Intellectual Capital and Bank Profitability: Evidence from Serbia

Ljumović, Isidora and Minović, Jelena and Stevanović, Slavica (2022) Intellectual Capital and Bank Profitability: Evidence from Serbia. Management. ISSN 1820-0222

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Abstract

Research Question:This paper examines how investing in Intellectual Capital (IC) influences bank profitability measuredby return on average assets and return on average equity. Motivation: IC is a source of non-physical (added) value forinnovative companies in the knowledge-based economy. In finance and banking, efficient use of IC is critical since a bank'scapacity to supply high-quality services is based on its investment in IC. As a result, our goal was to throw light on thecomponents of IC and examine how they relate to the commercial bank's financial performance in Serbia.Idea: The mainidea behind this paper is to assess the relationship between components of IC and bank profitability. We used the threemost common components: Human Capital Efficiency (HCE), Capital Employed Efficiency (CEE), and Structural CapitalEfficiency (SCE), as well as control variables such as banks' size and leverage. Data: We used a Bankscope data set thatincluded 27 Serbian commercial banks from 2011 to 2019, with 212 observations. Tools: We used Breusch–PaganLagrange multiplier and the Pesaran test to examine cross-section dependence. Based on the test results, we used thesystem generalized method of moments (GMM) to assess the relationship between IC components and bank profitability.Findings: In Serbian banking industry, both HCE and CEE considerably impact bank profitability. However, we couldn't findevidence that SCE contributes to bank profitability. Contribution: This paper adds to the existing literature on therelationship between IC and bank profitability. However, it also includes a policy recommendation for bank executives aswe discovered that investing in IC can positively influence bank profitability.

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