Abstract

This study evaluates the impact of intellectual capital—human capital efficiency

(HCE), structural capital efficiency (SCE), and capital employed efficiency (CEE)—
on the performance of banks listed on the Dhaka Stock Exchange (DSE) using the
Value-Added Intellectual Coefficient (VAIC) model. Secondary data were collected
from 30 banks over a 10-year period (2014–2023). Stata 13.0 was employed for data
analysis, and diagnostic tests, including unit root, normality, linearity,
heteroscedasticity, autocorrelation, and endogeneity tests, were conducted. While no
issues of autocorrelation or multicollinearity were identified, the presence of
heteroscedasticity and endogeneity necessitated the use of a two-step Generalized
Method of Moments (GMM) approach for dynamic regression analysis.
The findings indicate that HCE positively and significantly impacts bank
performance, particularly enhancing return on equity (ROE), highlighting the
importance of skilled human resources. In contrast, SCE negatively influences return
on assets (ROA), pointing to inefficiencies in structural resource utilization. CEE was
found to have an insignificant and occasionally negative effect on both ROA and
ROE, suggesting the need for more effective capital allocation strategies.
This research underscores the critical role of intellectual capital, particularly human
capital, in improving bank performance. It recommends strategic investments in
human resource development and addressing inefficiencies in structural and capital
employment to achieve sustainable growth. The study offers valuable insights for
policymakers and bank managers, contributing to the broader understanding of
intellectual capital's role in banking performance within emerging economies.

viii
 CHAPTER 1: INTRODUCTION

The banking industry is essential to a nation's economic prosperity since it facilitates

trade, channels cash, and promotes economic expansion. As vital financial
intermediaries, banks listed on the Dhaka Stock Exchange (DSE) in Bangladesh
support the stability of the country's economy. However, the conventional measures
of bank performance are changing as a result of the quickening pace of technology
development and the growing complexity of global financial systems.

In this regard, one of the main factors influencing financial institutions' performance
and long-term competitive advantage is intellectual capital. Human capital, structural
capital, and capital employed are the three main components that make up intellectual
capital. Employee knowledge, skills, and abilities are referred to as human capital;
organizational culture, methods, and processes are referred to as structural capital; and
the financial and operational resources that the organization efficiently uses are
referred to as employed capital.

The purpose of this study is to assess how these three aspects of intellectual capital
affect the performance of Bangladeshi banks that are listed on the DSE. The research
attempts to provide insights into how banks might use their intellectual resources to
improve efficiency, profitability, and competitiveness by comprehending these
linkages. Furthermore, in a financial environment that is changing quickly, the results
should offer strategic advice for bank management as well as regulatory implications
for regulators.

1.1 : BACKGROUND

The most often used definition of IC is "any knowledge that can be converted into
value" (L. Edvinsson, 1997). Scholars have offered many definitions of intellectual
capital. As a result, there is no one definition that adequately captures the concept of
intellectual capital. Intellectual capital is defined by Dumay et al. (2015) as
"intellectual material, intellectual property, experience and knowledge-based
information that can be used to create value."

In recent years, knowledge-based resources have drawn more attention as a critical

component for creating value and improving organizational standing (Bakshi and
Chahal, 2016). Knowledge and information have influenced the current business
environment. Both tangible and intangible assets are crucial components of strategic
growth. Numerous scholars contend that the most important elements influencing a
company's performance are its tangible and intangible assets. If the company wishes
to do better, it must focus more on its intellectual capital (Ali and Khan, 2010). As a
result, gaining intellectual capital (IC) is prioritized over acquiring physical capital in
many modern firms, particularly those in the service industry like banks. Therefore, in
addition to having a direct impact on banks' values, IC is also a crucial tool for
obtaining a competitive advantage and reaching optimal output levels (Madani et al.,
2015). Scholars and researchers from a variety of nations and businesses are
examining the
1
link between intellectual capital and bank performance, which has attracted more
attention in the global arena. A bank's financial performance is seen to be significantly
impacted by the efficient use of intellectual capital components, such as Human
Capital (HC), Structural Capital (SC), and Capital Employed (CE) (Montequin et al.,
2006). A company's operational effectiveness and financial performance are its two
main performance factors. The effectiveness of a business depends on how it conducts
business. The two financial metrics Return on Assets (ROA) and Return on Equity
(ROE) and the one market ratio. These two variables are used as dependent variables
in this study.

The knowledge, skills, and intangible resources that are ingrained in a business and
contribute to its competitive advantage and value generation are collectively referred
to as intellectual capital. The competency of employees (Human Capital Efficiency,
or HCE), the efficacy of organizational processes and systems (Structural Capital
Efficiency, or SCE), and the strength of capital (Capital Employed Efficiency, or
CEE) are some of the ways that intellectual capital appears in the banking industry. A
technique known as the Value-Added Intellectual Coefficient (VAIC) was developed
to evaluate the efficacy of value added utilizing these HCE, SCE, and CEE, according
to Pulic (2000a, b). These three factors are therefore included in this investigation as
independent variables.

Intellectual capital (IC), or simply the knowledge of corporate equity, has attracted a
great deal of practical interest. Despite IC's growing significance, many businesses
find it difficult to manage, frequently due to measurement issues. Several scholars
claim that IC represents the unrecorded value that offers businesses a competitive
advantage and eludes accounting records. Moreover, it holds that financial reporting
errors reflect the fact that, nowadays, the growth of IC—rather than only the
manufacturing of material goods—is the main source of financial value (Chen et al.,
2005). Its acceptance as a source of strategic advantage has led to the development of
appropriate measuring tools because traditional financial instruments are unable to
account for all IC properties.

Given the conflicting results of earlier research, it is crucial to look at this

phenomenon especially in relation to Bangladesh's banking industry. This research
aims to offer important insights into the advantages and disadvantages of intellectual
capital components within the broad banking sector as well as their potential impact
on important financial performance metrics by performing an empirical study on
DSE- Listed Banks. Therefore, this study aims to determine the relationship between
intellectual capital and how it affects bank performance.

1.2 : CONTEXT

In a global economy that is becoming more and more knowledge-driven, intellectual

capital is now essential to an organization's success. As a knowledge-intensive
business, the banking industry is highly dependent on the efficient use of intellectual
resources in order to retain competitiveness, develop, and adjust to changing market
needs. Technology breakthroughs, financial liberalization, and regulatory changes
have all contributed to major changes in Bangladesh's banking industry in recent
decades. A greater comprehension of the non-traditional elements influencing bank
performance has become necessary as a result of these developments.
2
The importance of intellectual capital, which includes human, structural, and
employed capital, is still understudied in the context of emerging countries like
Bangladesh, even though financial capital has historically been the major emphasis
when evaluating bank performance. Examining how these intangible assets affect the
performance of banks listed on the Dhaka Stock Exchange (DSE) is crucial given the
particular socioeconomic circumstances and regulatory framework.

This study fills a knowledge vacuum in the literature by providing a thorough

examination of the relationship between intellectual capital and bank performance,
which makes it very pertinent. In doing so, it supports the overarching goal of
improving the strategic management of intellectual resources in the banking industry
of Bangladesh.

Globally, research on the efficacy of IC and its relationship to bank performance is

yielding a plethora of data for certain service sectors, including banks. Even though
the economic structure of the Bangladeshi banking system has attracted a lot of
interest from international researchers, there aren't many studies that discuss bank IC
and performance in Bangladesh (Shahid et al., 2006). Furthermore, like many
growing countries, Bangladesh's banking sector is seen as one of the most important
knowledge- based (or service-based, depending on your point of view) service sectors
for ensuring long-term economic progress. The purpose of this study is to quantify the
effect of intellectual capital on the 30 banks among the 36 listed Banks on the Dhaka
Stock Exchange in Bangladesh, as these institutions often reflect the nation's
economic situation. Additionally, the study attempts to investigate the relationships
between a bank's performance and intellectual efficiency.

