Effects of intellectual capital information disclosed in ... - IngentaConnect

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1401-338X.htm

Effects of intellectual capital information disclosed in annual reports on market capitalization Evidence from Bursa Malaysia

Effects of IC information

85

Ousama Abdulrahman Anam Multimedia University, Cyberjaya, Malaysia, and

Abdul Hamid Fatima and Abdul Rashid Hafiz Majdi International Islamic University Malaysia, Kuala Lumpur, Malaysia Abstract Purpose – This paper aims to examine the effects of intellectual capital (IC) disclosure in the annual reports of listed companies in Bursa Malaysia (BM) on their market capitalization (MCAP). Design/methodology/approach – The paper uses secondary data for listed companies on BM for the years 2002 and 2006. A disclosure index was used to measure the extent of IC information disclosed in the annual reports. The MCAP data were obtained from the Bloomberg database. The data were analyzed using correlation and regression analyses. Findings – The paper finds that the extent of IC disclosure by Malaysian-listed companies has a positive significant effect on their MCAP. In addition, the paper found that there is significant positive impact of the control variables (i.e. book value, net profit, firm size and leverage) on the MCAP. Research limitations/implications – Although the paper was focused on the IC information and MCAP data for two years (i.e. 2002 and 2006), it provides empirical evidence that IC disclosure does affect the MCAP of companies. Hence, it means that the IC information is picked up by the market. Future research may incorporate more control variables and years. Practical implications – The findings provide empirical evidence that IC information disclosed by the Malaysian-listed companies positively affects their MCAP. These findings can be considered to be useful for these companies and work as a signal towards the need for more IC disclosure. In addition, the findings could be useful for the regulatory bodies, e.g. the Malaysian Accounting Standards Board and BM, perhaps to develop guidelines on IC disclosure to enhance transparency and increase confidence in the capital market. Originality/value – The paper is considered the first empirical study to examine the effects of IC disclosure in the annual reports of Malaysian-listed companies on their MCAP. Keywords Intellectual capital, Effects, Disclosure, Market capitalization, Bursa Malaysia Paper type Research paper

1. Introduction In the knowledge-based economy or knowledge economy (KE), the main economic resources are no longer physical capital, natural resources and labor, but knowledge itself (Drucker, 1992). Thus, a KE is an economy in which the generation, application and exploitation of knowledge play an important role as the driving forces of economic The authors gratefully acknowledge the many constructive and insightful comments received from the reviewers.

Journal of Human Resource Costing & Accounting Vol. 15 No. 2, 2011 pp. 85-101 q Emerald Group Publishing Limited 1401-338X DOI 10.1108/14013381111157328

JHRCA 15,2

86

growth (Leadbeater, 1999; Goh, 2005). Knowledge Economy companies tend to create value based on intangible capital and resources rather than tangible ones (Abeysekera, 2006; Whiting and Miller, 2008). Consequently, this has resulted in hidden capital, which is the difference between the market and book values of the companies. This hidden capital is recognized and valued by the market (Al-Ali, 2003; Ordon˜ez de Pablos, 2003). Broadly speaking, this hidden capital can be called “intellectual capital” (IC) (Stewart, 2000; Brennan, 2001). Therefore, there is increasing recognition of the role of IC in driving the market value of the company (Chen et al., 2005). IC can be defined from the perspective of wealth creation as “intangible resources and assets that an organization can use to create value by converting it into new processes, products, and services” (Al-Ali, 2003, p. 5). Similarly, Stewart (2000, p. xi) defines IC as “intellectual material – knowledge, information, intellectual property, experience – that can be put to use to create wealth”. IC is usually classified into three main categories, based on one of the most popular classifications by Sveiby (1997), who classifies IC as internal structure, external structure and employee competence. This classification of IC by Sveiby (1997), is often referred to and adopted by the IC literature (April et al., 2003; Abeysekera and Guthrie, 2005; Wong and Gardner, 2005; Whiting and Miller, 2008), with slight modification of the terminology of the categories into internal capital (INC), external capital (EXC) and human capital (HUC). INC refers to the IC inside the company which consists of innovations, technological infrastructure, internally generated intangible assets (e.g. patents, brand names and trademarks), quality, processes and management philosophy (Sanchez et al., 2000; Guthrie and Petty, 2000; Bontis, 2003; Seetharaman et al., 2004). On the other hand, EXC refers to the IC that exists outside of the company, which includes business partnering and alliances, business combination, information about customers (e.g. information about the customers number or market share), customers’ satisfaction, suppliers (e.g. information about suppliers), distribution channels, marketing, market value and share price, and shareholders (Sanchez et al., 2000; Brennan, 2001; Bontis, 2003; Seetharaman et al., 2004; Olsson, 2004). Finally, HUC refers to the human resources of the company which include employees’ education, skills, training, values and experience (Sanchez et al., 2000; Guthrie and Petty, 2000; Bontis, 2003; Seetharaman et al., 2004). There are some prior empirical studies in developed economies that examine the impact of the extent of disclosure in general (e.g. voluntary, mandatory, both) on the market value of the companies (Botosan, 1997; Lang and Lundholm, 2000), and which report a significant relationship. On the other hand, in emerging economies some empirical studies (Ragab and Omran, 2006) show the effect of general disclosure on market valuation. This indicates that when the information is useful, it is valued by the market (Hassan et al., 2011). Looking at the disclosure of IC, there are a limited number of studies that specifically examine the relationship between IC disclosure and market value (as will be discussed in the literature review section). Nevertheless, these studies found that there is a positive significant relationship between the two. However, in Malaysia, as an emerging economy, so far, there are no studies that examine the effect of IC disclosure in the annual reports of listed companies on their market value. Therefore, this research is motivated by the fact that such a study is warranted since IC (i.e. hidden value) may or may not be captured by the market in emerging economies like Malaysia, which may be subjected to market imperfections.

