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JHRCA
16,1

Global financial crisis and the

intellectual capital performance
of UAE banks

20

Magdi El-Bannany
Department of Accounting, Finance and Economics,
College of Business Administration, University of Sharjah,
Sharjah, United Arab Emirates
Abstract
Purpose The purpose of this paper is to investigate the determinants of the intellectual capital
performance of UAE banks over the period 2004 to 2010.
Design/methodology/approach Multiple regression analysis was used to test the relationship
between the intellectual capital performance as a dependent variable and certain independent variables.
Findings The results indicate that standard variables, namely investment in information technology
systems, barriers to entry, bank risk, bank size, bank age and bank listing age, are important. The results
also show that the global financial crisis and market structure as measured by concentration ratio
variables, which have not been considered in previous studies, have a significant impact on intellectual
capital performance.
Research limitations/implications More evidence is needed regarding the determinants of
intellectual capital performance before any generalisation of the results can be made. In addition, the
empirical tests were conducted only for UAE banks between 2004 and 2010. Therefore, it cannot be
assumed that the results of the study extend beyond this group of banks or to different periods.
Practical implications The paper might help the banking regulators address the factors affecting
intellectual capital performance and also help banks to take action to developing their performance, in
turn maximising their value creation.
Originality/value The paper adds to the literature discussing determinants of intellectual capital
performance in banks. In particular, it tests the theory that the global financial crisis and market
structure, as measured by concentration ratio, have an impact on intellectual capital performance.
Keywords United Arab Emirates, Banks, Organizational performance, Intellectual capital,
Intellectual capital performance, Global financial crisis, Market structure
Paper type Research paper

Journal of Human Resource Costing

& Accounting
Vol. 16 No. 1, 2012
pp. 20-36
q Emerald Group Publishing Limited
1401-338X
DOI 10.1108/14013381211272626

1. Introduction
Intellectual capital (IC) is a source of competitive advantage, and a powerful engine of
production, which is capable of adding value to the outputs of knowledge-based firms.
It may also help to differentiate the outputs of some firms from those of others.
Therefore, strong IC performance may, in turn, lead to the maximisation of the wealth of
stakeholders (Kamath, 2007; Goh, 2005; Usoff et al., 2002; The World Bank, 1999;
Pulic, 1998). The World Bank (1998) pointed out that knowledge is becoming the
most important factor influencing national and regional standards of living, and this can
be evidenced by the fact that todays most technologically advanced economies
are knowledge-based. The World Bank (1999) also noted that knowledge is a key
element in enhancing the production process. Usoff et al. (2002) argued that
knowledge as an economic resource is important for gaining competitive advantage.

Therefore, in a knowledge-driven economy, IC plays a crucial role in creating value

and maximising the wealth of shareholders.
The present study aims to explain the factors that influence the performance of
intellectual property, and is, therefore, directly relevant to understanding how
knowledge-based economies function.
Service-based industries rely on IC, in the form of the knowledge and creativity of
employees, rather than physical capital, in the form of land, machinery, and monetary
capital, to add value to a business and to maximise the value of the business (Bharathi,
2010; Young et al., 2009). It has been argued that the weight of IC in knowledge-based
sectors, such as banking, in creating value is higher than for other sectors in the
economy. This supports the use of banks as a sample for the present study (El-Bannany,
2008; Mavridis, 2004). Mavridis (2004) also noted that the banking industry is the most
convenient location for a study researching IC because of the availability of reliable data
and the intellectual nature of banking activities. In addition, the United Arab Emirates
(UAE) is a knowledge-based economy country, as stated by the UAE Minister of Labour
(Subhani, 2009). These arguments have influenced the choice of the banking industry in
the UAE as an appropriate source of the empirical evidence for the present study.
Previous studies have taken into account different theories about the factors affecting
IC performance, e.g. firm size, foreign ownership, investment in information technology
(IT) systems and barriers to entry (Joshi et al., 2010; El-Bannany, 2008; Yalama and
Coskun, 2007; Goh, 2005). However, none of these studies were in a position to consider
the impact of the global financial crisis (GFC) and market structure on the performance
of IC. This will be investigated in the present study and consequently the study can be
considered an important contribution to the field by adding new theories to the literature
explaining IC performance.
Table I shows the names and abbreviations of the banks in the study sample. The
study period, 2004-2010, can be seen as providing a range of conditions that are relevant
to the purpose of the study, because it includes a period before the GFC from 2004 to 2007
and also period of the financial crisis and the immediate post-crisis period, from 2008
No.

