Does intellectual capital reduce the probability of default?

Abstract

Purpose

This study aims to examine the impact of intellectual capital (IC) on default risk in Indian companies listed on the National Stock Exchange.

Design/methodology/approach

This study applies panel data regression analysis to derive a relationship between IC and default risk for the sample period 2013–2022. The value-added intellectual coefficient (VAIC) of Pulic (2000) has been applied to measure IC performance, and default risk is estimated using the revised Z-score model of Altman (2000).

Findings

The results revealed a positive association between Z-score and VAIC. It implies that a higher value of VAIC improves financial stability and leads to a lower likelihood of default. The findings further suggest that new default forecasting models can be experimented with IC indicators for better default prediction.

Practical implications

The findings can have implications for investors and banks. This paper provides evidence of IC performance in improving the financial solvency of firms. Investors and financial institutions should invest their resources in a healthy firm that effectively manages and invests in their IC. It will eventually award investors and creditors high returns through efficient value-creation processes.

Originality/value

This study provides evidence of IC performance in improving the financial solvency of Indian high-defaulting firms, which lacks sufficient evidence in this domain of research. Numerous studies exist examining the relationship between firm performance and IC value, but this area is inadequately focused and underresearched. This study, therefore, fills the research gap from an Indian perspective.

Citation

Khurana, S. and Sharma, M. (2024), "Does intellectual capital reduce the probability of default?", Journal of Financial Regulation and Compliance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRC-10-2023-0162