Components of intellectual capital 11
2.1.2.1 Human
capital 12
2.1.2.2 Structural
capital 18
2.1.2.3 Relational
/ customer capital 22
2.1.3 Relationship between intellectual capital
components 24
2.1.4 Managing intellectual capital
27
2.1.5 Intellectual capital and financial
performance 27
2.1.6 Concept of profitability
28
2.1.6.1 Return of
investment 29
2.1.6.2 Return on
asset 29
2.1.6.3 Return on
equity 29
2.1.7 Emergence of intellectual capital
concept
29
2.1.8 The Nigerian banking industry
33
2.1.9 Importance
of measuring intellectual capital
35
2.1.10 Developing
intellectual capital
35
2.1.11 Reporting
investment in intellectual capital
40
2.1.12 Definition
of intellectual capital and difficulties incurred by defining
the
concept 41
2.1.12.1 Value
added intellectual coefficient (VAIC) 43
2.1.12.2 Capital
employed efficiency 45
2.1.12.3
Structural capital efficiency
45 2.2 Theoretical
Framework
47
2.2.1 Value added intellectual coefficient (VAICTM)
model 47
2.2.2 General system theory 49
2.3 Empirical
Framework
50
2.4 Gap in Literature
64
CHAPTER 3: METHODOLOGY
3.1 Research Design
66
3.2 Area of Study
66
3.3 Population of the Study 67
3.4 Sample and
Sampling Techniques 68
3.5 Method of Data
Collection
68
3.6 Data Analysis Technique
68
3.7 Validity and
Data Reliability of Research Instrument 69
3.8 Model
Specifications
69
3.8.1 Description
of dependent variables
71
3.8.2 Description
of independent variables
72
CHAPTER 4: DATA PRESENTATION, ANALYSIS AND DISCUSSION
4.1 Data
Presentation 74
4.2 Data Analysis
and Discussion 76
4.2.1 Test for
symmetry and normality 76
4.2.2 Effect of
intellectual capital costs on financial performance 76
4.2.2.1 Effect of
intellectual capital costs and return on investment 78
4.2.2.2 Effect of
intellectual capital costs and return on asset 80
4.2.2.3 Effect of
intellectual capital costs on return on equity 82
4.3 Test of
Hypotheses 84
4.3.1 Test of
hypothesis 1 84
4.3.2 Test of
hypothesis 2 84
4.3.3 Test of
hypothesis 3 85
4.4 Discussion of
Findings
85
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of
Findings 89
5.2 Conclusion 89
5.3
Recommendations 92
5.4 Contribution
to Knowledge 93
5.5 Suggestion for
Further Studies 94 References 94
Appendices
LIST OF TABLES
Page
3.1: List of listed commercial banks in
Nigeria
67
4.1: List of banks and variables used
75
4.2 Descriptive
statistics of the variables 76
4.3 Panel
regression analysis on ICCs and ROI 78
4.4 Panel
regression analysis on ICCs and ROA 80
4.5 Panel
regression analysis on ICCs and ROE 82
LIST OF FIGURES
2.1 Describing intellectual capital in the
knowledge economy 11
2.2 Measuring intellectual capital in the
knowledge economy 19
2.3 Leadership challenges in the knowledge
economy
20
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE
STUDY
It
is incontrovertible that information is vital to corporate development and what
enhances business success is the capability of firms to be innovative, adaptive
to changes in technology and, improvements in employee skills and knowledge to
meet challenges in the dynamic business environment. What therefore
distinguishes flourishing companies from those that flounder is the
intellectual capital.
Knowledge
being the engine of corporate advancement has become` one of the colossal
prosaisms of ongoing years, Yet, there is presumably that fruitful
organizations have a tendency to be those that persistently take part in
development by adjusting to new innovations and enhancing the abilities and
information of representatives instead of depending on just change in
resources, for example, plants and machinery.
In today's fast moving economy with the
rapid growth of knowledge and technology innovation, the growth of organization
has changed in order to cope with the changing environment. With big changes in
the global economy, intellectual capital has become the main ingredient and
vital for the organization to sustain the competitive world in which they operate
and to create more values (Bontis, 2001).
The changing patterns from customary
economy (Land, Labor and capital) to learning concentrated economy amid the
most recent two centuries have made administration based businesses take the
real offer in the esteem creation process particularly in created social
orders. Intellectual
capital (IC) has been generally recognized as that inborn property normally
obtained by a firm which drives it on the wheel of significant worth creation,
esteem expansion and esteem supportability. To this end, numerous definitions
have been propounded by various researchers and scholars. The idea for the most
part exuded from depicting the dynamic impacts of people: the “intellect” (Sveiby,
1998). The 21 century is dominated by knowledge economy, with more and more firms
trying to finding better approaches to utilize their assets effectively and
stay economical in a dynamic business condition. Hence, there is an enormous
move by numerous organizations from creation time to information time and from
generation work to learning labourer (Lipunga, 2014). It is a dependable fact
that the firm that keeps on putting resources into new aptitude and innovation
will keep on being fruitful. Along these lines impalpable resources particularly
Knowledge is picking up unmistakable quality than any time in recent memory as
an issue of survival and of accomplishing upper hand for the firm to contend
deliberately (Latif, Malik & Aslem, 2012) as refered to in (Isanzu, 2015).