Bank abbreviation

Bank name

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

ADCB
ADIB
BOS
CBD
CBI
DIB
EIB
FGB
IB
MB
NBAD
NBQ
RAKB
SIB
UNB

Abu Dhabi Commercial Bank PJSC

Abu Dhabi Islamic Bank PJSC
Bank of Sharjah
Commercial Bank of Dubai
Commercial Bank International PSC
Dubai Islamic Bank PJSC
Emirates Islamic Bank PJSC
First Gulf Bank PJSC
Invest Bank PSC
Mashreq Bank
National Bank of Abu Dhabi PJSC
National Bank of Umm Al Qauiwain
The National Bank of Ras Al-Khaimah PSC
Sharjah Islamic Bank
United National Bank

Note: 105 observations

IC performance
of UAE banks

21

Table I.
The study sample of
banks in the UAE
2004-2010

JHRCA
16,1

22

to 2010 (Fariborz, 2011). This is helpful in the analysis of the relationship between
the GFC and IC performance.
The aim of this study is to investigate the factors affecting the IC performance of
UAE banks over the period 2004-2010 (Table I) by considering factors which have been
ignored in previous studies. This will make it possible to examine the factors that have
affected IC performance over the period 2004-2010.
The remainder of this paper is structured as follows. Section 2 explains the meaning
of IC and discusses the measurement of IC performance. Section 3 explains the factors
affecting IC performance. Section 4 covers the research method used. Section 5 presents
the empirical results, and Section 6 states the conclusions of this study.
2. Meaning and measurement of IC performance
An accurate definition of the term intellectual capital (IC) is crucial to the reliability and
validity of any measurement of the performance of IC. The literature does not provide an
agreed and specific list of elements that contribute to IC, and that can be relied on to define
a measure of it. However, many studies refer to three dimensions that are related to this
concept. These are human capital, internal capital and external capital. Human capital can
be defined as a source of power for the business to create and maximise business value.
The components of human capital include features related to the employees, such as
expertise, know-how, knowledge, productivity and skill (Bruggen et al., 2009; Abeysekera,
2008; Beattie and Thomson, 2007; Abdolmohammadi, 2005). Internal capital can be
defined as power generated from something inside the firm. The features of internal capital
include corporate culture, leadership, communication, management processes,
information systems, IT, networking, computer software and telecommunication (Yi and
Davey, 2010; Branco et al., 2010; Davey et al., 2009). External capital can be considered as
power generated from sources outside the firm, including brands, goodwill, customer
loyalty, customer satisfaction, customer recognition and distribution network (Whiting
and Woodcock, 2011; Campbell and Abdul Rahman, 2010; Striukova et al., 2008).
A high quality measure for IC performance should take into consideration all the
items included in the IC dimensions identified above. Therefore, it should consider
the performances of human capital, internal capital and external capital. Measuring
the performance of IC could then proceed by measuring the performance of each of the
components of each dimension, and then producing an overall measure of the performance
on the dimension, as an accumulation of the performance of the components. The
performance of IC will then be the sum of the performance on each of the three dimensions
mentioned above. In the literature relating to IC performance in banks, the value added
intellectual capital (VAICit) method, introduced by Pulic (1997), is the only method that has
been used consistently to measure IC performance (Bharathi, 2010; Young et al., 2009;
El-Bannany, 2008; Kamath, 2007; Goh, 2005; Mavridis, 2004; Pulic, 2002, 1997) and hence
VAICit can be seen as a convenient, appropriate and publicly available method to use for
measuring IC performance in the present study.
This method has been criticised because it does not calculate the performance of
the dimension by adding up the performance of the individual components in each of the
three dimensions. On the other hand, Saengchan (2008) argues that the data needed
to calculate VAICit is available from financial statements, which in turn makes the
calculation easier and makes it possible to have a consistent and standardised measure for
IC performance across banks, supporting effective comparative analyses across banks.

Measuring IC performance for bank i in year t using the VAICit method can be
achieved using the following variables:
Output

gross income.

Input

operating
expenses
personnel costs).