1.3 : PURPOSES

This study's main goal is to assess how intellectual capital—more especially, human,
structural, and employed capital—affects the performance of banks that are listed on
Bangladesh's Dhaka Stock Exchange (DSE). The purpose of this study is to:

1. Recognize the Role of Human Capital: Analyze how workers' knowledge,

abilities, and experience affect banks' operational effectiveness and profitability.

2. Examine the Value of Structural Capital: Examine how organizational

procedures, frameworks, and culture support banks ‘long-term expansion and
competitive edge.

3. Evaluate Employed Capital's Effectiveness: Determine how well operational and

financial resources are used to improve bank performance.

4. Reduce the Knowledge Gap: In the context of emerging economies, especially

Bangladesh, there is a dearth of empirical data about the connection between bank
performance and intellectual capital.

5. Offer Useful Insights: Give lawmakers and bank management concrete

suggestions on how to maximize intellectual resources and enhance overall
performance in a changing financial landscape.

3
The purpose of this study is to increase knowledge of the strategic role that
intellectual capital plays in promoting innovation, resilience, and competitiveness in
the banking industry of Bangladesh.

1.4 : SIGNIFICANT OF THE STUDY

This study fills important knowledge gaps on the impact of intellectual capital on
bank performance, especially in Bangladesh, which makes it noteworthy for a number
of reasons. The following succinctly describes the significance of this study:

1. Contribution to Literature: By examining the effects of employed, structural, and

human capital on the performance of banks listed on the Dhaka Stock Exchange
(DSE), the research advances current scholarly understanding. Given the paucity of
such research in emerging nations, this is especially pertinent.

2. Bank Strategic Implications: The study offers useful insights for bank
management to create strategies that maximize resource allocation and boost
competitiveness by identifying the critical aspects of intellectual capital that influence
performance.

3. Policy Development: The results can help regulators and policymakers

comprehend the value of intellectual capital and create regulations that promote
efficiency and innovation in the banking industry.

4. Economic Relevance: Bangladesh's economic expansion is greatly aided by the

banking industry. This study demonstrates how banks' operational effectiveness and
financial stability may be improved by leveraging intellectual capital, which promotes
economic stability in general.

5. Practical Insights: The study provides useful suggestions for enhancing

organizational structures, resource usage, and staff competencies, assisting banks in
achieving long-term sustainability and resilience in a financial environment that is
changing quickly.

6. Advice for Stakeholders: By using the study's insights, stakeholders, analysts, and
investors may evaluate banks' intangible assets and decide on partnerships and
investments with knowledge.

By examining these facets, the study highlights how important intellectual capital is to
promoting innovation, enhancing output, and propelling the banking industry's long-
term expansion in Bangladesh.

4
1.5 : OUT LINE OF THE REPORT

The outline of the research is structured as follows:

Chapter Chapter Name Outlines
Chapter 1 INTRODUCTION  Theoretical Framework of the Study
 Review of Empirical Literature
 Summary and Implications
 Hypothesis Statement
Chapter 2 LITERATURE  Theoretical Framework of the Study
REVIEW  Review of Empirical Literature
 Summary and Implications
 Hypothesis Statement
Chapter 3 METHODOLOGY  Methodology
OF THE  Data Collection
RESEARCH  Variables
 Variable List
 Instruments
 Analysis
 Ethics and Limitations
Chapter 4 RESULT AND  Descriptive Statistics
DISCUSSION  Pearson Correlation Analysis
 Dynamic Regression Analysis
Chapter 5 CONCLISION
Table 1: Outline of the report

5
 CHAPTER 2: LITERATURE REVIEW

Human capital is defined by Rehman et al. (2011) as an employee's abilities and

inventiveness that may be enhanced via increased training program investment.
Human capital is the experience and knowledge of employees that improves an
organization's productivity. A more efficient organization is represented by more
efficient individuals, which raises Value Added (VA) efficiency. Conversely,
competence include knowledge and training, whereas attitude describes how people
act in the workplace (Bontis et al., 2000).

2.1 : THEORITICAL FRAMEWORK

Structural capital includes the supporting infrastructure that allows an organization to

access its intellectual capital. For instance, a company may sell real commodities like
databases, patents, and trademarks. Corporate culture, employee trust, and employee
transparency are all completely intangible assets. Competitive intelligence, equations,
information management, patents, policies, and procedures are some of the systems or
products that the company has created throughout the years using structural capital
(Maheran et al, 2009).

John Kenneth Galbraith coined the term "intellectual capital" in 1969 (Feiwal, 1975).
He claimed that intellectual capital (IC) extended beyond "intellect as pure intellect"
and encompassed some "intellectual action." Intellectual capital is based on intangible
assets. IC is becoming more widely acknowledged as a crucial corporate strategic
asset that may provide fixed competitive advantage and enhanced financial
capabilities, despite the fact that it is usually an intangible asset (Barney, 1991).

Stewart (1997) asserts that intellectual capital is composed of three components:

structural capital (SC), capital employed (CE), and human capital (HC). Scholars
were able to gain a better understanding of intellectual capital by breaking it down
into many components. Human resources Human Capital (HC) is the foundation of a
company's employees' knowledge, skills, knowledge, and talents (Youndt et al, 2004).
According to Kianto et al. (2010), HC is usually thought of as the most relevant
component of IC.

According to Kretschmer and Dean (2007), a company's ability to create, develop,

and assess intangible assets with the goal of increasing their value is linked to its
intellectual capital; in reality, this improves the efficacy of the firm. More precisely,
two important measures of business efficiency are revenue ratios that incorporate
Return on Equity (ROE) and Return on Assets (ROA). According to Pandya and
Rao's (1998) research, ROA and ROE are the two most commonly used accounting-
based metrics that academics wish to use to assess performance.

On the other hand, Hayes (2022) defines capital employed as the entire amount of
money invested in a business's current and fixed assets. Financially speaking, it is
equal to the sum of all contributions made by investors, equity capital, loan capital,
and long- term debt. From an asset perspective, however, it is equivalent to the sum of
working capital and fixed assets. Therefore, capital utilized, sometimes referred to as
operational assets, represents the worth of the resources that allow a business to turn a
6
profit.

7
Nonetheless, a number of researches provide different methods for gauging company
performance. Jackson (1996), for instance, proposed that using EVA in performance
analysis offers the benefit of focusing on operating cash flow rather than just earnings
per share (EPS). However, the majority of researchers feel that it is a conventional
method. EVA is the conventional accounting metric that illustrates the distinction
between ROR and Cost of Capital, according to Bidde (1999). The most limited
concept of company performance focuses the most emphasis on employing financial
measures like ROA and ROE, whereas the most complete definition of organizational
efficiency lays more emphasis on more market-based performance indicators.
According to Ponnu (2008), ROA is a gauge of an organization's real performance.
Another performance statistic that may be used for both short-term and long-term
gains for the majority of shareholders is return on equity (ROE) (Johnson & Greening,
1999; Brealey & Myers, 2000). For this reason, ROA and ROE are used in this study's
analysis to evaluate bank performance.

2.2 : REVIEW OF EMPIRICAL LITERATURE

Many scholars have found a significant direct relationship between bank profitability
and IC and its constituents. For example, Saengchan (2008) found a high correlation
between the ROA of Thai commercial banks and IC. Using a sample of Bahraini
banks from 2005 to 2007, Karem and Ismail (2011) asserted that intellectual capital
has a positive impact on banks' financial operations. Meles et al. (2016) used data
from US banks from 2005 to 2012 and found that IC had a positive effect on bank
performance.

According to Mazur et al. (2021), there is a growing correlation between IC and

organizational performance, particularly in periods of significant economic disruption.
IC has a mixed effect on banks' performance. Its effects might be positive, negative,
or even show a U-shaped connection. The effects of intellectual assets on corporate
success vary depending on factors such as the sample and quantitative approach used.
(Tran and Vo, 2021).

