Abstract
This research examines investment in human capital, financial risk, industry sector and corporate governance mechanisms as determinants of the voluntary disclosure of intellectual capital in a sample of 443 UK listed company annual reports for the year 2003/2004. This year precedes 2005 and the adoption of International Accounting Standards by European Union Member States thus providing the context for the study under reduced mandatory regulation. Voluntary disclosure is measured by an index based on intellectual capital attributes disclosed in the narratives and illustrations of the annual reports. The benefits of signalling intellectual capital are expected to outweigh proprietary costs due to these disclosures. These costs may be more prevalent in innovative and technological companies. Corporate governance mechanisms enhance voluntary disclosure and reduce information symmetry more specifically in those companies found to have higher levels of intangible assets in their resource base. The results suggest that companies associated with reduced financial risk and accompanied by growth are characterised with higher levels of voluntary disclosure of intellectual capital. Voluntary disclosure of intellectual capital is enhanced when large companies operating in high-tech and innovative industries are characterised by investments in human capital. The results suggest that companies that are able to maintain adequate governance systems through segregation of executive and non-executive duties and to a less extent through the presence of experienced non-executive directors exhibit higher levels of voluntary disclosure.
Highlights
1.1 Importance of Intellectual Capital DisclosureThe influence of Intellectual Capital (IC) on financing and investing decisions continues to grow due to its increasing value within the equity of firms
Dependent Variables: SRWDI: Weighted disclosure index (WDI) based on disclosed IC competitive advantage (ICCA) attributes measured as a square root transformation; SRDI: disclosure index based on disclosed IC attributes measured as a square root transformation; Independent Variables: LNSALES: Size being the sum of net sales or revenues representing gross sales and other operating revenue less discounts, returns and allowances as a log-transformed variable; MVTA: ratio of market value to total assets
The range for weighted disclosure index (WDI) is 0.07 to 0.75 and the mean is 0.33. For both DI and WDI, the mean and median are similar and the standard deviation is marginal indicating that the content analysis methodology was appropriate and reliable in measuring disclosure in DI and WDI; the results suggest normal distribution for both DI and WDI
Summary
The influence of Intellectual Capital (IC) on financing and investing decisions continues to grow due to its increasing value within the equity of firms. The extent of information asymmetry is likely to be higher in UK listed firms as managers may have more control relative to shareholders and with respect to other European equity markets. Markets are becoming increasingly aware that due compliance with accounting standards in a manner endorsed by audit firms does not generally provide adequate information on the wealth of the company, its growth or financial opportunities. Companies supplement these mandatory regulations with voluntary disclosure to ensure information asymmetry is reduced between internal and external stakeholders and that the financial risk to the equity is minimised
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