Value added (VAit)

output-input.

Human capital (HCit)

personnel costs
investment).

Internal capital (ICit)

physical capital which is equal to the

book value of net assets.

External capital (ECit)

external capital for bank i in year t

which is equal to VAit 2 HCit.

Human capital efficiency (HCEit)

VAit/HCit.

Internal capital efficiency (ICEit)

VAit/ICit.

External capital efficiency (ECEit)

ECit/VAit.

IC performance
of UAE banks

(excluding

23
(considered

as

Value added intellectual capital(VAICit) (HCEit) (ICEit) (ECEit).

3. Factors influencing IC performance
In the literature relating to the IC performance of banks, some factors have been
considered as determinants of IC performance. These are investment in IT systems,
barriers to entry, bank risk, bank size, bank profitability, bank age and listing age
(El-Bannany, 2011, 2008; Saengchan, 2008; Kamath, 2007). This paper adds to the
literature discussing the determinants of IC performance in banks by testing new
theories that the GFC and market structure have had an impact on IC performance.
3.1 Global financial crisis
Otobe (2011) argued that the GFC led to a crisis in the labour market in the UAE,
represented by job losses, increases in the unemployment rate, reduced working hours
and lost or reduced income. Habibi (2009) found that the GFC led to reductions in the
UAE hotel occupancy rates in Dubai and Abu Dhabi, by 16 and 7 per cent, respectively,
during the first four months of 2009, while the performance of financial institutions and
stock markets were also severely harmed. The results of the study by Hasan and
Dridi (2010) reveal a negative impact of the GFC on profitability, credit and asset growth,
and external ratings of UAE Islamic and conventional banks. The results of a study by
Asis (2010) reveal that job losses in the UAE were compensated for by a high demand for
employees in other Gulf Cooperation Council (GCC) countries. Ellaboudy (2010) found
that the GFC led to an increase in the liabilities of UAE banks. In addition, the UAE
sectors of industrial conglomerates, including construction and banking, have
experienced negative earnings with falls of around 30 per cent in 2008.
Khan (n.d.) argued that the impact of the GFC on the UAE and the outflow of the
capital, revealed as a 50 per cent reduction in property prices, leading to the collapse of
the real estate and construction sectors. This increased the ratio of unoccupied office

JHRCA
16,1

24

space by 40 per cent. It also exacerbated the economic downturn in the UAE from
mid-2008, together with Dubai worlds financial problems. In addition, many projects
could not be completed because of lack of finance and uncertain future prospects. In turn,
these effects hit the balance sheets of banks, especially the ones exposed to the housing
sector, which affected the entire UAE financial market.
Based on the above indicators, it can be argued that the occurrence of a GFC might
create an atmosphere of fear among firms in the market, resulting in them suffering
severe losses or bankruptcy and hence leaving the market. This in turn could have
a negative impact on the three dimensions of IC performance. Human capital might be
affected by job losses. The quality of internal and external capital might not be
maintained due to a lack of funds. Therefore, it can be supposed that the performance of
IC will be poor during and after the GFC compared with the period before the GFC.
Therefore, the first hypothesis is:
H1. There is a negative relationship between the GFC and IC performance.
3.2 Market structure
Market structure reflects the nature of the relationship between the sellers and buyers of
certain goods or services in a specific market, and hence sets the market conditions. The
types of market structure can be classified into perfect and imperfect markets based on
the market conditions. In a perfect market, the unrestricted competition between many
sellers and buyers decides prices.
Imperfect markets can be divided into four types (Begg et al., 1997; Lipsey and
Harbury, 1992; Bannock et al., 1984):
(1) Monopoly, where a single seller dominates the whole output of a certain product
or service, and the seller is then able to set the price or output of the product or
service so as to maximise profits.
(2) Duopoly, where there are two competing sellers of a certain product or service
and any action of one seller will provoke a reaction of the other seller, so that
neither seller can estimate the consequences of their own action unless they are
able to estimate the reaction of their competitor.
(3) Oligopoly, where a few firms dominate a large share of assets, deposits, etc. and
where no firm can predict the consequences its own action unless it is able to
predict the reactions of competitors in that market, and where firms may collude
to avoid this uncertainty to maximise their own profits.
(4) Monopolistic competition, where there are a large number of firms with
differentiated types of products or services and hence there can be competition
among the firms on the price of their product.
Bain (1968, p. 7) states that:
The most salient dimensions of market structure are the degree of seller concentration, the
degree of buyer concentration, the degree of product differentiation and the condition of entry
to the market.