Based on the need to discover whether a relationship exists, the main objective of this paper is to examine the effects of IC information disclosed in the annual reports of listed companies on Bursa Malaysia (BM)[1] on their market capitalization (MCAP)[2]. The paper makes several contributions. First, it contributes towards the IC literature in Malaysia, especially on the issue of the effects of IC information on the market value of the company. Second, since it was found that IC disclosure does affect MCAP, the paper contributes towards practice by highlighting the importance of IC disclosure to the Malaysian-listed companies as this affects their MCAP. Thus, the findings should motivate these companies to disclose more IC information. Third, the paper contributes to the policy making by providing empirical evidence on the effects of IC disclosure on listed companies’ MCAP to the regulatory bodies (e.g. Malaysian Accounting Standard Board (MASB); BM). Thus, these regulatory bodies may enhance the voluntary disclosure of IC information in the annual reports of listed companies by developing disclosure guidelines. The paper is structured as follows. Section 2 reviews literature on the relationship between IC information and firm value. This is followed by the theoretical framework and hypotheses development section. Section 4 discusses the research method. Section 5 provides the results and their discussions. Section 6 concludes the paper. 2. Literature review Very few studies have been conducted to examine the effects of IC disclosure on market value or MCAP; among them are: Abdolmohammadi (2005) in the USA, Orens et al. (2009) in continental European countries and Abeysekera (2011) in Sri Lanka. These studies found that there is a positive significant relationship between IC disclosure and MCAP. The argument underlining such a relationship is that when there are IC related activities, it would be a significant part of a company’s values. Thus, these values contribute to the MCAP of the company. As a result, a company would expect to report these values with more IC disclosure to explain their effects on MCAP[3]. Supporting empirical evidence can be found, for example, in Abdolmohammadi (2005). He found that the IC disclosure in the annual reports of US companies had a highly significant ( p , 0.01) relationship with their market values. This finding indicates that there are greater benefits than costs for companies to disclose more IC information voluntarily (Abdolmohammadi, 2005). Similar to Abdolmohammadi (2005), Orens et al. (2009) focused on the impact of internet-IC disclosure (i.e. web-based) on the company value for four continental European countries (i.e. Belgium, France, Germany and The Netherlands). The findings of their study supported those of Abdolmohammadi (2005), as they found that there was a positive significant effect on the extent of internet-IC disclosure on company value. Further support for the significant relationship between IC disclosure and MCAP can be found in Citron et al. (2005). They found that there was a positive relationship between IC disclosure in the annual reports and the market value of UK companies (although this relationship was significant only for EXC and INC, but not for HUC). On the other hand, Abeysekera (2011) reports a study conducted in a developing country, Sri Lanka, to examine the influence of IC disclosure (i.e. narrative, visual and numerical) on market value of companies during two political settings (i.e. civil war and temporary truce). He found that IC disclosure (i.e. narrative disclosure) had a positive significant effect on the MCAP during the period of temporary truce, but not during


