Does Intellectual Capital Impact Firms' Capital Structure? Exploring The Role Of Firm Risk And Profitability

Purpose The purpose of this paper is to analyze the relationship between intellectual capital and firm capital structure by exploring whether firm profitability and risk are drivers of this relationship. Design/methodology/approach Based on a comprehensive data set of Italian firms over the 2008-2017 period, this paper examines whether intellectual capital affects firm financial leverage. Moreover, it analyzes whether firm profitability and risk mediate the abovementioned relationship. Financial leverage is measured by the debt/equity ratio. Intellectual capital is measured via the value-added intellectual coefficient approach. Findings The findings show that firms with a high level of intellectual capital have lower financial leverage and are more profitable and riskier than firms with a low level of intellectual capital. Furthermore, this study finds that firm profitability and risk mediate the relationship between intellectual capital and financial leverage. Thus, the higher profitability and risk of intellectual capital-intensive firms help explain their lower financial leverage. Research limitations/implications The findings have several implications. From a theoretical standpoint, the paper presents and tests a mediating model of the relationship between intellectual capital and financial leverage and its underlying processes. In terms of the more general managerial implications, the results provide managers with a clear interpretation of the relationship between intellectual capital and financial leverage and point to the need to strengthen the capital structure of intangible-intensive firms. Originality/value Through a mediation framework, this study provides empirical evidence on the relationship between intellectual capital and firm financial leverage by exploring the underlying mechanisms behind that relationship, which is a novel approach in the literature.