Strategic Financial Management in Financial Firms: Risk Impacts on Intellectual Capital and Competitive Advantage in Banking Sector

Abstract

A fundamental question in corporate strategy and industrial organization is how strategic financial management decisions affect firm performance. While existing literature extensively analyzes the non-financial firm perspectives of strategic financial management, there is very little work on how risk impacts intellectual capital and competitive advantage in financial firms.  From a performance perspective, risk management can ensure sustainability and longevity in a business. From a practical perspective, survival in any industry also requires establishing and maintaining a competitive advantage. By analyzing risk impacts on intellectual capital and competitive advantage, this framework can be explored. The sample for this study consists of all commercial banks listed in Pakistan, Bangladesh, and Sri Lanka. The time frame of analysis is from 2008 to 2018. For dependent variables, this study determines the impact of risk exposure, measured as insolvency risk and credit risk. Insolvency risk is calculated by Z-Score (return on assets + capital ratio)/standard deviation of return on assets. Credit risk is measured as total equity divided by net loans, and impaired loans divided by gross loans. Intellectual capital is to be measured by Pulic’s Value Added Intellectual Capital (VAIC) while the competitive advantage is measured as firm-specific profits. For robustness measure of bank, performance is CAMELS rating, value is to be measured as Tobins Q. Control variables in this study include firm-level controls – leverage and firm size, industry-level controls- industry concentration, and country-level controls – GDP per capita. The results of this study have both theoretical and practical implications.