Does Intellectual Capital Efficiency Matter for Firms' Investment Efficiency?

The determination of investment expenditures' compatibility with growth opportunities always remains a challenge for organizations. However, the efficient utilization of resources of firms may help them to overcome the challenge of over and under-investment. The present study examines the direct and indirect effect of intellectual capital efficiency (ICE) on firms' investment efficiency (IE) where the channel of indirect effect is the financial constraint (FC) faced by firms. For this, we developed a panel of 174 firms belonging to Pakistan from 2016 to 2020. In the first stage, we measure investment efficiency as a trichotomous variable under the categories of firms with over-investment, under-investment, and optimal (efficient) investment. In the second stage, we converted our panel data into cross-sectional data by taking an average of all variables and then used the multinomial logistic regression model to estimate the direct and indirect effect of intellectual capital efficiency on firms' investment efficiency. The findings of the present research reveal that although intellectual capital efficiency, measured by the E-VAIC model, does not have a direct effect on investment efficiency, it affects investment efficiency indirectly through the channel of financial constraint measured by Z-Score. Therefore, firms should work on the enhancement of the efficiency of their intellectual capital to avoid the problem of inefficient investment.