87

JHRCA 15,2

88

the civil-war period. These findings are interesting as the results, during peace, are consistent with the findings of the studies in the developed countries. Overall, it can be seen that the findings of the positive significant relationship (i.e. between IC disclosure and market value) are consistent with the findings of the general disclosure literature (e.g. voluntary, mandatory and both) which found that the extent of disclosure in the annual reports positively affect the MCAP. Within the extant of Malaysian literature, there are a number of studies that examined the issue of IC from different perspectives (e.g. measurement, performance, disclosure and usefulness), such as Bontis et al. (2000), Goh and Lim (2004), Seetharaman et al. (2004), Saudah et al. (2004), Wan Fadzilah et al. (2004), Faridah (2004), Goh (2005), Amilia (2006), Abdul Latif and Fauziah (2007), Huang et al. (2007), Shaniz Khan and Daing Nasir (2007), Zuliana (2007), Norman et al. (2009), Amrizah and Rashidah (2009), Huang et al. (2010) and Ousama et al. (2011). However, none of these studies extended IC disclosure in the annual reports to investigate its affects on MCAP. Thus, the current paper can be considered as the first to test the relationship between IC disclosure and market value in Malaysia. Consequently, it is hoped that a study in this area would produce findings that are beneficial, while simultaneously filling the gap in the Malaysian IC literature. 3. Theoretical framework and hypotheses Previous studies have tried to identify a link between disclosure in general (i.e. voluntary, mandatory and both) and MCAP (Healy and Palepu, 1993; Welker, 1995; Botosan, 1997; Lang and Lundholm, 2000). The findings of these studies reveal that increasing the extent of disclosure results in decreasing the misevaluation of a company’s share price, hence increasing its MCAP. However, with regards to IC disclosure, as mentioned earlier, there are few studies, which examine the relationship between IC information disclosure by companies and their MCAP. The findings of these studies also indicate that there is a significant positive relationship between IC disclosure and MCAP. Thus, these findings are consistent with findings on the voluntary disclosure studies which found the extent of voluntary disclosure in the annual reports and MCAP to be positively associated (Abdolmohammadi, 2005). Resource-based theory can be used to explain the relationship between the IC disclosure in the annual reports and the MCAP. It is known that IC is one component of the company capital and resources, and it contributes to the wealth creation of the company. Therefore, when companies disclose more IC information in their annual reports, it enables the stakeholders to understand the wealth creation process. As a result, such disclosure will decrease the misevaluation of the company’s share prices, and increase MCAP. Furthermore, the signalling theory can also be applied to explain this relationship. The management of a company that has good value (as a result of the value creation process of its capital and resources which include IC) will try to signal this fact by disclosing more IC information in the annual reports to its stakeholders. Thus, this information might be reflected in the market value (MCAP) of the company. On the other hand, if there is no effect of such information on the market value of the company, there would be no reason to signal. In addition, disclosing information about IC might enable the user to better determine the company’s future value which might result in increasing the company’s share price. Based on the above discussion, the following theoretical framework is developed (Figure 1). The framework depicts that IC information (i.e. independent variable – IV)

will affect the MCAP (i.e. dependent variable – DV). In addition, the framework shows that book value, net profit, firm size and leverage (i.e. control variables – CVs) will also affect the MCAP. Therefore, based on the theoretical framework, it can be hypothesized that IC disclosure in the annual reports would have a positive relationship on MCAP. Thus, the following hypotheses were formulated, in the alternate form: H1. The disclosure of IC information by Malaysian-listed companies in the year 2002 has a positive significant effect on their MCAP.


89

H2. The disclosure of IC information by Malaysian-listed companies in the year 2006 has a positive significant effect on their MCAP. 4. Research method 4.1 Sample selection The paper focuses on listed companies on the Main Board[4] in BM for two years, i.e. 2002 and 2006. The selection of the listed companies is due to several reasons. First, the listed companies, being large companies, have more resources to start and sponsor new initiatives in practising disclosure in new areas such as IC information. Second, the issue of accessibility of the annual reports, where listed companies are required to provide a copy of their annual reports to BM. Therefore, it is easy to access all listed companies’ annual reports via BM’s web site. Also, listed companies were selected as the subject of study since their MCAP was required. The selection of the years 2002 and 2006 was made due to the fact that IC is a new area both internationally and in Malaysia. Internationally, companies started to measure and disclose their IC in the late-1990s. However, in Malaysia, the IC issues (e.g. measurement and disclosure) are still new and still in their development stage in companies. In addition, the practices of disclosure of IC may still be considered limited. Furthermore, the National Annual Corporate Report Awards (NACRA) were introduced in Malaysia in the year 2000. The introduction of NACRA had the general aim of encouraging listed companies to be competitive in preparing and presenting their corporate annual reports and improving the level of disclosure of information (NACRA Organising Committee, 2008). Thus, choosing earlier years (e.g. 1999-2001) might not be appropriate. Therefore, the gap of two years (i.e. years 2000 and 2001) was given since the introduction of NACRA to allow time for NACRA to take effect, hence the selection of year 2002. Then, for Malaysian-listed companies, financial reporting standard (FRS) 138 (i.e. intangible assets) became effective for the financial period beginning January 1, 2006. FRS 138 may indirectly affect the extent of intellectual capital disclosure (EICD) of Malaysian IC information (IV)