HC is more efficient than structural capital and physical assets, according to

Mohammad et al. (2016), who examined the IC performance of Saudi banks. Physical
capital has a significant influence on bank profitability, while human capital in the
most recent year has an inverse relationship with performance, claim Vo and Tran
(2018), who sampled Thai banks from 1997 to 2016. Comparisons of the efficacy of
intellectual capital in the international banking sector are still sparse in the literature.
Physical capital is the most important factor in the profitability of Chinese and
Pakistani banks, per the research of Xu et al. (2009).

Researchers have refined several techniques to assess IC. VAIC was widely utilized
by the Pulic (1998) because of its simple, consistent, and reliable qualities. Pulic
(1998) states that a mechanism was created to assess the effectiveness of value added
(VA) using a corporate intellectual coefficient called the Value-Added Intellectual
Coefficient (VAIC). Additionally, the VAIC paradigm makes it possible to
differentiate across businesses or countries (Williams and Firer, 2003).

According to Maditinos et al. (2011), this method examines how well the three
corporate components—capital employed efficiency (CEE), human capital efficiency
8
(HCE), and structural capital efficiency (SCE)—work together to create value.
Effective utilization of the company's financial, intellectual, and physical resources to
optimize potential value is indicated by a high VAIC rating. The banking sector has
made extensive use of the VAIC technique to examine the impact of IC on company
performance as measured by financial importance, market value, profitability, and
growth rate.

Chen Goh (2005) employed the VAIC model to evaluate the Intellectual Capital
development of Malaysian commercial banks from 2001 to 2003. He found that while
both local and foreign banks in Malaysia generate a substantial amount of wealth,
local banks are more efficient at doing so than foreign banks. According to the study
by Pandya and Rao (1998), researchers wish to examine performance using a variety
of accounting-based metrics, with ROA and ROE being the two most commonly
utilized variables to gauge the impact of VAIC. Mondal and Ghosh (2012) conducted
a longitudinal analysis spanning the years 1999–2008 on 65 Indian banks. They
observed that whereas intellectual capital has a positive impact on return on equity for
three of the ten years, it has a positive impact on return on assets for eight of the
years.
However, there are several serious problems with the VAIC paradigm. For instance,
Stahle et al. (2011) pointed out that it only focuses on the efficiency of labor and
capital investments made by businesses, not IC efficiency. Nonetheless, a number of
experts contend that the VAIC model is the best way to evaluate how IC affects a
business's performance. The VAIC technique has been extensively used in the
banking sector to examine the impact of IC on company performance, which is
measured by profitability, efficacy, market value, and growth rate (Mondal and Gosh,
2012). Therefore, the impact of IC on Bangladeshi banks listed on the DSE is
assessed in this research using the VAIC model.

Research on company performance and capital efficiency is lacking in Bangladesh's

banking industry. The precise relationship between capital efficiency and company
success has not been adequately explored in these researches. No significant
coefficients or explanations for the observed population have been found in the
results. Therefore, this study aims to demonstrate the relationship between capital
efficiency and performance for the 35 banks that are listed on the DSE. The current
literature review anticipated that examining the connection between intellectual
capital and bank performance in Bangladesh's banking sector would greatly benefit
this study.

2.3 : SUMMARY AND IMPLICATION

Numerous studies on capital efficiency and profitability have been conducted in

different banks, industries, and nations. Thus, most studies have found a strong
positive correlation between corporate performance and capital efficiency. Effective
management of intellectual capital is therefore crucial for an organization's
development, success, and capacity to prosper in a constantly shifting business
environment, from promoting innovation and competitive advantage to improving
decision-making and risk management. Nonetheless, a number of studies have
9
demonstrated a negative relationship between capital workers, human capital, and
structural capital.

2.4 : HYPOTHESIS STATEMENT

Researchers from all around the world have come to value IC in improving corporate
performance as a result of the many theories put out by various thinkers. First,
assuming that intellectual capital and business success are unrelated variables, a null
hypothesis is created.

When assessing good financial performance, intangible assets must also be included.
When the value of intellectual property rises, the company's financial performance is
better than it was the previous year. International Accounting Standards (IAS), which
are rapidly being embraced by practically all industrialized and emerging nations, are
followed in the thorough accounting of all intangible assets. Regardless of other
factors, SC has a positive impact on financial success, claim Bontis et al. (2000).
Following discussion, Belkaoui's research showed a positive relationship between IC
and financial performance.

Human capital efficiency (HCE), structural capital efficiency (SCE), and capital
employed efficiency (CEE) are the three components of the VAIC that indicate a
positive relationship with financial performance (ROA, ROE).

After analyzing the Literature, we have constructed the hypothesis for our research as
follows:

Null Hypothesis Alternative Hypothesis

H0: Firm performance and intellectual H1a: Financial performance is enhanced
capital (HCE, SCE, and CEE) are by human capital efficiency.
unrelated.
H1b: Financial performance is enhanced
by Structural capital.

H1c: Financial performance is enhanced

by Capital employed.

Table 2: Hypothesis table

10
 CHAPTER 3: METHODOLOGY OF THE RESEARCH

The methodology section outlines the research approach, Data Collection, Variables,
Variables List, Instruments, Analysis, Ethics and Limitation.

3.1 : METHODOLOGY

The methodology of this study, which is centered on quantitative research methods

and the VAIC (Value Added Intellectual Coefficient) model. The VAIC model is used
to quantify a bank's value-added intellectual capital and assess how it affects
competitiveness and performance. The purpose of the study is to investigate, using the
VAIC framework, the relationship between organizational performance and
intellectual capital.

A technique for evaluating the effectiveness of value creation inside a company that
focuses on the function of intellectual capital (IC) is called VAIC (Value Added
Intellectual Coefficient). The VAIC, which was created by Pulic (1998), assesses how
well a business uses its physical and intellectual resources to create value. Particularly
in knowledge-intensive sectors like banking, it is frequently employed in performance
evaluation.

Components of VAIC:

1. Human Capital Efficiency (HCE): Evaluates how much human capital such as
workers' knowledge, abilities, and competencies contribute to the value generation of
the business.
2. Structural Capital Efficiency (SCE): Shows how well structural capital like
databases, organizational procedures, and intellectual property generates value.
3. Capital Employed Efficiency (CEE): Evaluates the efficiency with which the
company's financial and physical resources produce value.
VAIC is especially important in the context of banks because it assesses how
knowledge-intensive resources, such as staff knowledge and process effectiveness,
affect financial success. For evaluating banks that are listed on stock markets, like the
Bangladeshi stock exchange, this makes it a useful tool.

3.2 DATA COLLECTION

From 2014 to 2023, data from the annual reports of 30 of the 36 banks listed on the
Dhaka Stock Exchange were analyzed. (10 years). The annual reports are available on
the websites of each bank. This study then collects the necessary samples. The data
samples are used to investigate the relationship between business performance and the
efficacy of intellectual capital.

11
3.3 : VARIABLES

For this research we have selected two dependent variables, three independent
variables and two control variables. These are the selected variables:
Dependent Variables:
Numerous authors have made extensive use of two key metrics that measure the
profitability of 30 banks listed on the DSE. These two metrics have to do with
accounting performance. Return on Asset (ROA), which Firer and Williams (2003)
also utilize in their research, is the first measure of accounting performance. The
ability of a company to generate income at a certain level of its total assets is
measured by the ratio of net income to total assets.

Return on Equity (ROE) is the second accounting performance metric employed in

this study to gauge profitability. It illustrates the efficient use of shareholder capital
and shows the ratio of net income to total equity. Abowd (1990), Main et al. (1996),
Kern & Kerr (1997), and Core et al. (2007) are among the scholars who utilize ROE
as a metric to gauge profitability.

