Author: Eugene B. Mutuc

Research Article

Year: 2021, Volume 21 Number 2

Pages: 202 – 221


The importance of intellectual capital (IC) has become visible and increase recognition as a worthy issue in academic and practical investigations. Although IC drives financial performance and competitiveness in the past literature, the quality of financial reporting is one of the essential factors to analyze and examine to achieve IC’s wholistic impact on company practices. This study integrates the mediating effect of financial performance and industry competition’s moderating role to explain IC’s effect on earnings quality (EQ). This study analyzes 1,813 firm-year observations from 2011 to 2017 based on 259 non-financial listed firms from industrials, consumer services, technology, basic materials, consumer goods, utilities, health care, resources, and telecommunications services, based on Thomson Reuters Business Classification (TRBC). The Asian economies, including China, India, Malaysia, South Korea, Philippines, Taiwan, and Thailand, were examined to raise a new perspective on the phenomenon and chosen according to the availability of firms’ data at the Thomson Reuters Eikon database. The study employs multivariate regression analyses using SPSS and Baron and Kenny’s (1986) causal steps approach to test conditional hypotheses. Our main findings reveal that IC investments are essential in creating value for the company and generating better EQ. IC causes better EQ, but the impact is partially mediated by financial performance among the firms from the combined sample (from China, Philippines, Taiwan, and Thailand). Moreover, industry competition reinforces a change in the effect of IC on EQ. Specifically, the combined samples and firms from China show that industry competition positively moderates the IC-EQ relationship. In contrast, the Philippines and Thailand firms offer that industry competition negatively moderates the IC-EQ relationship. The control variables, such as financial leverage and size, show mixed findings depending on the analysis context. This study acknowledges that VAIC has limitations as a measure of IC. However, this estimate is considered an appropriate measure of IC because the data needed to calculate VAIC were gathered from audited financial statements (Komnenic & Pokrajčić, 2012). This study fills the literature gap through the developed and integrated model to explain the IC-EQ relationship. Future studies may incorporate some more robust consequences and boundary conditions in examining IC’s impacts on EQ. Lastly, the firm’s decision-makers should contemplate that IC investments have relevant importance to achieve a competitive advantage and better financial performance. These outcomes are reflected in the means of the quality of financial reports presented by companies. 

Keywords: Intellectual Capital; Earnings Quality; Financial Performance; Industry Competition; Asian Economies