Book value Net profit Firm size Leverage (CVs)

Market capitalization (DV)

Figure 1. Theoretical framework

JHRCA 15,2

90

companies as intangible assets may be considered as components of IC. Therefore, EICD may have improved in 2006 as well as affecting MCAP; thus the year 2006 was selected as the other sample period for the study. Furthermore, although the potential affect of EICD on MCAP may be studied annually (i.e. in 2003, 2004 and 2005), yearly changes of EICD would be minimal. Thus, a gap period would give the sample companies time to enhance their EICD as well as its possible association with MCAP. Hence, the effect of EICD on MCAP was tested in the years 2002 and 2006. In 2002, the population of listed companies on BM was 456 and they were classified into the following strata (Investors Digest, 2003): consumer products; industrial products; construction; trading and services; properties; plantations and others (i.e. technology, infrastructure project companies, hotels and mining). Therefore, in order to have a sample representative of the population, a stratified sampling method was used. Then, a systematic sampling method was utilized as it is “statistically more efficient than a simple random sample” (Cooper and Schindler, 2003, p. 193). This method (i.e. systematic sampling) was carried out within the industry groups, in order to have approximately 20 per cent of the companies in each industry as the sample. Therefore, the sample of the study consists of 91 companies with a total number of 182 annual reports for the years 2002 and 2006. Table I shows the sample size of the companies and annual reports based on sectors. 4.2 Data collection A number of methods were used to obtain the secondary data in this paper. First, the extent of IC disclosure, book value, net profit, firm size and leverage data (i.e. independent variables) were gathered from the annual reports of the sample companies for the years 2002 and 2006. Next, the MCAP data (i.e. dependent variable) was obtained through the Bloomberg database. 4.3 Variables measurement Dependent variable. MCAP is the dependent variable in the regression model; it is measured as the market value of shareholders’ equity, which is computed by multiplying its share price by the number of shares outstanding at the end of the accounting year (Hussey, 1999; Ibrahim et al., 2004). The MCAP in this paper for the years 2002 and 2006 were obtained from Bloomberg database, which is consistent with prior studies (Abdolmohammadi, 2005). Industry

Table I. Sample size based on companies and annual reports

Consumer products Industrial products Construction Trading and services Properties Plantation Others Total

Population

Sample for one year

Annual reports for 2002 and 2006

58 105 35 106 83 38 16 456

11 21 7 21 17 8 6 91

22 42 14 42 34 16 12 186

Independent and control variables. In addition to the independent variable (EICD), there are four control variables (i.e. book value, net profit, firm size and leverage) included in the regression model. The inclusion of these control variables was due to their plausible effect on MCAP as found by prior studies (Abdolmohammadi, 2005; Citron et al., 2005; Orens et al., 2009; Abeysekera, 2011). The measurement of the independent and control variables are specified as follows: (1) EICD is measured based on a disclosure index that was developed by adopting Sanchez et al.’s (2000) work with significant modifications based on prior IC disclosure literature (Sveiby, 1997; Stewart, 2000; Guthrie and Petty, 2000; Bontis et al., 2000; Brennan, 2001; Williams, 2001; Bontis, 2003; Ordon˜ez de Pablos, 2003; Olsson, 2004; Goh and Lim, 2004; Seetharaman et al., 2004; Abeysekera and Guthrie, 2005; Abdolmohammadi, 2005; White et al., 2007). Finally, the disclosure index consists of 101 items that are within the three IC categories (i.e. 35 items for INC, 35 items for EXC and 36 items for HUC)[5]. A dichotomous scoring system was used, where “1” is assigned when an item in the disclosure index is disclosed in the annual report and “0” otherwise, as measured in prior studies (Abdolmohammadi, 2005; White et al., 2007; Omar, 2008). (2) Book value (BVALUE) is measured by the difference between total assets and total liabilities at the end of the accounting year, as measured in prior studies (e.g. Ibrahim et al., 2004; Abdolmohammadi, 2005). (3) Net profit (NETPROFT) is measured by the net profit of the company at the end of a reporting year as measured in prior studies (Citron et al., 2005; Zuliana, 2007; Orens et al., 2009). (4) Firm size (SIZE) is measured by the total assets of a company at the end of a reporting year, as measured by prior studies (Beaulieu et al., 2002; Bozzolan et al., 2003). (5) Leverage (LEVERAGE) is measured as a ratio of total liabilities to shareholders’ equity, as measured in prior studies (Williams, 2001; Zuliana, 2007; Omar, 2008). 4.4 Regression model To examine whether the market perceives IC disclosure information as an important variable in the determination of the company’s market value, a multiple ordinary least square regression model based on the transformation of the variables to normal scores was adopted[6]. The regression model is adopted from prior studies with modification[7] (Abdolmohammadi, 2005; Orens et al., 2009; Abeysekera, 2011). The framework of this model was originally developed by Ohlson (1995). The model includes the dependent variable (MCAP), independent variable (EICD) and control variables (BVALUE, NETPROFT, SIZE and LEVERAGE) and specified as follows: MCAP jt ¼ a þ b1 EICDjt þ b2 BVALUE jt þ b3 NETPROFT jt þ b4 SIZE jt þ b5 LEVERAGE jt þ ejt where: MCAPjt