Return on Asset (ROA):

A crucial indicator of financial success, return on assets (ROA) gauges how well a
business uses its resources to produce a profit. Because banks mostly rely on asset
utilization to earn revenue, it is very helpful in assessing their performance.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
ROA= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

Return on Equity (ROE):

A financial performance indicator called return on equity (ROE) gauges how well a
business or bank makes money off of the equity held by its shareholders. Particularly
in the banking industry, it is frequently used to assess profitability and the
effectiveness of equity capital usage.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
ROE= 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

Independent Variables:

In this study, the acronym VAIC is employed to measure the effectiveness of

intellectual capital. Three separate stages make up the VAIC calculation. The VAIC
indicator for the VA by IC coefficient has been used in a number of studies (Mavridis,
2004; Purohit and Tondon (2015); Joshi et al. (2013); Kamath, 2008). According to
Pulic (2001), a firm's VAIC may be determined using the five methods listed below:

To determine how well the company used IC, the additional benefit that capital has
created must be classified and Value Added (VA) must be computed. Thus, the first
method is:

Value Added (VA) = Total output - total input

12
Net income, often known as "output" in this context, is the total amount of money
earned from all sold goods and services. Inputs are the total amount of all costs
incurred by the company.

The HCE, SCE, and CEE perform the second phase, which is to compute the IC
efficiency. The ratio of each of the three IC components to value added is known as
the IC efficiencies. The value-added contribution of one unit of human capital costs is
the definition of human capital efficiency, or HCE. The overall salaries and wages of
the bank are used to determine HC expenses.

𝐻𝑢𝑚𝑎𝑛 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (𝐻𝐶)

HCE= 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑 (𝑉𝐴)

The contribution of structural capital (SC) to the creation of value added (VA) is
measured by structural capital efficiency (SCE). It is the SC to VA ratio. SC is equal
to Value Added less Human Capital.

Structural Capital (SC)

SCE= 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑 (𝑉𝐴)

Capital Employed (CE), the final element of IC, displays the total assets used by a
bank. Accordingly, the contribution of all physical assets to the creation of value
added is represented by capital employed efficiency, or CEE.

Capital Employed (CE)

CEE= 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑 (𝑉𝐴)

The final step is to calculate the VAIC by combining the IC efficiencies which shows
the contribution of intellectual, physical, and financial capital to the creation of
profits:

Value Added Intellectual Coefficient (VAIC) = [Human Capital Efficiency (HCE)

+ Structural Capital Efficiency (SCE)+ Capital Employed Efficiency (CEE)]

Control Variables:
This study uses two key variables, namely Bank Size (BS) and Equity Ratio (ER), to
quantify the control for certain bank features. Wilson et al. (2004) assert that
economies of scale resulting from a bank's size significantly reduce costs. To
determine a bank's size, the natural logarithm of its total assets is utilized.

Banks Size = ln (total asset)

By comparing equity to total assets, the Equity ratio demonstrates the bank's
improved capacity to handle an uncertain macroeconomic environment (Paolucci,
2016).

𝐸𝑞𝑢𝑖𝑡𝑦
Equity Ratio =
13
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

14
3.4 : VARIABLE LIST

Independent Variables:
Variable Name Reference
Human Capital Efficiency (HCE) Chen et al., (2005),
Structural Capital Efficiency (SCE) Pulic (2000, 2004)
Capital Employed Efficiency (CEE) Pulic (2000, 2004) Chen et al., (2005),
Table 3: Indipendent Variable

Dependent Variables:
Variable Name Reference
Return on Asset (ROA) Kamath (2008), Firer and
Williams (2003),
Return on Equity (ROE) Abowd (1990); Main et al. (1996); Kern
& Kerr (1997); Core et al. (2007)
Table 4: Dependent Variable

Control Variables:
Variable Name Reference
Banks Size (BS) Wilson et al. (2004)
Equity Ratio (ER) (Paolucci, 2016)
Table 5: Control Variable

3.5 : INSTRUMENTS

Both models and investigations are assessed as helpful active panel data analysis tools
using statistical methods with STATA 13.0, MS Word, and MS Excel in order to
examine the results and validate the study's hypothesis. Numerous significant
elements must be considered by this empirical model. Three dependent, three
independent, and two control variables are included in this study in order to identify
the ideal linear regression model. The perfect regression model is predicated on a
number of assumptions. After each premise is verified, a regression model may be
used. Once the full test is analyzed, the model's fitness is confirmed. Based on test
results, the study's optimal regression model is used. The panel data regression
analyzes the general performance-influencing elements as well as the distinctive
features of banks. The regression model produces a result free of bias when the
variables are chosen appropriately. The skewness/kurtosis test, JB test, unit root test,
multicollinearity, heteroskedasticity, autocorrelation, and endogeneity were among
the several statistical methods employed in this investigation. In the section that
follows, describe these findings.

15
3.6 : ANALYSIS

3.6.1 : Unit Root Test:

One statistical technique for figuring out if a time series is stationary or non-stationary
is the unit root test. Because non-stationary data might produce false statistical
conclusions, stationarity is essential in time series analysis. A time series is non-
stationary if it has a unit root, which indicates that its statistical characteristics (such
as mean, variance, and autocorrelation) vary with time.
A series may have an unexpected systematic pattern if it has a unit root. It is
important to verify for stationarity since the regression's whole set of results might be
erroneous. In this paper, the unit root test of panel data is investigated. The Hadri LM
test and the Levin-Lin-Chi unit root test were both used in this investigation for my
project report. The 2002 Levin-Lin-Chu test is used to confirm that the panel data are
stable and balanced. Every panel contains the unit root, which is the null hypothesis if
the panel remains stationary due to the significant results. The opposing theory never
changes. When the p-value is less than 0.05, we uphold the alternative hypothesis to
show that the data are stable.
Ho: Panels contain unit roots
Ha: Panels are stationary

Variable T-statistics P value

ROA -8.1171 0.0000
ROE -7.7428 0.0000
HCE -10.8214 0.0000
SCE -10.3545 0.0000
CEE -13.8486 0.0000
BS -5.0882 0.0000
ER -3.3388 0.0000
Table 6: Levin_Lin-Chu Test (Source: Stata, Appendix: A)

As a result, all variables’ p values are less than 0.05, we should accept an alternative
hypothesis. In Levin-Lin- Chu test, the alternative hypothesis denotes the absence of a
common unit root.

16
S3.6.1(A): Hadri LM Stationary test:

Ho: Panels contain unit roots

Ha: Panels are stationary

Variable Z-statistics P value

ROA 5.7232 0.0000
ROE 2.5381 0.0056
HCE 6.9794 0.0000
SCE 1.9163 0.0277
CEE 6.7829 0.0000
BS 24.6067 0.0000
ER 15.9113 0.0000
Table 7: Hadri LM Stationary Test (Source: Stata, Appendix: B)
As a result, all variables’ p values are less than 0.05, we should accept an alternative
hypothesis. In Hadri LM Stationary test, the alternative hypothesis denotes the
absence of a common unit root.

3.6.2 : Normality Test:

To find out if a dataset has a normal distribution, a normality test is utilized. In many
statistical tests, including regression, ANOVA, and t-tests, normality is a crucial
presumption. The results of the normality test are used to assess the likelihood that the
random variable that created the data set would have a normal distribution. Normality
tests include the Shapiro-Wilk test and the skewness kurtosis test. The Shaprio-Wilk
test and the skewness Kurtosis test were employed in this study to determine if the
data were normally distributed.

3.6.2(A): Skewness and kurtosis test for normality:

Indicators of distribution shape include skewness and kurtosis. Conversely, the

kurtosis represents the height and sharpness of the central peak. In a skewness test,
positive skewness is defined as a larger or fatter tail on the right side of the
distribution. In a distribution with negative skewness, the left half of the tail will be
longer and fatter than the right, and the mean, median, and mode will all be smaller
than the mode. Asymmetry and kurtosis values between -2 and +2 are acceptable for
determining if a distribution is normal for a single variable (Ghasemi & Zahediasl,
2012).

