Intellectual capital, chief executive officer tenure and financial performance of firms listed at the Nairobi securities exchange, Kenya

Abstract

It is expected that companies listed in the Security Exchange may have strong financial performance rates. Despite the popular belief among scholars that intellectual capital efficiency has a significant effect on firm financial results, evidence from financial management studies that support this proposition has presented have been varied. Given the aforesaid, the objective of the study was to investigate the relationship between Intellectual capital efficiency firm's financial performance and how chief executive officer's tenure moderating the relationship between intellectual capital elements and financial performance of firms in Kenya. This study was informed by Agency theory, Dynamics capability, and Resource-based theory. A longitudinal research design was used. The study targeted 67 firms in Nairobi Security Exchange. The study used secondary data (financial reports) to obtain financial performance information from 48 firms with full information from Capital Market Authority Statistical Bulletins and Nairobi Securities Exchange Handbook for a period of twelve years from 2006 to 2017. Data were analysed using both descriptive and inferential statistics. Specifically, Pearson's correlation coefficient, standard multiple regression analysis, and hierarchical multiple regression analysis were adopted to analyse and test the hypotheses. The study established a positive and significant effect between Human capital (β = 0.18; ρ<0.05), Structural capital (β = 0.11; ρ>0.05), Capital employed and firm financial performance (β = 0.95; ρ<0.05) and Innovation capital (β = 0.14; ρ<0.05). The sum of the intellectual capital coefficient had a positive and significant effect on Firm Financial Performance (β= 0.02, ρ<0.05). The moderating variable CEO tenure had a positive and significant relationship between Intellectual Capital on financial performance (β = 0.04; ρ<0.05). When the independent variables were moderated with CEO tenure the study findings indicated CEO tenure moderated the relationship between Human capital and financial performance (β= -0.12; ρ<0.05), Structural capital and firm financial performance (β= 0.01; ρ<0.05), Capital Employed and firm financial performance(β= 0.005; ρ<0.05), Innovation capital and firm financial performance (β= -0.03; ρ<0.05) and Modified Value Added Intellectual confident and firm financial performance (β= 0.14; ρ<0.05), hence the existence of moderating effect of Chief Executive Officer tenure on the relationship between the three intellectual capital components and firm financial performance and VAIC. The study concludes that in determining financial performance levels among firms in the Nairobi Securities Exchange, human capital, and capital employed, and innovation capital and VAIC are significant. In general, CEO tenure equally enhances the influences on financial performance levels given the intellectual capital efficiency. The results support the Agency theory, Dynamic Capability Theory, and Resource-based theory by clarifying how the organization decision-makers build, assemble, and recombine internal and external capabilities to answer quickly shifting the firm's financial environments. This study has brought to the fore significant evidence that will help in generating an additional improvement on the understanding of Intellectual components and their effect on the firm's financial performance moderated by CEOs' tenure both empirically and methodologically. It offers evidence to the regulatory bodies as well as academicians with an understanding of Intellectual Capital components practices in the annual report of firms listed in Nairobi Security Exchange. The study contributes to the on-going discussions on the rationality of linking intellectual capital components to the traditional accounting-based measures to enhance firm financial performance.