¼ market capitalization of company j at year t;

EICDjt

¼ extent of intellectual capital disclosure in the annual report of company j at year t;


91

JHRCA 15,2

BVALUEjt

¼ book value of company j at year t;

NETPROFTjt ¼ net profit of company j at year t; ¼ firm size of company j at year t;

SIZEjt

LEVERAGEjt ¼ leverage of company j at year t;

92

ejt

¼ error;

a

¼ regression intercept; and

bI

¼ parameters to be estimated, i ¼ 1, . . . ,5.

5. Results and discussion As mentioned earlier, the research objective of the paper is to investigate the effects of IC disclosure (i.e. overall) on MCAP. In other words, it aims to examine the relationship between the dependent variable (MCAP) and independent variables (EICD, BVALUE, NETPROFT, SIZE and LEVERAGE). The analysis in this section includes the descriptive analysis, correlation analysis and regression analysis which will be discussed in the following subsections. 5.1 Descriptive analysis Tables II and III provide the descriptive statistics of the variables (i.e. MCAP, EICD, BVALUE, NETPROFT, SIZE and LEVERAGE) based on raw data for the years 2002 and 2006, respectively. The tables show that MCAP, NETPROFT BVALUE and SIZE were higher in 2006 compared to 2002. Whereas, LEVERAGE had decreased in 2006 compared to 2002. This indicates that the overall financial performance in 2006 was better than 2002. In addition, the tables show that the means of the EICD in the annual reports of listed companies were 0.22 and 0.24 for the years 2002 and 2006, respectively. These findings show that the EICD in annual reports for the year 2006 was slightly higher compared to the year 2002 which suggests that Malaysian-listed companies have increased their disclosure of IC information in the later year.

Table II. Descriptive statistics of variables for the year 2002

Table III. Descriptive statistics of variables for the year 2006

Mean Median SD

Mean Median SD

MCAP (million)

EICD

BVALUE (million)

NETPROFT (million)

SIZE (million)

LEVERAGE

1,053 202 3,213

0.223 0.207 0.055

784 254 1,902

43 16 181

1,680 582 4,122

1.443 0.634 2.112

MCAP (million)

EICD

BVALUE (million)

NETPROFT (million)

SIZE (million)

LEVERAGE

1,806 224 4,950

0.238 0.218 0.066

996 334 2,432

90 19 301

2,045 650 5,021

1.330 0.643 1.857

5.2 Correlation analysis Pearson correlation analyses were performed for the years 2002 and 2006. Table IV presents the correlation analysis between all the variables for the year 2002. The results show that the EICD, BVALUE and NETPROFT were positively correlated with each other. The initial analysis of the relationship between the dependent variable and the independent variables shows that the MCAP was statistically significant with the EICD, BVALUE, NETPROFT and SIZE ( p , 0.01), but not with LEVERAGE. These findings reveal that there is an association between the MCAP of the Malaysian-listed companies and the extent of IC disclosure (i.e. overall) in their annual reports. However, further analysis of this relationship will be based on the regression analysis. Next, Table V presents the correlation analysis for the year 2006. Similarly, all variables were positively correlated with each other. The results also show that the dependent variable (MCAP) was significantly positively correlated ( p , 0.01) with most of the independent variables (EICD, BVALUE, NETPROFT and SIZE) except LEVERAGE. Thus, the results for 2006 confirm that there is a strong association between the extent of IC disclosure (i.e. overall) in the annual reports of Malaysian-listed companies and their MCAP. Further analysis is carried out based on the regression.