Intellectual capital refers to a much
wider range of assets than those normally recognized as intangible e.g.
goodwill, trade mark, patent, company reputation, etc. Consequently it is often
referred to as intangibles particularly in the European literature. In the assessment
of Onyekwelue, Okoh and Iyidiobi (2017), accounting and intellectual capital
are linked to each other because of the necessity to provide an accounting
perspective on value creation. Value can be produced by intangibles not
constantly reflected in budgetary explanations and forward looking
organizations have understood that these are a basic piece of completely
understanding the execution of their business.
Knowledge
is considered as a standout amongst the most critical properties of an organization
in the contemporary administration hypothesis and practice. In any case,
learning is acknowledged as a supportable key resources for accomplishing and
keeping up upper hands.
Foray
(2004), pointed out that in the knowledge-based economy, the commitment of intangible
assets is more noteworthy than tangible assets; including that in knowledge-based
economy, intellectual capital is the most basic resource of the organization. Subsequently;
intelligent capital is the core of organizational value and performance.
Therefore, it becomes exigent for organizations to comprehend the idea of
intellectual capital in real sense so they will have the capacity to use their
scholarly capital all the more proficiently and successfully.
Many scholars are endeavoring to see how
Intellectual capital (IC) accounting influence the money related execution of
firms. Money related execution is an emotional proportion of how well a firm
can utilize resources from its essential method of business to generate
resources.
Intellectual
capital is the group of knowledge assets that are credited to an association
and most fundamentally add to an enhanced focused position of the association
by increasing the value of characterized key partners (Marr and Schiuma, 2001).
Kristand and Bontis (2007) defined Intellectual
Capital (IC) as a portfolio of strategic firm resources that enable an
organization to create sustainable value; it is a company's solitary
considerable resource; most different resources (building, machinery, equipment
and plant, and so on) start to devalue the day they are procured.
Intellectual capital must develop if a
firm is to succeed. A manager's activity is to make information beneficial, to
transform intellectual capital into client esteem. Administration by and large
originates from connections established on the fitness and duty of people.
1.2 STATEMENT OF THE PROBLEM
The
academia for the past two (2) decades has been drawn into the web of an
unending debate concerning the place of intangible asset (of which Intellectual
Capital is one) in corporate value creation, many scholars have argued on the
extent that intellectual capital can enhance firm’s performance. The concept of
IC is also used to reflect the true value of a company. Organizations are
motivated to measure their IC to assist with competitive benchmark exercises
and to provide structured information to the capital and labour markets to
enhance perception of the company.
Among
the factors of production – Land, Labour, capital and Entrepreneurship- (Labour
which is intellectual capital) is the only factor of production that is not
reported in the financial statement; hence, the question as to why are the
banks brain power or greatest assets not reported is the reason that attracted
our attention to the topic. As much
as the popularity of IC among researchers, up to date, none has reported IC
(Labour or firm’s brain power) on Financial Statement; It is now common on the
chairman’s report that “Our employees are our greatest assets”, yet there has
been an inadequate attention given to the great value asset and contributor(IC)
of the overall performance of the bank. Thus, financial institutions which are
intellectual capital should be more concerned with the management of this great
asset of the bank.
Furthermore,
despite the popularity of intellectual capital among the research community in
the developed world, there have been very few studies that have used emerging
economies of the world especially in Africa as a case for evaluating the
implications of intellectual capital for specific industries. This is a gap
that needs filling, because with globalization, all organizations (both in developed
and developing economies) are increasingly confronted with worldwide competition,
which is making intellectual capital equally important to all of them to
survive. Thus being mentioned there is equally a need to promote studies in
developing countries.
The
study uses the banking sector to investigate the effect of intellectual capital
on financial performance, because the banking sector is one of the high
knowledge intensive sectors it therefore provides a rich environment for the
research and the availability of the reliable data from the audited annual
reports of the selected banks. The study is therefore set to investigate the
effect of intellectual capital costs on the financial performance of listed
commercial banks in Nigeria.
1.3 OBJECTIVES OF THE
STUDY
The
main objective of the study is to determine the effect of intellectual capital
cost on financial performance of listed commercial banks in Nigeria. The
specific objectives are to:
i.
determine the effect of intellectual
capital cost on Return on Investment (ROI) of listed commercial banks in
Nigeria;
ii.
investigate the effect of
intellectual capital cost on return on Assets (ROA) of listed commercial banks
in Nigeria; and
iii.
ascertain the effect of intellectual
capital cost on return on Equity (ROE) of listed commercial banks in Nigeria.
1.4 RESEARCH QUESTIONS
The
following research questions were formulated in line with the research
objectives and to give more direction to the project.
i.
To what extent does intellectual
capital cost affects Return on Investment (ROI) of listed commercial banks in
Nigeria?
ii.