In the banking literature, seller concentration is the most widely used indicator to
measure market structure (El-Bannany, 2007, 2002; Holden and El-Bannany, 2004;
Chang et al., 1998; Calem and Carlino, 1989).

El-Bannany (2002) argued that the level of market concentration indicates the extent
to which a small number of the largest firms in an industry or sector dominate the total
industry (sector) output in terms of total assets, total deposits, etc. For example, an
industry or sector where the largest two firms dominate 30 per cent of the total output of
the industry or sector is more concentrated than one in which the figure is 15 per cent.
The degree of concentration affects the nature of competition and hence the motivation
to enhance the performance of IC as a way to maximise a firms profits. Ferguson (1988)
states that the degree of market concentration is easily estimated since published data on
the number and size distribution of firms are generally available. For other structural
variables published information is rare (pp. 23-24). Therefore, in the present study the
level of market concentration will be used as a measure of the market structure variable.
Different measures for the degree of market concentration have been used in the
literature. For example, the proportion of assets held by the five largest commercial
banks in a country, five (ten) firm deposit (asset) concentration ratio and 1, 2, 3, 4 firms
concentration ratio (Ajlouni, 2010; Pasiouras et al., 2006; Denizer, 1997). The weakness of
these measures is that there is no justification for the number of firms that have been
included in the measure. Choosing a specific number to reflect the degree of market
concentration requires justification to overcome this weakness.
The UK Monopolies and Mergers Commission (1996, p. 12) states that:
The complex monopoly is a situation where individuals or companies, account for at least
25 per cent of the supply or acquisition of particular goods or services, followed by a course of
conduct, by agreement or not, that prevents, restricts or distorts competition.

Thus, the number of banks which account for at least 25 per cent of the total output
(e.g. assets, deposits) of the market will be used in the present study. That is, if the
concentration ratio of two chosen banks is equal to 20 per cent, while that of three banks
is equal to or more than 25 per cent, then the three-bank concentration ratio will be
the more suitable measure for the level of concentration in the market. In the banking
literature the concentration ratio for the industry in year t has been expressed in terms
of total assets and total deposits. However, in the context of market competition using
total deposits can be more convenient because it includes a competition indicator
represented by customer satisfaction and loyalty. In addition, this indicator is a
component of IC performance (external capital dimension).
To conclude, less-than-perfect market structure encourages competition and this in
turn motivates companies to enhance the three dimensions of IC performance with the
aim of maximising the companys value creation. In contrast, in the absence of
competition, companies will not be motivated to do this.
Based on the above discussion, the second hypothesis is:
H2a. There is a negative relationship between the concentration level in the market
and IC performance.
The condition of entry into the market is another dimension of market structure
that might have an impact on IC performance. El-Bannany (2008) argued that firms in
industries that are highly protected by barriers preventing other companies from
entering the market, such as regulations or a requirement for a high minimum level of
capital, will not be motivated to compete through enhancing their IC performance
to maximise value creation. He added that the ratio of fixed assets to total assets

IC performance
of UAE banks

25

JHRCA
16,1

for bank i in year t is a more convenient measurement than others when taking into
consideration the idea of barriers to entry (Depoers, 2000).
Based on the above discussion, the second hypothesis is:
H2b. There is a negative relationship between barriers to entry in a firms sector
and the performance of IC.