H0: The data normally distributes.

Ha: The data not normally distributed

17
 Variables obs Pr(Skewness) Pr(Kurtosis) adj chi2(2) Prob>chi2

ROA 300 0.0000 0.0000 - 0.0000

ROE 300 0.0000 0.0000 - 0.0000
HCE 300 0.0000 0.0000 - 0.0000
SCE 300 0.0000 0.0000 - 0.0000
CEE 300 0.0000 0.0000 - 0.0000
BS 300 0.0000 0.0000 59.64 0.0000
ER 300 0.0000 0.0000 - 0.0000
Table 8: Skewness/Kurtosis Test (Source: Stata, Appendix:C)

As the P value is less than .05 for all variables so based on the skewness/kurtosis test
for normality, all the variables, ROA, ROE, HCE, SCE, CEE, BS and ER are likely
not normally distributed

3.6.2(B): Shaprio-Wilk test for normality:

The p-value derived from the test serves as the foundation for the Shapiro-Wilk test
for normalcy. Assuming that the sample data originated from a normally distributed
population, the p-value obtained after performing the test on a dataset will show the
likelihood of witnessing the sample data. This study concludes that the data is
normally distributed if the p-value is higher than the selected significance threshold,
which is often set at 0.05. This is because there is not enough evidence to reject the
null hypothesis. In contrast, we reject the null hypothesis and conclude that the data
does not follow a normal distribution if the p-value is less than or equal to the
significance threshold. In these situations, it implies that there is a substantial
departure from normalcy in the data.

H0: The data normally distributes.

Ha: The data not normally
distributed.

Shapiro-Wilk W test for normal data

Variable Obs W V z Prob>z

ROA 300 0.63283 78.225 10.233 0.00000

ROE 300 0.36034 136.278 11.536 0.00000
HCE 300 0.64259 76.145 10.170 0.00000
SCE 300 0.12213 187.029 12.280 0.00000
CEE 300 0.63300 78.188 10.232 0.00000
BS 300 0.87567 26.488 7.692 0.00000
ER 300 0.35723 136.941 11.548 0.00000

Table 9: Shapira Wilk Test (Source: Stata, Appendix:D)

The results show that all of the variables have p-values of 0.00000, which is less than
0.05. Thus, we would reject the null hypothesis (Ho) and conclude that the data are
not
18
19
normally distributed for each of the following variables: ROA, ROE, HCE, SCE,
CEE, BS, and ER.
3.6.3 : Linearity Test:

In regression analysis, a linearity test establishes whether the connection between

independent variables and the dependent variable, or between two variables, is linear.
In linear regression, the assumption of linearity is crucial since non-linear connections
can result in skewed estimates and poor model performance. One component of
regression model diagnostics is the linearity test. There is evidence to refute the
linearity assumption if the p-value is significant, which is often below the selected
significance threshold, such as 0.05. The linearity test's hypothesis is:
Ho: The variables are linear
Ha: The variables are not
linear

. regress ROA _hat _hatq

Source SS df MS Number of obs = 300

F( 2, 297) = 184.34
Model .012646728 2 .006323364 Prob > F = 0.0000
Residual .010187785 297 .000034302 R-squared = 0.5538
Adj R-squared = 0.5508
Total .022834513 299 .00007637 Root MSE = .00586

ROA Coef. Std. Err. t P>|t| [95% Conf. Interval]

_hat 1.078744 .0565938 19.06 0.000 .9673687 1.19012

_hatq -15.04769 2.35054 -6.40 0.000 -19.67351 -10.42186
_cons .0008627 .0005634 1.53 0.127 -.0002461 .0019715

. regress ROE _hat _hatq

Source SS df MS Number of obs = 300

F( 2, 297) = 219.14
Model 3.00525412 2 1.50262706 Prob > F = 0.0000
Residual 2.03649229 297 .006856876 R-squared = 0.5961
Adj R-squared = 0.5934
Total 5.04174642 299 .016862028 Root MSE = .08281

ROE Coef. Std. Err. t P>|t| [95% Conf. Interval]

_hat 9.899349 .8001479 12.37 0.000 8.324672 11.47403

_hatq 458.474 33.23296 13.80 0.000 393.0721 523.8759
_cons -.0058954 .0079656 -0.74 0.460 -.0215716 .0097807

Table 10: Linearity Test (Source: Stata, Appendix: E)

There is sufficient evidence to reject the null hypothesis since the probability value for
both ROE and ROE (p-value) linked to the F-statistic is 0.0000, which is below the
20
traditional significance level of 0.05. Therefore, the outcome implies that the
variables' connection is not linear and that a non-linear functional form would be a
better way to express it.

3.6.4 : Multicollinearity Test:

When there is a strong correlation between two or more independent variables in a

regression model, this is known as multicollinearity. Because of this, it is challenging
to ascertain how each variable affects the dependent variable separately, which might
result in inaccurate coefficient estimates and exaggerated standard errors. The degree
of multicollinearity may be determined using the VIF test. The VIF test is also known
as the Variance Inflation Factor. When independent variables are correlated with one
another, this is known as multicollinearity. Gujrati d. (2009) states that a VIF of less
than 10.0 is considered appropriate. For example, Gujrati argues that the
multicollinearity number should be around zero and the 1/VIF ratio should be
approximately five.

. vif

Variable VIF 1/VIF

ER 3.66 0.273508
CEE 3.50 0.285926
HCE 2.58 0.387926
BS 2.10 0.477163
SCE 1.45 0.687723
ROE 1.09 0.917802

Mean VIF 2.40

Table 11: Multicollinearity Test (Source: Stata, Appendix: F)

The results of the multicollinearity test show that the independent variables in the
model do not exhibit significant multicollinearity. Moderate multicollinearity is
shown by the fact that all Variance Inflation Factor (VIF) values fall below the
generally recognized cutoff point of 10. The highest VIF values are 3.66 for ER and
3.50 for CEE. The VIF values for the remaining variables HCE, BS, SCE, and ROE
are much less than 5, indicating minimal multicollinearity. Furthermore, the dataset's
mean VIF of 2.40 further demonstrates that multicollinearity is not a major problem.
This guarantees that the regression estimations are accurate and unaffected by the
predictors' collinearity.

3.6.5 : Heteroskedasticity Test:

In regression analysis, heteroskedasticity occurs when the variance of the residuals

(errors) varies across all levels of the independent variable or variables. It goes against
the fundamental premise of homoscedasticity (constant variance of residuals), which
is
21
a prerequisite for ordinary least squares (OLS) regression. Unreliable hypothesis
testing and ineffective estimates might result from heteroskedasticity. The null
hypothesis, known as homoscedasticity, states that all error variances are the same.
Error variances are nonlinear functions of one or more variables (heteroscedasticity),
according to the alternative hypothesis. The constant variance null hypothesis, which
implies that there is homoscedasticity in the residuals, may thus be accepted at a 5%
significance level. The range of dependent variables for ROA, ROE, and TQ were
tested for heteroscedasticity using the Breusch-Pagan / Cook-Weisberg test for
heteroskedasticity and Cameron & Trivedi's decomposition of IM-test. The hypothesis
of heteroscedasticity is:
Ho: Constant Variable
Ha: Not Constant Variable
3.6.5(A): Breusch-Pagan / Cook-Weisberg test for heteroskedasticity:

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of ROA

chi2(1) = 16.20
Prob > chi2 = 0.0001

(Source: Stata, Appendix: G)

The result shows that the p-value is less than the chosen significance level
(commonly 0.05), we would reject the null hypothesis (Ho) in favor of the alternative
hypothesis (Ha), indicating that there is evidence of heteroskedasticity in the data.