How does intellectual capital cost affects
Return on Assets (ROA) of listed commercial banks in Nigeria?
iii.
What is the extent to
which intellectual capital cost affects Return on Equity (ROE) of listed commercial
banks in Nigeria?
1.5 RESEARCH HYPOTHESES
The
researcher formulated three hypotheses in null form, thus:
i.
Intellectual capital cost
has no significant effect on return on investment (ROI) of listed commercial banks
in Nigeria.
ii.
Intellectual capital cost
has no significant effect on return on assets (ROA) of listed commercial banks
in Nigeria.
iii.
There is no significant
effect of intellectual capital cost on return on equity (ROE) of listed commercial
banks in Nigeria.
1.6 SIGNIFICANCE OF THE
STUDY
The
significance of this study is derived from the attempt to provide further evidence
of the effect of intellectual capital cost on financial performance of commercial
banks in Nigeria with justification based on its relevance to contemporary
financial and economic considerations.
Considering
the subject of the study to be a topical issue in the accounting and finance
circle, the study will specifically be of benefit to all stakeholders of firms
in Nigeria, the management of firms in Nigeria, the research community, the
regulatory bodies and the general public.
To the Shareholder: it
will enable them to determine which bank to invest in considering their return
on investment on intellectual Capital. Moreso, it will be of immense benefit to
stakeholders in terms of better knowledge of why firms do what they do. As a
result, the stakeholders would be equipped to properly direct its demands on
the firm and thus achieve greater and better results.
The Management: it
will help them appreciate the need to prepare and include intellectual Capital
in financial information with the mind to give a better and more effective business
policies and decisions; again the knowledge gained from this research would
enhance the understanding of management in dealing with its stakeholders in the
broader sense rather than just the traditional shareholders.
The Standard Setters: it
will help them to know which accounting standard set to develop and which set
are of higher quality so as to know how to improve the standards and also
advice the relevant supervisory bodies to enforce compliance.
The Academics / research
bodies: This
study will add to existing literature which may be used by researchers and
students as reference materials for further research work. It will equally be
of relevance to present and future researchers as a basis of improving general
knowledge of the behavior of various stakeholders to issues of managing
intellectual capital and their eventual response to the firms. The theoretical
importance of the study in understanding the importance of disclosure of
intellectual capital and its possible effect to return on investment, provides
an added empirical knowledge in the study of intellectual capital cost.
To Banks: who will need this study to understand the
nature of their intellectual capital investment and how they contribute to the
overall generation of revenue/returns.
To other users of Annual
reports: This study will provide a knowledgeable
insight into how companies in Nigeria disclose and report information on
intellectual capital.
1.7. SCOPE OF THE STUDY
The
scope of this study is such that it appraises the effect of Intellectual
capital costs in Nigeria on financial performance of listed commercial banks.
The research was carried out on commercial banks listed on the Nigerian Stock
exchange.
The
study does not cover microfinance banks, development banks, mortgage banks and
the supervisory authorities in the banking industry. The study covers a ten
(10) year period between 2007 and 2016 for the selected commercial banks. The
researcher made use of panel regression analysis (Fixed and random effect
model) to determine which model is best fitted in drawing conclusion and test
of hypotheses.
1.8. LIMITATION OF THE
STUDY
The
researcher encountered challenges during the course of the empirical work.
Amongst the limitations are;
1. Complexity in extracting
information: The extraction of information from
banks is complex particularly as it relates to group accounts and banks. The
researcher meticulously extracted the variables for the empirical work.
Data
on intellectual capital cost in Nigeria is characterized by complex
information, non-disclosure of intellectual cost items from the banking sector.
This is the major challenge faced in the cause of this work.
1.9. OPERATIONAL
DEFINITION OF TERMS
Intellectual Capital Cost
(ICC): This can be referred to as the cost
associated with the value of expenses a firm incurs as a result of its
intellectual capital.
Intellectual Capital (IC):
This is the value that an organization has due to abilities, skills, knowledge,
competencies of its workforce and other intangible organizational factors. It
covers its people (human capital), the value inherent in its relationships (customer/
relational capital),and everything that is left when the employees go home
(structural capital). In other words, it is the knowledge that can be exploited
for some money-making, that combines the idea of the intellect or brain-power
that can be invested in producing more goods and or services.
Value Added Intellectual
Coefficient (VAIC): it is referred to as the
value added of intellectual capital as a result of the combination and or
summation of the three sub-indicators of intellectual capital (hum an,
structural and capital employed efficiency) used as a measure for the valuation
of intellectual capital.
Human Capital Efficiency
(HCE): It is the major component/indicator of
intellectual capital. It measures the value added by the human resource of an
organization.
Structural Capital Efficiency
(SCE): This is the measure of value added of the
component of intellectual capital that is left in the organization after
employees return home at night (structural capital).
Capital Employed
Efficiency (CEE): Capital employed
efficiency is a measure of the value added of Relational capital which is the
third component of intellectual capital. It measure the value added as a result
of the inter relationship between the organizations employees and its
customers.
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