26

3.3 Investment in IT systems

Firms invest in IT systems for reasons such as:
.
The desire to increase income and reduce cost. The results of a study by Shaukat
and Zafarullah (2010) in Pakistan show that investment in IT led to an increase
in the income of banks and a reduction in the number of employees. The results
of a study by Holden and El-Bannany (2004) reveal that investment in ATMs by
UK banks led to a reduction in the number of staff needed.
.
Improving the approach of staff towards carrying out their duties will increase the
efficiency of employees which should lead to a reduction in transactional costs and
in turn increase the firms profitability. The results of a study by Venkatesh et al.
(2010) in India show that investing in information and communication technology
enriched employees job characteristics, but employees reported significantly
lower job satisfaction and job performance was also reduced.
.
El-Bannany (2008, 2011) studied IC performance in UAE and UK banks and
argued that investment in IT systems can have a negative impact on employees
because it reflects the intention of management to fire a number of staff.
Based on the above, investment in IT systems might have a positive impact on the
components of IC performance represented by human capital (through raising the
efficiency of IT-literate staff), internal capital (through IT resources allocated to serve
the purposes of the management of the company) and external capital (through IT
resources allocated to serve customers of the bank such as electronic distribution
channels including ATMs and internet banking). However, at the same time it
might have a negative impact on human capital by threatening the jobs of IT-illiterate
staff.
Therefore, the final impact of investment in IT systems on IC performance could be:
.
positive if the accumulated positive impact is higher than the accumulated
negative impact;
.
negative if the accumulated negative impact is higher than the accumulated
positive impact; or
.
neutral if the accumulated positive impact is equal to the accumulated negative
impact.
The published data for the IT costs for bank i in year t will be used as a measure of
investment in IT systems.
This leads to the third null hypothesis:
H3. There is no relationship between the levels of investment in IT and IC
performance.

3.4 Bank risk

Risk can be defined as the potential loss arising from different sources, e.g. transaction
risk, translation risk or economic risk (Duffie, 2010; Behr et al., 2010). El-Bannany
(2008, 2011) argued that better IC performance can mitigate the negative outcome of
higher risk efficiency by managing these risks. Thus, it can be argued that banks in
more risky positions will perform better intellectually than those in less risky positions,
as they seek to minimise the potential negative effect of these risks. The empirical
results of El-Bannany (2008, 2011), in UAE and the UK banks, support this argument.
Firms create reserves for the purpose of using them as a comprehensive shield to
protect the firm from risks, regardless of its source (Balkrishna et al., 2007; Smith, 2007;
Bagnoli and Watts, 2005). Hence total reserves can be seen as a suitable than other
measures to reflect the level of bank risks (Bonfim, 2009; Rene, 2008; El-Bannany, 2002).
Based on the above argument, the fourth hypothesis is:
H4. There is a positive relationship between bank risk and IC performance.
3.5 Bank size
It can be argued that the facilities available to larger firms can help these firms to
perform better than smaller ones. These facilities include access to external funds
and visibility in the economy, which reflect the importance of the firm and hence
the possibility of gaining government support. This might attract more investors and
better qualified staff. Hence, it can be supposed that the IC performance for bigger
banks will be greater than for small ones.
Different measures have been used in the banking literature to measure bank size, but
total assets can be seen as most convenient to represent the size of the bank. As argued
by El-Bannany (2007), this is a comprehensive indicator and hence reflects all powers
including internal, external and human powers which contribute to the size of the bank.
The empirical results of El-Bannany (2011) in UAE banks supported this argument.
Based on the above discussion, the fifth hypothesis is:
H5. There is a positive relationship between bank size and IC performance.
3.6 Bank profitability
El-Bannany (2008, 2011) argued that by assuming profit as a measure of a firms
success, directors of successful firms will have more time to conduct beneficial
activities for the firm, such as supporting innovation, compared with those of failing
firms, which should enhance the profitability of the firm. On the other hand, directors
of failing firms will not have the same amount of time to encourage innovation because
they will be busy investigating the reasons for the failure of the firm. Thus, we should
expect a positive relationship between firm profitability and IC performance. The
empirical results of El-Bannany (2008, 2011) in UAE and UK banks support this
argument.
The annual net profit before taxation of bank i divided by its total assets, in year t,
will be used to measure the profitability of that bank.
Based on the above argument, the sixth hypothesis is:
H6. There is a positive relationship between bank profitability and IC
performance.