22
3.6.5(B): Cameron & Trivedi's decomposition of IM-test:

White's test for Ho: homoskedasticity

against Ha: unrestricted heteroskedasticity

chi2(26) = 296.75
Prob > chi2 = 0.0000

Cameron & Trivedi's decomposition of IM-test

Source chi2 df p

Heteroskedasticity 296.75 26 0.0000

Skewness 81.88 6 0.0000
Kurtosis 1.83 1 0.1759

Total 380.46 33 0.0000

Table 12: Cameron & Trivedi’s IM test (Source: Stata, Appendix: H)

Here, the totall p-value for ROA, ROE, are 0.0000, which is less than 0.05 (assuming
a common significance level of 0.05). Therefore, we would reject the null hypothesis
(Ho) and conclude that there is evidence of unrestricted heteroskedasticity in the data.

3.6.6 : AUTOCORRELATION TEST:

The association between a variable and its own historical or projected values is known
as autocorrelation. In econometrics, checking for autocorrelation is a crucial step in
guaranteeing the reliability of regression findings. Serial correlation, often referred to
as autocorrelation, is the degree of association between the variable values over
several data sets. Time series data often contain it. In order to determine if
autocorrelation existed in the datasets, the Wooldridge test for autocorrelation was
employed. Assuming that the error term follows a first-order autoregressive process is
the foundation of the Wooldridge test. The absence of first-order autocorrelation in
the error term is rejected if the p-value is smaller than the often-used significance
threshold (e.g., 0.05). The hypothesis is:

H0: First-order autocorrelation does not exist

Hα: Autocorrelation exists.

23
Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
F( 1, 29) = 3.821
Prob > F = 0.0603

(Source: Stata, Appendix: I)

Since the p-value (0.0603) is greater than the significance level commonly chosen
(e.g., 0.05), this study can’t reject the null hypothesis (H0) that there is no first-order
autocorrelation in the error term. This suggests that there is no evidence of first-order
autocorrelation in the panel data regression model. In other words, the error terms are
not correlated over time, and the assumptions of classical OLS regression are not
violated.

3.6.7 : ENDOGENEITY TEST:

When an explanatory variable and the regression model's error term are associated,
this is known as endogeneity. Biased and inconsistent estimations may result from
this. In econometric analysis, endogeneity testing is essential. When examining causes
and effects relationships, endogeneity bias is a prevalent issue that has to be
considered. Endogeneity, which would cause the error term to be connected to the
explanatory variables and go against a fundamental tenet of ordinary least squares
(OLS) linear regression, might arise from the regression's lack of explanatory variable
predictors. OLS may produce inconsistent and inaccurate parameter estimates when
endogeneity is present. Testing theories may be a very difficult procedure.

The hypothesis of the endogeneity test:

H0: The variable does not contain an endogeneity problem.
Hα: The variable contains an endogeneity problem.

Endogeneity test for ROA:

Variable F value Prob>F
HCE 20.10 0.0000
SCE 20.10 0.0000
CEE 35.14 0.0867
BS 40.11 0.0000
ER 40.11 0.0000

Table 13: Endogeneity test for ROA (Source: Stata, Appendix: J)

Here, for the variables HCE, SCE, BS, ER the p-values less than 0.05 (assuming a
common significance level of 0.05). Therefore, we would reject the null hypothesis
for these variables and conclude that there is evidence of endogeneity for each of
them. In
24
opposite, CEE has p-values greater than 0.05 thus there is no endogeneity problem for
CEE.

Endogeneity test for ROE:

Variable F value Prob>F

HCE 0.19 0.6644
SCE 0.19 0.6644
CEE 0.23 0.0000
BS 14.59 0.0002
ER 14.59 0.0002
Table 14: Endogeneity test for ROE (Source: Stata, Appendix: J)

Here, for the variables CEE, BS, ER the p-values less than 0.05 (assuming a common
significance level of 0.05). Therefore, we would reject the null hypothesis for these
variables and conclude that there is evidence of endogeneity for each of them. In
opposite, HCE and SCE have p-values greater than 0.05 thus there is no endogeneity
problem for HCE and SCE.

3.7 : RESEARCH MODEL

In order to measure the relationship between capital efficiency and company

performance, this study constructed the following dynamic panel data generalized
method of moment (GMM) model, which was proposed by Arellano and Bond
(1991), based on the variables.
∑𝑛 β𝑘 𝑥𝑘,𝑖𝑡 + 𝑌𝑖𝑡 + μ𝑖𝑡.............(ⅰ)
𝑌𝑖𝑡 = α0 + 𝑖=
1
The bank's ROA and ROE performance are represented by 𝑌𝑖𝑡. In this case, 𝑥𝑖𝑡
stands for the independent variables, and 𝛽𝑘 for the coefficient. The control variable
in this model is 𝑌𝑖𝑡, the error terms are 𝑖 and t, and the particular bank and time
period are provided by 𝑖 and t.

Model - 1 (ROA):
The study's first model determines the statistically significant correlation between two
control variables, three independent variables, a dependent variable, and Return on
Assets (ROA). The following is the equation:

𝑅𝑂𝐴𝑖𝑡= α0 + 𝑅𝑂𝐴𝑡−1 + 𝛽1𝐻𝐶𝐸𝑖𝑡 + 𝛽2𝑆𝐶𝐸𝑖𝑡 + 𝛽3𝐶𝐸𝐸𝑖𝑡 + 𝑌5𝐵𝑆𝑖𝑡 + 𝑌5𝐸𝑅𝑖𝑡 + μ𝑖𝑡 ….

(ii)

In this model, where α0 denotes the intercept or constant, βk (k=1, 2…) represents the
calculated coefficients, and Ʋ stands for the equation's error term. The model has
included a one-year time lag ROA to observe the carryover effects of intellectual
capital efficiency on the performance of banks.

25
Model – 2 (ROE):
The statistical relationship between the dependent variable ROE, three independent
variables, and two control variables is estimated by the second model. This is how the
calculation appears:
𝑅𝑂𝐸𝑖𝑡 = α0 + 𝑅𝑂𝐸𝑡−1 + 𝛽1𝐻𝐶𝐸𝑖𝑡 + 𝛽2𝑆𝐶𝐸𝑖𝑡 + 𝛽3𝐶𝐸𝐸𝑖𝑡 + 𝑌5𝐵𝑆𝑖𝑡 + 𝑌5𝐸𝑅𝑖𝑡 + μ𝑖𝑡
……. (iii)

The model has included a one-year time lag ROE to observe the carryover effects of
intellectual capital efficiency on the performance of banks. The relationship between
the relevant variables and bank performance is statistically significant when the
estimated coefficient is positive. In this model, where α0 denotes the intercept or
constant, βk (k=1, 2...6) Represents the calculated coefficients, and Ʋ stands for the
equation's error term.
In summary, there is no autocorrelation or multicollinearity in the dataset. But
Heteroscedasticity and endogeneity, nevertheless, have made serious issues. Ignoring
endogeneity bias is dangerous since it is a common issue in studies examining cause-
and-effect relationships (Ullah et al., 2018). An approach that uses instrumental
variables is frequently used to address the endogeneity of missing components. A
number of methods, including the generalized method of moments (GMM), SEM,
two- stage least squares (2SLS), and three-stage least squares (3SLS), can be used to
estimate instrumental variable models. The GMM technique was used in this
investigation to ensure a fair conclusion. The findings of an ordinary least square
(OLS) regression technique will not be accurate and reliable when those problems are
present, particularly when the endogeneity problem is present.
As an alternative to OLS, the fixed or random effect technique can address the
unobserved heterogeneity issue, even if it does not meet the strong homogeneity
condition. The dynamic panel data strategy used in this study employs the two-step
system GMM methodology to ensure reliable results. This computation additionally
considers the dataset's endogeneity, heteroskedasticity, and autocorrelation. The two-
step robust command was also used in this work instead of the one-step robust
command since it produces a robust standard covariance matrix in panel-specific
autocorrelation and heteroskedasticity (Belkaoui, 2003).

