Does intellectual capital predict future stock returns? An Indian perspective

Purpose The purpose of the present research is to explore the relationship between intellectual capital and subsequent stock returns. Design/methodology/approach The present study has applied the Fama–French (1993) portfolio formation technique to calculate the portfolios and find the relationship with future stock returns for the duration of 22 years, i.e. 2000–2021, on all listed nonfinancial firms of India. Findings The findings suggest that intellectual capital proxied by VAIC (Pulic, 2000) shows a negative relationship with subsequent stock returns. Along with overall VAIC, components of VAIC, i.e. value-added human capital (VAHU), value-added capital employed (VACA) and Structural capital value added (SCVA) have also been explored. The results suggest that Indian firms still rely on financial and physical capital as compared to human and structural capital. There exists heterogeneity across industries while predicting the subsequent stock returns. Sub-period analysis shows that the latest duration is positively, however, insignificantly impacting the VAIC and stock return relationship. Age and size as control variables have also been explored. The results show that young-low VAIC and small-low VAIC firms are more significant as compared to high VAIC firms. Practical implications The paper reveals that physical capital plays an important role in predicting future stock returns. Originality/value The present study will prove to be an impetus in finding the relationship between intellectual capital and future stock returns, as it is an unexplored area both in the global as well as in the Indian context.