93

5.3 Regression analysis Regression analyses for the years 2002 and 2006 were performed[8]. Tables VI and VII report the empirical results of the relationship between MCAP and EICD (i.e. overall) in the annual reports of Malaysian-listed companies[9]. Table VI presents the empirical results of the regression analysis for the year 2002, which shows that the adjusted R 2 was 0.76. The value of R 2 indicates that the ability of the model to explain the relationship between the dependent and independent variables is 76 per cent. The adjusted R 2 in the current paper is higher than 0.14 by Abdolmohammadi’s (2005) study. In addition, the table shows that the F value was 58.04 with a significance level of 0.000, revealing that the model fits the data. The intercept was not significant ( p ¼ 1.000) which indicates that there is unlikely to be other significant independent variables missed in the equation of the regression model. MCAP MCAP EICD BVALUE NETPROFT SIZE LEVERAGE

1.000

EICD 0.593 * 0.000 1.000

BVALUE

NETPROFT

0.824 * 0.000 0.551 * 0.000 1.000

0.703 * 0.000 0.473 * 0.000 0.578 * 0.000 1.000

SIZE 0.680 * 0.000 0.489 * 0.000 0.876 * 0.000 0.447 * 0.000 1.000

LEVERAGE 20.109 0.306 20.019 0.859 20.080 0.450 20.170 0.107 0.317 * 0.002 1.000

Notes: Significant at: *0.01 level (2-tailed); the values in bold font are the Pearson/Spearman correlation coefficients; the values in italic font are the significance levels

Table IV. Correlation analysis results of the variables for the year 2002

JHRCA 15,2

MCAP MCAP EICD

94

1.000

EICD

BVALUE

NETPROFT

0.661 * * * 0.000 1.000

0.865 * * * 0.000 0.581 * * * 0.000 1.000

0.687 * * * 0.000 0.450 * * * 0.000 0.613 * * * 0.000 1.000

BVALUE NETPROFT SIZE

Table V. Correlation analysis results of the variables for the year 2006

0.746 * * * 0.000 0.560 * * * 0.000 0.833 * * * 0.000 0.440 * * * 0.000 1.000

20.153 0.148 0.109 0.304 20.148 0.162 20.234 * * 0.025 0.204 * 0.053 1.000

Notes: Significance at: * * *0.01, * *0.05 and *0.10 levels (two-tailed); the values in bold font are the Pearson/Spearman correlation coefficients; the values in italic font are the significance levels

Constant EICD BVALUE NETPROFT SIZE LEVERAGE

Coefficient

SE

t-statistic

Sig. t

2 0.000 0.131 0.817 0.304 2 0.266 0.095

0.049 0.064 0.178 0.066 0.180 0.087

0.000 2.057 4.584 4.608 2 1.480 1.092

1.000 0.043 * 0.000 * * 0.000 * * 0.142 0.278

Notes: Significance at: * * *0.01 and * *0.05 levels; R 2 ¼ 0.773; Adj. R 2 ¼ 0.760; F-value ¼ 58.041; Sig. F ¼ 0.000; D-W ¼ 2.158

Variable

Table VII. Regression results of the effects of ICD on MCAP for the year 2006

LEVERAGE

LEVERAGE

Variable

Table VI. Regression results of the effects of ICD on MCAP for the year 2002

SIZE

Constant EICD BVALUE NETPROFT SIZE LEVERAGE

Coefficient

SE

t-statistic

Sig. t

20.000 0.215 0.439 0.217 0.185 20.098

0.044 0.059 0.112 0.060 0.103 0.059

20.001 3.655 3.909 3.615 1.798 21.668

0.999 0.000 * * * 0.000 * * * 0.001 * * * 0.076 * 0.099 *

Notes: Significance at: * * *0.01 and *0.10 levels; R 2 ¼ 0.824; Adj. R 2 ¼ 0.813; F-value ¼ 79.506; Sig. F ¼ 0.000; D-W ¼ 1.988

The results show that EICD was positively significant ( p , 0.05) even with BVALUE and NETPROFT in the regression model. The results reveal that the EICD can be considered as a predictor of MCAP. This finding is consistent with prior IC disclosure studies (Abdolmohammadi, 2005; Orens et al., 2009; Abeysekera, 2011), which found it to be statistically significant. The significant positive coefficient of EICD (i.e. overall) indicates that the more disclosure of information about IC, the higher MCAP would be. Several possible reasons can explain the significance of the EICD. First, as there

