The Influence of Intellectual Capital Efficiency on Firm Investment Efficiency: The Role of Corporate Governance

Abstract

This study examines the impact of intellectual capital efficiency on firm investment efficiency, with corporate governance as a moderator. This study examines board size, board meetings, and board independence as the three board characteristics associated with corporate governance. The study hypothesized that efficiency of intellectual capital, which would be through increasing the efficiency of the use of knowledge, information processing, and allocation of resources of the firms, results in increased investment efficiency. Moreover, it is further hypothesized that efficient corporate governance reinforces this positive relationship through enhanced monitoring and reduced agency costs. This research applies panel-data regression to analyse the direct impact of intellectual capital efficiency on investment efficiency and the moderating effect of the three board characteristics on non-financial firms listed in Pakistan. The study uses pooled ordinary least squares and firm fixed-effects estimations to investigate these relationships and mitigate potential endogeneity; it also uses generalized method of moments, entropy balance, and propensity score matching techniques. The results show that intellectual capital efficiency positively affects firms' investment efficiency. Moreover, the corporate governance characteristics, i.e., board size, board meetings, and board independence, strengthen the positive relationship between intellectual capital efficiency and corporate investment efficiency by providing a monitoring function for management. The results are robust to alternative measures of the variables and remain consistent when endogeneity tests are applied. The results highlight the importance of strong knowledge-based resources, coupled with appropriate board-level monitoring arrangements, to make more efficient investment decisions in the context of Pakistan.