IC performance
of UAE banks

27

JHRCA
16,1

28

3.7 Bank age

It can be argued that age is a proxy for the success of a firm. This might be due to older
firms achieving better performance than younger ones, because their experience in the
market helps them gain competitive advantage through the adoption of better staff
recruitment, production and marketing strategies. This can lead to a more robust
component of IC performance encompassing internal, external and human capital. The
empirical results of El-Bannany (2011) in UAE banks support this argument.
Therefore, the seventh hypothesis is:
H7. There is a positive relationship between the age of a bank and IC performance.
3.8 Listing age
El-Bannany (2011) argued that companies that have been listed for a long time are more
efficient than more recently listed ones because of the factor of experience. Hence the
oldest listed companies have more intellectual skills than more newly listed companies.
The empirical results of El-Bannany (2011) in UAE banks support this argument.
Listing age is measured as the period from the year when the bank first listed in the
Dubai Financial Market until each year of the study period.
Based on the above argument, the eighth hypothesis is:
H8. There is a positive relationship between the listing age of a bank and IC
performance.
4. Research methods
The regression model used in this study is shown as follows:
VAICit a0 a1 GFCt a2a CR2DEPt a2b FATAit a3 LGITit a4 LGRESVit
a5 LGASSit a6 ROAit a7 LGAGEit a8 LGLSAGit uit
where:
VAICit the dependent variable value added intellectual coefficient for bank i
in year t; measured as explained in Section 2.
a0

constant.

a1,2,3

coefficients of the independent variables.

uit

disturbance term, i.e. the usual error term.

Details of the definitions of the independent variables are provided in Table II.
5. Analysis of the results
5.1 Descriptive statistics
Table III reports the descriptive statistics for the IC performance and independent
variables selected in this study. The IC performance for the sample banks throughout
the study period varies from 2 0.56 to the maximum value of 17.18, and the mean IC
performance is 7.94. The independent variables represented by GFC, concentration ratio,
barriers to entry, investment in IT systems, bank risk, bank size, bank profitability,
bank age and listing age also all vary, and this should increase the confidence level in the
results, as Naser and Al-Khatib (2000) have argued.

Variable and
abbreviation

Expected
sign
Actual sign

Measurement

Global financial
crisis (GFCt)
Concentration ratio
(CR2DEPt)
Barriers to entry
(FATAit)
Investment in IT
systems (LGITit)
Bank risk
(LGRESVit)
Bank size (LGASSit)

A dummy variable equal to 1 for years 2008-2010 and

0 for years 2004-2007 to represent the GFC period
The concentration ratio for the industry based on the
largest two banks in year t in terms of total deposits
The ratio of fixed assets to total assets for bank i in
year t
Natural logarithm for total cost of hardware and
software of computing systems for bank i in year t
Natural logarithm for total reserves for bank i in
year t
Natural logarithm for total assets for bank i in
year t
Individual bank i annual net profit before taxation
Bank profitability
divided by total assets in year t
(ROAit)
Bank age (LGAGEit) The logarithm for the age of bank i in year t,
measured by the number of years the bank had been
in business for each year of the study period
Bank listing age
The logarithm for the listing age in the Dubai
(LGLSAGit)
Financial Market for bank i in year t, measured by
the number of years since the bank first listed for each
year of the study period

Intellectual capital performance (VAICit)

Global financial crisis (GFCt)
Concentration ratio (CR2DEPt)
Barriers to entry (FATAit)
Investment in information technology systems (LGITit)
Bank risk (LGRESVit)
Bank size (LGASSit)
Bank profitability (ROAit)
Bank age (LGAGEit)
Bank listing age (LGLSAGit)

29

Table II.
Description of
independent variables
and expected signs

Source: Annual reports and Dubai Financial Market web site

Variable

IC performance
of UAE banks

Mean

SD

Min.

Max.

7.94
0.43
0.35
0.01
1.50
3.02
4.38
0.02
1.46
0.59

3.58
0.50
0.03
0.01
0.57
0.54
0.50
0.02
0.15
0.32

20.56
0.00
0.31
0.00
0.30
2.05
3.37
0.00
0.85
0.00

17.18
1.00
0.39
0.08
3.85
4.13
5.33
0.10
1.63
1.18

Note: n 105 observations

5.2 Test for multicollinearity and cross-sectional correlation

Multicollinearity is a statistical problem which occurs when a high correlation exists
between one or more of the independent variables used in the regression model,
possibly producing misleading results. Therefore, it is important to apply a statistical
test, i.e. a correlation matrix, to check whether this problem exists before progressing to
the application of the regression analysis. The results of applying the correlation matrix
technique in Table IV shows that the highest coefficient value is between LGASSit and
LGRESVit and is less than 0.99 (it is 0.78), which means that the multicollinearity
problem does not exist here, as argued by El-Bannany (2002, 2007, 2008, 2011).