is a substantial benefit of increasing the market value of a company, there will be an incentive for the company to disclose more IC information (Abdolmohammadi, 2005). Second, disclosing more IC information in the annual reports enables the stakeholders to understand the wealth creation process, hence decrease the misevaluation of the company’s share prices, and increase MCAP. Third, according to the signalling theory, the company with a good value will signal this fact by disclosing more IC information in the annual reports to its stakeholders. Disclosing IC information may capture some of the hidden values that are not measured in BVALUE. Similarly, this will reduce the misevaluation of the share prices, thus increase market value of the company. Therefore, based on the results, it can be concluded that the EICD in the annual reports of Malaysian-listed companies has an effect on their MCAP, thus hypothesis H1, that IC disclosure for the year 2002 would have a positive impact on MCAP, is supported. In addition, BVALUE and NETPROFT have their influence on the MCAP as they were statistically significant ( p , 0.01). On the other hand, SIZE and LEVERAGE were not significant. The findings of the BVALUE and NETPROFT are consistent with the findings of Abeysekera (2011), but inconsistent with the findings of Abdolmohammadi (2005) who found them not to be significant. In the Malaysian context, the results support that book value and the net profit of the companies are deemed important by the market in determining the value of the company. Next, the regression model results for the year 2006 are shown in Table VII. The table shows that adjusted R 2 was 0.81 which indicates that the model is able to explain about 81 per cent of the relationship between dependent and independent variables. This is a considerable finding, as only 19 per cent of MCAP in the Malaysian market remains unexplained when the extent of IC disclosure is included in the equation. Examining the fitness of the model, the table shows that the model is significant at 0.01 with F value of 79.51. This indicates the model fits the data. Similar to the model for the year 2002, the intercept was not significant ( p ¼ 0.999), indicating that other important explanatory variables are unlikely to be missed in the equation. Similarly, the results show that the EICD was statistically significant at the 0.000 level ( p , 0.01). Therefore, it is more significant in the year 2006 compared to the year 2002. In fact, even with the inclusion of key-control variables such as BVALUE and NETPROFT, EICD is highly significant, thus indicating that the EICD in the annual reports is a predictor of MCAP. In addition, the BVALUE and NETPROFT were positively significant at the 0.000 level ( p , 0.01), and SIZE and LEVERAGE were weakly significant ( p , 0.10). Therefore, it can be said that the MCAP of Malaysian-listed companies can be affected by the extent of IC disclosure (i.e. overall) in their annual reports; hence, once again, hypothesis H2 for the year 2006 is supported. 5.4 Additional analysis As reported in the correlation analysis (i.e. Tables IV and V), there was a high correlation between MCAP and BVALUE, and MCAP and NETPROFT. Therefore, it may indicate that BVALUE and NETPROFT are behaving very similarly where each variable may not add any incremental value to the regression model[10]. Hence, further analysis was conducted by omitting BVALUE. Tables VIII and IX report the regression results for the years 2002 and 2006, respectively. The results support the results found in the main regression models in Tables VI and VII which indicates that EICD has a positive significant relationship with the MCAP at 0.05 and 0.01 significance levels for 2002


95

JHRCA 15,2

96

and 2006, respectively. In addition, the results show that all control variables (i.e. NETPROFT, SIZE and LEVERAGE) are statistically significant in the two years (i.e. 2002 and 2006). 5.5 Sensitivity analysis A sensitivity analysis was conducted using a dummy variable for year (i.e. 0 for year 2002 and 1 for year 2006); the results are shown in Table X. The results support the results in Tables IV and V that EICD significantly impact the MCAP. In addition, the results supported the significant results of BVALUE and NETPROFT for both years. However, SIZE and LEVERAGE were not significant, perhaps again due to the stronger affect of BVALUE on MCAP. Variable

Table VIII. Regression results with omitting BVALUE for the year 2002

Constant EICD NETPROFT SIZE LEVERAGE

Constant EICD NETPROFT SIZE LEVERAGE

t-statistic

Sig. t

20.000 0.175 0.365 0.494 22.200

0.055 0.070 0.072 0.077 0.065

0.000 2.509 5.090 6.440 23.055

1.000 0.014 * 0.000 * 0.000 * 0.003 *

Coefficient

SE

t-statistic

Sig. t

20.000 0.266 0.289 0.515 20.219

0.047 0.062 0.062 0.064 0.054

20.002 4.288 4.702 8.053 24.028

0.999 0.000 * 0.000 * 0.000 * 0.000 *

Notes: Significant at: *0.01 level; R 2 ¼ 0.792; Adj. R 2 ¼ 0.783; F-value ¼ 81.950; Sig. F ¼ 0.000; D-W ¼ 1.981

Variable

Table X. Regression results of the sensitivity analysis

SE

Notes: Significant at: *0.01 level; R 2 ¼ 0.717; Adj. R 2 ¼ 0.704; F-value ¼ 54.594; Sig. F ¼ 0.000; D-W ¼ 2.085

