Mediating Role of Audit Fees in the Relationship Between Intellectual Capital and Financial Distress: Evidence from Pakistan’s Non-Financial Sector

Purpose: This study investigates the relationship between intellectual capital (IC) and financial distress and examines the mediating role of audit fees in the non-financial sector in the context of Pakistan. Drawing on the Resource-Based View (RBV), the study examines whether intellectual capital, as a valuable intangible resource, enhances firms’ financial resilience and reduces their vulnerability to financial distress. Design/Methodology/Approach: The study uses panel data obtained from the annual reports of non-financial companies listed in the PSX-100 from 2013 to 2022. Logistic regression is used to examine the direct relationships among the variables, while mediation analysis is conducted to examine the indirect effect of intellectual capital on financial distress through audit fees. Findings: The findings indicate that intellectual capital is significant in reducing the risk of financial distress and is negatively associated with audit fees. Furthermore, audit fees are positively associated with financial distress, indicating that lower audit fees are associated with a lower probability of financial distress. The mediation analysis further indicates that audit fees provide an important indirect link between intellectual capital and financial distress. Implications/Originality/Value: The findings suggest that firms should recognize intellectual capital as a strategic resource for strengthening financial stability and resilience. The study contributes to the existing literature by examining the mediating role of audit fees in the relationship between intellectual capital and financial distress, providing empirical evidence from Pakistan’s non-financial sector.