Table III.
Descriptive statistics for
the dependent and
independent variables

Table IV.
The correlation
coefficient matrix for the
independent variables

LGITit

LGRESVit

LGASSit

ROAit

LGAGEit

20.108 (0.272) 0.132 (0.178) 0.269 * *(0.006) 0.284 * *(0.003) 0.347 * *(0.000) 20.279 * *(0.004) 0.188 (0.055)

2 0.024 (0.811) 2 0.141 (0.151) 2 0.235 *(0.016) 20.275 * *(0.005) 0.133 (0.176) 20.081 (0.414)

0.057 (0.562)
0.035 (0.721) 20.248 *(0.011)
0.244 *(0.012)
0.177 (0.071)

0.493 * *(0.000) 0.490 * *(0.000) 20.119 (0.227)

0.127 (0.195)

0.783 * *(0.000) 20.004 (0.971)

0.156 (0.112)

20.348 * *(0.000) 0.013 (0.892)

0.150 (0.127)

FATAit

Notes: Correlation is significant at: *0.05 and * *0.01 levels (two-tailed); the two-tailed significance level is shown in brackets

GFCt
CR2DEPt
FATAit
LGITit
LGRESVit
LGASSit
ROAit
LGAGEit
LGLSAGit

CR2DEPt

30

Independent
variables
GFCt

0.577 * *(0.000)
2 0.304 * *(0.002)
2 0.011 (0.907)
0.228 *(0.019)
0.490 * *(0.000)
0.542 * *(0.000)
2 0.251 * *(0.010)
2 0.002 (0.984)

LGLSAGit

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Cross-sectional correlation is a statistical problem which arises when the residuals could
be correlated across banks and the estimated standard error of coefficients might be
biased as a result of the small number of banks represented in the study sample and the
repeated use of each bank over time. This can be solved as suggested by Petersen (2009)
by including dummy variables in the regression model to represent the firms and this is
done as shown in Table V.

IC performance
of UAE banks

31
5.3 Regression results and discussion
The study used the best fitting data approach followed by El-Bannany (2002, 2008,
2011), which can be summarised as adding and dropping some of the independent
variables until a suitable combination of variables is reached which strengthens the
regression model in terms of its results.
The results (Table V) show that the regression model is significant and explains
78 per cent of the relationship between IC performance and the independent variables
and this suggests that the regression model is well-specified.
The coefficients for the GFC, concentration ratio, barriers to entry, investment in IT
systems, bank size, bank profitability, bank age, listing age and bank dummy variables
are highly significant ( p , 0.05) and the signs of the coefficients for these variables are
in line with the hypothesised direction, with the exception of bank age.
The empirical results reveal that.
The GFC, as measured by a dummy variable equal to 1 for years 2008, 2009 and 2010
and equal to 0 otherwise, is negatively related to VAICit and this is in line with the
expectation of H1.

Regressor
Intercept
GFCit
CR2DEPt
FATAit
LGITit
LGRESVit
LGASSit
ROAit
LGAGEit
LGLSAGit
ADCBit
ADIBit
CBDit
DBit
DIBit
NBQit
SIBit
R 2 0.81
F (16,88) 23.64
n 104

Coefficient

t-ratio

Probability

30.16
2 1.46
2 17.47
2 78.83
2 1.19
1.76
2.83
99.88
2 21.99
2.79
2 7.03
2 15.46
2 1.59
2 4.22
2.49
3.07
3.96
R 2 0.78
Sig. F 0.000

5.13
23.11
22.59
25.43
23.15
2.58
3.32
7.25
25.27
3.15
25.99
26.34
22.08
25.83
23.12
24.17
24.43

0.000
0.003
0.011
0.000
0.002
0.012
0.001
0.000
0.000
0.002
0.000
0.000
0.041
0.000
0.002
0.000
0.000

