Intellectual capital, earnings quality and investment efficiency: a study of listed firms in Nairobi Securities Exchange, Kenya

Abstract

Company’s investment activities are the most important basis for firms to achieve the goal of maximizing their value, and to guarantee for the survival and development of firms. However, investment in the developing countries remains below the pre-crisis level and in Kenya there has been an alarming increase of investment inefficiencies. Most firms in emerging economies including Kenya have displayed declining stock returns over time which is a challenge to investors. Thus, to fill this knowledge gap, the study seeks to establish the effect of intellectual capital, on investment efficiency of listed firms in Nairobi Securities Exchange (NSE) and whether earnings quality moderates the relationship. Specifically, the study was to determine the effect of the human capital, structural capital, relational capital and innovation capital on investment efficiency of listed firms in NSE and whether there is any moderating effect of earnings quality on this relationship. The study was anchored on agency theory, stewardship theory and earnings management theory. Both explanatory and longitudinal research design was adopted in the study. The study targeted 30 listed firms from 2016 to 2023. Panel regression analysis results indicated that human capital (β 1 = .190, ρ<.05), structural capital (β 2 = .868, ρ<.05), and relational capital (β 3 = .190, ρ<.05) had a positive and significant effect on investment efficiency of selected listed firms. In addition, the findings indicated that innovation capital (β 4 = .395, ρ>.05) had a positive and insignificant effect on investment efficiency in Kenyan firms. Further, earning quality positively moderated the relationship between human capital (β 5a =0.029, ρ<.05), structural capital (β 5b = .009, ρ<.05), relational capital (β 5c = .011, ρ<.05) and investment efficiency. Similarly, the overall R 2 of the moderated model showed a joint contribution of 62.7% of predictor variables that explain investment efficiency. The study concludes that human capital, structural capital and relational capital are key predictors of investment efficiency. In addition, earning quality is an enhancing moderator in human capital, structural capital and relational capital in relation to investment efficiency. On the contrary, earning quality is a buffering moderator in the relationship between innovation capital and investment efficiency. The results validate the propositions of stewardship, agency, and earnings management theories. The study recommends that firms needs to invest in human resource and talent development, focus on optimizing operational frameworks, build and maintain strong relationship and collaborations with stakeholders as a strategic initiative to foster investment efficiency.