Does intellectual capital help predict bankruptcy?

Purpose: The purpose of this paper is to explore whether intellectual capital affects the probability that a particular firm will default. The authors also test whether including intellectual capital performance in bankruptcy prediction models improves their predictive ability. Design/methodology/approach: Using a sample of US public companies from the period stretching from 1985 to 2015, the authors test whether intellectual capital performance reduces the probability of bankruptcy. The authors use the VAIC as an aggregate measure of corporate intellectual capital performance. Findings: The findings show that the intellectual capital performance is negatively associated with the probability of default. The findings also indicate that the bankruptcy prediction models that include intellectual capital have a superior predictive ability over the standard models. Research limitations/implications: This paper contributes to prior research on intellectual capital and firm performance. To the best of the knowledge, this is the first study to show that the benefits of intellectual capital extend from superior performance to long-term financial stability. The research can also contribute to bankruptcy studies. By using a time frame covering decades, the findings suggest that intellectual capital performance measures can be included in bankruptcy prediction models and can effectively complement traditional performance measures. Originality/value: This paper highlights that intellectual capital is associated with long-term financial stability and a lower bankruptcy risk. Firms realising the potential of their intellectual capital can produce a virtuous circle between higher performance and greater financial stability.