3.8 : ETHICS AND LIMITATION

Despite being crucial for assessing a company's efficacy, the VAIC model has been
criticized by a number of scholars. The VAIC model, according to Maditinos et al.
(2011), is not sufficiently dependable since it disregards possible risk and has an
impact on overall revenues. Therefore, there must be less of a difference between the
input and output values. According to Sthle et al. (2011), inventive capacities and
rational capital are rejected by the value-added intellectual model.

Only operational effectiveness is the objective of the VAIC paradigm. In this case, the
HC determines the employee's pay and remuneration rather than their skills or
expertise. Only operational effectiveness is considered when using the VAIC
technique. The breakdown of human costs, depreciation, and amortization that
Nimtrakoon (2015) calls VA In this instance, the value generated by the firm's
26
performance is not taken

27
into consideration by depreciation and amortization. SC likewise ignores rational
capital as it relies it results on the distinction between VA and HC. Furthermore, since
HCE computes by dividing VA by HC, it is advisable to choose a smaller value for
HC since the computation yields better results. Despite this drawback, a number of
studies indicate that the VAIC performs best in terms of IC efficiency. A comparison
of business performance using the VAIC model is also helpful to users.

28
 CHAPTER 4: RESULT AND DISCUSSION

4.1 : DESCRIPTIVE STATISTICS

The area of statistics known as descriptive statistics deals with arranging and
summarizing data to facilitate comprehension and interpretation. Descriptive statistics
concentrate on clearly and concisely presenting data rather than drawing inferences or
formulating predictions, as inferential statistics do.

Variable Obs Mean Std. Dev. Min Max

ROA 300 .0077845 .008739 -.0475955 .0775481

ROE 300 .116127 .1298539 -.0728646 1.617999
HCE 300 1.296052 .8670643 .0221487 8.298846
SCE 300 -.1324166 2.616169 -44.14945 .8795013
CEE 300 .014727 .0112839 .000195 .0884311

BS 300 25.96851 .9628454 22.73779 28.239

ER 300 .1126014 .1612585 .0046889 1.182705

Table 15: Descriptive Statistics (Source: Stata, Appendix: K)

The descriptive statistics table summarizes the key features of the variables used in
the research. It includes 300 observations for each variable, offering a comprehensive
dataset for analysis.
1. Return on Assets (ROA): The average ROA is 0.0078, indicating a low profitability
level in terms of asset utilization. The standard deviation is 0.0087, reflecting minor
variability in the data. The minimum and maximum values range from -0.0476 to
0.0775, highlighting the variation in asset returns among the banks.
2. Return on Equity (ROE): The mean ROE is 0.1161, showing moderate profitability
relative to equity. The standard deviation is higher at 0.1298, suggesting greater
dispersion. The minimum value is -0.0728, and the maximum is 1.6179, pointing to
significant differences in equity returns across banks.
3. Human Capital Efficiency (HCE): The average HCE is 1.2961, indicating the
effectiveness of human capital in generating value. The standard deviation is 0.8670,
showing moderate variation. The HCE ranges from a minimum of 0.0221 to a
maximum of 8.2988, reflecting significant efficiency disparities.
4. Structural Capital Efficiency (SCE): The mean SCE is -1.1324, which may indicate
inefficiency or negative structural contributions in value creation. The standard

29
deviation is 2.6162, suggesting high variability. The minimum value is -44.1495, and
the maximum is 0.8795, showing wide differences across banks.
5. Capital Employed Efficiency (CEE): The average CEE is 0.0147, signifying a low
contribution of employed capital to bank performance. The standard deviation is
0.0112, reflecting small variability. The minimum and maximum values are -0.0002
and 0.0884, respectively.
6. Bank Size (BS): The mean bank size is 25.5681, with a standard deviation of
0.9628. The size varies from 22.7378 to 28.239, indicating consistency in the bank
sizes included in the study.
7. Efficiency Ratio (ER): The mean ER is 0.1126, with a standard deviation of
0.1612. The minimum and maximum values are 0.0047 and 1.1827, respectively,
showing some variability in operational efficiency.
Overall, the table provides insights into the distribution, central tendencies, and
variability of the variables. It also highlights the diversity among banks in the sample
regarding their efficiency, size, and profitability, which will contribute to analyzing
the impact of human, structural, and employed capital on their performance.

4.2 : PEARSON CORRELATION MATRIX

A table that displays the correlation coefficients between several variables is called a
Pearson Correlation Matrix. The degree and direction of the linear link between two
variables are measured by the correlation coefficient. It falls between -1 and +1:

+1: A perfect positive correlation means that as one variable rises, the other rises in
proportion.

0: There is no correlation, meaning that the variables don't affect one another.

-1: Perfect negative correlation, meaning that as one variable rises, the other falls in
proportion.

ROA ROE HCE SCE CEE BS ER

ROA 1.000
0
ROE 0.407 1.0
4 000
HCE - - 1.0
0.364 0.0 000
8 603
SCE - 0.0 0.2 1.0
0.239 005 069 000
8
CEE - - 0.7 0.1 1.0
0.546 0.1 719 770 000
1 278
BS 0.195 0.1 - 0.1 - 1.0
5 632 0.3 420 0.4 000
882 197

30
ER - - 0.4 - 0.6 - 1.0
0.432 0.2 672 0.2 169 0.7 000
5 535 868 101

Table:16 Correlation Matrix (Source: Stata, Appendix: L)

31
Here the Pearson correlation matrix provides insights into the relationships between
variables such as ROA (Return on Assets), ROE (Return on Equity), HCE (Human
Capital Efficiency), SCE (Structural Capital Efficiency), CEE (Capital Employed
Efficiency), BS (Bank Size), and ER (Equity Ratio). Here's a broad description:

1. Overview of Correlation Matrix:

The table highlights the strength and direction of relationships among the variables,
where values range between -1 and +1. Positive values indicate direct relationships,
while negative values represent inverse relationships. The diagonal of the matrix
contains values of 1, as each variable is perfectly correlated with itself.

2. ROA Correlations:

ROA exhibits a positive correlation with ROE (0.4074), indicating a moderate

positive relationship. However, ROA shows negative correlations with HCE (-
0.3648), SCE (- 0.3959), and CEE (-0.5461), suggesting an inverse relationship
between ROA and these forms of efficiency. Additionally, ROA has a weak positive
correlation with BS (0.1756) and a negative correlation with ER (-0.1935).

3. ROE Correlations:

ROE shows a negative correlation with HCE (-0.0603) and SCE (-0.005), suggesting
these variables have minimal influence on ROE. It also has a slightly stronger
negative relationship with CEE (-0.1278). Interestingly, ROE has weak positive
correlations with BS (0.1432) and ER (-0.2863), indicating minor interactions.

4. HCE, SCE, and CEE Relationships:

HCE has a weak positive correlation with SCE (0.2069), suggesting limited
interdependence between these two variables. SCE shows a strong positive correlation
with CEE (0.7713), indicating these two are highly aligned in explaining capital
efficiencies. HCE has little or no correlation with BS and ER.

5. BS and ER:

Bank Size (BS) and Equity Ratio (ER) exhibit a negative correlation (-0.7101),
suggesting larger banks tend to have a lower equity ratio. BS shows weak positive
correlations with ROA (0.1756) and ROE (0.1432), implying limited impact on
performance.

Finally, the correlation values suggest that capital employed efficiency (CEE) has a
significant negative impact on ROA and ROE. Structural and human capital
efficiencies play a smaller role in influencing bank performance, while bank size and
equity ratio interactions are complex.

32
4.3 : DYNAMIC REGRESSION ANALYSIS:

To provide precise, impartial, and consistent estimates, this study used the dynamic
panel data approach of the two-step system GMM methodology. This estimate
additionally accounts for endogeneity problems and heteroskedasticity in the dataset.
After the study is finished, the residuals are subjected to the Arellano-Bond AR (2)
test in order to detect second-order autocorrelation. The instruments of the GMM
model are validated using the Sargan and Hansen test. While considering the
influence of several independent factors, the study concentrates on two dependent
variables: return on equity (ROE) and return on assets (ROA).