Note: Number of observations: 105

Table V.
The regression results:
dependent variable VAICi

JHRCA
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32

The market concentration ratio, as measured by the deposits of the largest two banks in
the market divided by total deposits of the banking sector in year t, is negatively
related to VAICit and this is in line with the expectation of H2a.
The barrier to entry, measured as fixed assets divided by total assets for bank i in
year t, is negatively related to VAICit and this is in line with the expectation of H2b and
the results of El-Bannany (2008).
Investment in IT systems, as measured by the natural logarithm of total cost of
hardware and software of computing systems for bank i in year t, is negatively
related to VAICit. This is in line with the expectation of H3 and the results of El-Bannany
(2008, 2011).
Bank risk, as measured by total reserves for bank i in year t, is positively related
to VAICit and this is in line with the expectation of H4 and the results of El-Bannany
(2008, 2011).
Bank size measured by the logarithm of total assets for bank i in year t is
positively related to VAICit, and this is in ine with the expectation of H5.
Bank profitability, as measured by net profit before taxation divided by total assets
for bank i in year t, is positively related to VAICit and this is in line with the
expectation of H6 and the results of El-Bannany (2011).
Bank age, measured by the logarithm of the age of bank i in year t, is negatively
related to VAICit and this contradicts the expectation of H7 but is in line with the results
of El-Bannany (2011). The reason for this contradiction might be that older banks rely
more on previous success to achieve future success than younger banks do, and hence
ignore the enhancement of IC performance as a potential vehicle to achieve better
financial results in the future.
Listing age, measured by the period from the year when the bank listed in the Dubai
financial market until each year of the study period, is positively related to VAICit and
this is in line with the expectation of H8 but contradicts the results of El-Bannany (2011).
6. Conclusions
This paper investigates the relationship between IC performance and nine independent
variables (two of which, namely the GFC and market structure as measured by
concentration ratio, have not been considered in previous studies) over the period
2004-2010 using data for UAE banks.
The independent variables that have been considered in previous studies are.
Barriers to entry, which prevent newcomers from entering the market and might
encourage existing players in the market not to undertake innovative activities to
compete in the market. This might in turn have a negative impact on VAICit.
Investment in IT systems. It is hypothesised that increasing investment in IT could
act as a signal to employees that the bank is planning to reduce the number of staff and
this could in turn de-motivate them from improving their intellectual work and hence
improving VAICit.
Bank risk. Banks may be motivated to raise the efficiency of VAICit as a way to
minimise the negative effect of this risk on the perceptions of investors and customers.
Bank size. Larger banks will perform better in terms of IC performance due to the
resources available to these banks, and the potential for government support.
Bank profitability. The directors of banks that are making higher profits might be
more motivated than their counterparts in banks with lower profits to support methods

to raise the efficiency of the dimensions of IC performance, which could in turn lead to
better financial results.
The bank age. It is hypothesised that IC performance for older banks will be better
than for younger banks due to reasons such as experience, and the same logic is
applicable to the listing age hypothesis.
However, no previous study investigating factors affecting IC performance has
considered the GFC and market structure, as measured by concentration ratio, as ways
to explain IC performance. The GFC hypothesis states that the occurrence of the GFC
will motivate banks to maximise the three powers of VAICit, with the aim of continuing
the business and avoiding the risk of bankruptcy. The market structure (as measured by
concentration ratio) hypothesis suggests that the conditions of a market dominated by
just a few banks will not encourage competition and this might have a negative impact
on the performance of IC.
The results indicate that there are significant relationships between the GFC and
market structure measured by concentration ratio and IC performance. In addition, the
results show that barriers to entry, investment in IT systems, bank risk, bank size, bank
profitability, bank age and listing age variables also have a significant impact on IC
performance.
There are some limitations to this study. First, more evidence is needed about the
factors explaining VAICit before any generalisation of the results can be made. Second,
the empirical tests were conducted only on UAE banks over the period 2004-2010, and
hence the results of the study cannot be assumed to extend beyond this group of banks or
to different study periods. Finally, theories such as corporate governance and financial
leverage might be considered for further research as a possible explanation for VAICit.
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About the author
Magdi El-Bannany obtained his PhD from the Liverpool Business School, LJMU. He is an
Assistant Professor at the University of Sharjah in UAE and Ain Shams University in Egypt and
a Research Fellow at the Liverpool Business School, LJMU. He has more than 25 years experience
as a professional accountant and auditor in Egypt, the UK and the UAE. His teaching and research
interests include auditing, financial accounting, intellectual capital, social responsibility, bank
profitability, earnings management and corporate governance. Magdi El-Bannany can be
contacted at: melbannany@sharjah.ac.ae

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