Unveiling the relationship between intellectual capital and corporate performance through earnings management practices

Abstract

Purpose

This study aims to empirically investigate the relationship between intellectual capital (IC) and corporate performance (CP), including financial, market and sustainability performance. The research also investigates the mediating role of earnings management practices (EM) in the IC and CP relationship.

Design/methodology/approach

The empirical connection between IC and CP for 795 nonfinancial listed Indian firms is examined for 17 years using industry and year-fixed effect panel regression models. The research has also used Baron and Kenny’s four-step model to examine the role of EM as a mediator between IC and CP.

Findings

IC plays a crucial part in improving the financial, market and sustainability performance of Indian firms. The empirical findings further claim that EM practices partially mediate the connection between IC and CP. However, the mediation effect of EM depends on its magnitude and direction, i.e. income-increasing (decreasing) EM practices. The study also claims that sustainability performance-oriented firms practice less EM.

Research limitations/implications

Managers and policymakers can use the findings of this study to their advantage by focusing on the significance of IC in the Indian context and their efforts to improve financial, market and sustainability performance while limiting earnings management practices.

Originality/value

The research uncovers a novel facet of the IC–CP relationship where EM mediates between the two. To the best of our knowledge, this is the first study that analyzes the impact of IC on CP through the lens of mediation using both accrual and real earnings management.

Citation

Mohapatra, S. and Pattanayak, J.K. (2024), "Unveiling the relationship between intellectual capital and corporate performance through earnings management practices", Benchmarking: An International Journal, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/BIJ-12-2023-0850