Variables Model- 1: ROA Model- 2: ROE

Coefficient P Value Coefficient P Value
𝑅𝑂𝐴𝑡−1 .3797177 0.002
𝑅𝑂𝐸𝑡−1 -.1921599 0.239
HCE .0095804 0.179 .0657762 0.020
SCE -.0009479 0.012 -.0014232 0.542
CEE -.7639341 0.178 -3.93377 0.421
BS -.0018415 0.311 .0080611 0.657
ER -.0070888 0.537 .0131328 0.911
No of obs. 270 270
Groups/ 30/32 30/34
instruments
AR (1) (P-value) 0.043 0.029
AR (2) (P-value) 0.675 0.393
Sargan test 0.000 0.013
Hansen test 1.000 0.472

Table 17: Dynamic Regression Analysis (Source: Stata, Appendix: M)

The table presented summarizes the results of the two-step Generalized Method of
Moments (GMM) analysis, which evaluates the impact of various components of
intellectual capital—human capital efficiency (HCE), structural capital efficiency
(SCE), and capital employed efficiency (CEE)—on the performance of banks listed
on the Dhaka Stock Exchange (DSE). Bank performance is measured through return
on assets (ROA) and return on equity (ROE), as reflected in Models 1 and 2,
respectively. Below is a detailed discussion of the findings:

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Model 1: ROA as the Dependent Variable
1. Lagged ROA (ROAt-1): The coefficient for lagged ROA is 0.3797, significant at
the 1% level (p-value = 0.002). This indicates a strong and positive persistence in
bank performance over time, where past ROA significantly influences current ROA.
2. Human Capital Efficiency (HCE): The coefficient for HCE is 0.0096, which is
positive but not statistically significant (p-value = 0.179). This suggests that while
HCE may positively contribute to bank performance measured by ROA, the effect is
not robust in this model.
3. Structural Capital Efficiency (SCE): The coefficient is -0.0009, significant at the
5% level (p-value = 0.012). This negative relationship indicates that SCE has a
detrimental impact on ROA, potentially reflecting inefficiencies in the utilization of
structural capital.
4. Capital Employed Efficiency (CEE): The coefficient is -0.7639, which is
negative but not statistically significant (p-value = 0.178). While the negative sign
implies that higher capital employed efficiency may negatively impact ROA, this
relationship is not strong enough to be conclusive.
5. Bank Size (BS): The coefficient is -0.0018 with a p-value of 0.311, indicating an
insignificant relationship between bank size and ROA.
6. Equity Ratio (ER): The coefficient is -0.0071 with a p-value of 0.537, suggesting
that ER does not significantly influence ROA.
Model 2: ROE as the Dependent Variable
1. Lagged ROE (ROEt-1): The coefficient is -0.1922, but it is not statistically
significant (p-value = 0.239). This indicates that past ROE does not significantly
influence current ROE.
2. Human Capital Efficiency (HCE): The coefficient is 0.0658 and significant at the
5% level (p-value = 0.020). This finding highlights the crucial role of HCE in
enhancing ROE, suggesting that investments in human capital contribute positively to
shareholder returns.
3. Structural Capital Efficiency (SCE): The coefficient is -0.0014, with a p-value of
0.542, indicating an insignificant effect of SCE on ROE.
4. Capital Employed Efficiency (CEE): The coefficient is -3.9338, which is
negative but not statistically significant (p-value = 0.421). This implies that, similar to
its relationship with ROA, CEE does not have a robust influence on ROE.
5. Bank Size (BS): The coefficient is 0.0081 with a p-value of 0.657, showing no
significant impact of bank size on ROE.
6. Equity Ratio (ER): The coefficient is 0.0131 with a p-value of 0.911, indicating
an insignificant relationship between ER and ROE.
Diagnostic Tests
Number of Observations and Groups/ Instruments: The analysis is based on 270
observations with 30 groups for Model 1 and 30 groups/34 instruments for Model 2,
ensuring sufficient data for dynamic panel analysis.

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Autocorrelation Tests:
The AR (1) p-values for both models (0.043 for ROA and 0.029 for ROE) indicate the
presence of first-order autocorrelation, which is expected in dynamic panel data.
The AR (2) p-values (0.675 for ROA and 0.393 for ROE) suggest no second-order
autocorrelation, validating the GMM estimation.
Sargan Test: The p-values (0.000 for ROA and 0.013 for ROE) indicate that the
instruments used may be over-identified, warranting caution in interpretation.
Hansen Test: The p-value of 1.000 for ROA and 0.472 for ROE confirms the validity
of the instruments, indicating no over-identification issues.
The results underscore the importance of human capital efficiency in driving bank
performance, especially in terms of ROE. However, structural and capital employed
efficiencies do not appear to significantly contribute to performance, and in some
cases, they negatively influence ROA. The diagnostic tests validate the robustness of
the GMM estimations, despite some concerns with the Sargan test results. These
findings highlight the need for DSE-listed banks to prioritize human capital
development while addressing inefficiencies in structural and capital employment
practices.

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 CHAPTER 5: CONCLISION

This research investigated the influence of human capital efficiency (HCE), structural
capital efficiency (SCE), and capital employed efficiency (CEE) on the performance
of banks listed on the Dhaka Stock Exchange (DSE), measured through return on
assets (ROA) and return on equity (ROE), using the VAIC model. The findings
revealed that HCE positively and significantly impacts bank performance, particularly
in improving ROE. This highlights the critical role of skilled and efficient human
resources in driving shareholder returns. However, SCE showed a significant negative
relationship with ROA, suggesting inefficiencies in the utilization of structural
resources. Similarly, the impact of CEE was largely insignificant, with a negative
coefficient in both models, raising questions about the effective deployment of
physical and financial capital in these banks. These insights suggest that while
intellectual capital is crucial, its components need to be strategically aligned to
optimize overall performance.

5.1 Limitations of the research

These are some limitation of these research:

1. Scope of Data: The study focused only on banks listed on the DSE, limiting the
generalizability of the findings to other financial institutions or regions.
2. Time Period: The analysis covered a specific time frame, which may not fully
capture long-term trends or the impact of external shocks, such as economic crises.
3. Model Specificity: The study employed the VAIC model, which, while widely
used, has been critiqued for its inability to account for qualitative aspects of
intellectual capital.
4. Instrument Validity: The results of the Sargan test indicate potential over-
identification issues, which could affect the robustness of the findings.
5. Limited Variables: The study excluded other variables like macroeconomic
indicators, regulatory changes, and technological advancements that could influence
bank performance.

5.2 Recommendations

1. Focus on Human Capital Development: Banks should prioritize investments in

training, development, and retention of skilled employees, as HCE has shown a
significant positive impact on performance.
2. Optimize Structural Capital Utilization: Efforts should be made to improve the
efficiency of processes, systems, and organizational structures to ensure structural
capital positively contributes to performance.

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3. Reassess Capital Deployment Strategies: The insignificant and negative
influence of CEE suggests a need for more strategic deployment of financial and
physical capital to enhance operational efficiency.
4. Expand Research Scope: Future studies could include other financial institutions
and non-banking sectors to provide broader insights into intellectual capital's role in
performance.
5. Incorporate Additional Variables: Including macroeconomic and regulatory
factors in future models can provide a more comprehensive understanding of the
determinants of bank performance.
6. Adopt Alternative Models: Researchers may consider alternative frameworks to
measure intellectual capital to capture its qualitative aspects more effectively.

In conclusion, while intellectual capital is a critical driver of bank performance,

particularly through human capital, inefficiencies in structural and capital utilization
require immediate attention. By addressing these gaps, DSE-listed banks can achieve
sustainable growth and competitiveness in an evolving financial landscape.

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