Abstract
This paper examines the cross-sectional effect of investment in employees and investment in research and development on the extent of voluntary disclosure of intellectual capital of 443 FTSE All Share Index companies for the year 2003/2004. The extent of disclosure is measured by a disclosure index based on intellectual capital attributes included in the narratives and illustrations of the annual reports. The paper predicts that agency costs may be minimised through voluntary disclosure. In addition, that in some industries, the benefits of signalling valuable, rare, inimitable and non-substitutable attributes may outweigh the competitive costs of reporting this information. The results suggest that large companies operating in non-manufacturing, high-tech and innovative industries that are characterised by investment in employees and research and development processes have higher levels of hidden value; these companies are associated with the signalling of intellectual capital.
Highlights
1.1 BackgroundThere appears to be a broad acceptance that intellectual capital (IC) resources applied to generate innovativeness in products and services through investment in employees and research and development are the key drivers of sustained competitive advantage and market value (Chen, Cheng, & Hwang, 2005; Drucker, 1993; Grant, 1996)
The results suggest that large companies operating in non-manufacturing, high-tech and innovative industries that are characterised by investment in employees and research and development processes have higher levels of hidden value; these companies are associated with the signalling of intellectual capital
A significant correlation is found between weighted disclosure index (WDI) and market value (MV), TMRK, MANUF, employee cost (EMPC) and research and development (R&D); in general, the direction of the relationships is consistent with the expected sign; the partial correlation coefficient of WDI with R&D is negative indicating that increasing R&D expenditure may result in lower voluntary disclosure of IC (VDIC)
Summary
There appears to be a broad acceptance that intellectual capital (IC) resources applied to generate innovativeness in products and services through investment in employees and research and development are the key drivers of sustained competitive advantage and market value (Chen, Cheng, & Hwang, 2005; Drucker, 1993; Grant, 1996). Not all investment in employees generates motivation, innovativeness and efficient productivity; neither is all investment in research and development (R&D) effective in generating successful products, services, brands, licenses, patents (Lev, 2001), customer loyalty, customer retention, market share and market value. Signalling mechanisms improve the allocation of resources ensuring that companies that are more efficient receive more capital as signalling reveals the company’s competitive advantage within the market (Inchausti, 1997)
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