Variable

Table IX. Regression results with omitting BVALUE for the year 2006

Coefficient

Constant EICD BVALUE NETPROFT SIZE LEVERAGE YEAR

Coefficient

SE

t-statistic

Sig. t

2 0.000 0.174 0.539 0.261 0.055 2 0.039 2 0.000

0.047 0.043 0.096 0.045 0.092 0.049 0.066

0.000 4.007 5.603 5.826 0.597 2 0.791 0.000

1.000 0.043 * 0.000 * * 0.000 * * 0.551 0.430 1.000

Notes: Significance at: *0.05 and * *0.01 levels; YEAR ¼ 0 for the year 2002 and 1 for the year 2006; R 2 ¼ 0.790; Adj. R 2 ¼ 0.783; F-value ¼ 110.000; Sig. F ¼ 0.000; D-W ¼ 2.074

6. Conclusion and suggestions for future research The aim of the paper was to find empirical evidence that IC disclosure in the annual report of the Malaysian-listed companies affects their MCAP. The empirical findings of the correlation analysis show that there is a positive relationship between EICD and MCAP. These findings are further supported by the regression models, which confirm that there is a positive significant relationship between EICD and MCAP. Hence, the EICD can be considered as a predictor of MCAP. Thus, it can be concluded that IC disclosure by Malaysian-listed companies in their annual reports does indeed affect their MCAP. In addition, the correlation analysis shows that there is significant association between BVALUE, NETPROFT and SIZE (i.e. control variables) and MCAP. The results of the correlation tests are generally supported by the findings of the regression analyses. Based on the findings mentioned above, it can be said that the empirical evidence obtained in this paper can be considered as useful for the Malaysian-listed companies as the added costs of IC disclosure is justified by its positive effect on the market value for companies that are disclosing this information. Moreover, these results should motivate companies that are not disclosing to do so. In addition, the findings of this paper could be useful for some of the regulatory bodies in Malaysia (e.g. the MASB, BM), perhaps to develop guidelines on IC disclosure, not only to enhance transparency and increase confidence in the capital market, but because the results of this paper have provided evidence on the significance of IC disclosure in the market. This study has certain limitations, mainly due to it being an initial study of the effect of IC disclosure on MCAP in Malaysia. These limitations are: the paper used only the data of two years (i.e. 2002 and 2006); it used a sample drawn from the population of listed companies; and it only included a few control variables in the regression model. Future research may consider conducting time series analysis, extending the sample to the population of listed companies in Malaysia, and including more control variables to better explain MCAP. Nevertheless, despite these limitations, it is hoped that the study provides ample evidence to be useful to companies and regulators to promote IC disclosure, as well as inspire more studies in this area of research. Notes 1. BM is the Malaysian Stock Exchange. 2. MCAP or market valuation is “the value of a company obtained by multiplying the number of its issued ordinary shares by their market prices” (Hussey, 1999, p. 231). 3. That could be explained by using signalling theory, where companies with good values are likely to signal their values with more voluntary disclosure. 4. Main Board refers to a board with larger sized companies that meet more listing requirements compared to the Second Board of the Bursa, for example, minimum paid-up capital of RM 60 million (Bursa Malaysia, 2009). 5. The disclosure index is available upon request from the first author. 6. The transformation of the regression variables based on normal scores, which is referred to as the Van der Waerden approach, was proposed by Cooke (1998). One of advantages of this approach is that the regression results will have exact statistical properties (Cooke, 1998). In addition, transforming the variables to normal scores will solve the problems of non-linearity and monotonicity (Cooke, 1998).


97

JHRCA 15,2

7. The difference in the current model compared to prior models is in terms of using the normalized variables. 8. All regression analysis assumptions were tested and results show that they were met. 9. The paper has performed regressions based on the categories of IC (i.e. INC, EXC and HUC) for both years. The results are consistent with the main findings.

98

10. BVALUE and SIZE seem to be even more highly correlated than BVALUE and NETPROFT, thus BVALUE is excluded from the additional analysis.

References Abdolmohammadi, M.J. (2005), “Intellectual capital disclosure and market capitalization”, Journal of Intellectual Capital, Vol. 6 No. 3, pp. 397-416. Abdul Latif, S. and Fauziah, S. (2007), “Intellectual capital management in Malaysian public listed companies”, International Review of Business Research Papers, Vol. 3 No. 2, pp. 262-74. Abeysekera, I. (2006), “The project of intellectual capital disclosure: researching the research”, Journal of Intellectual Capital, Vol. 7 No. 1, pp. 61-77. Abeysekera, I. (2011), “The relation of intellectual capital disclosure strategies and market value in two political settings”, Journal of Intellectual Capital, Vol. 12 No. 2, pp. 319-38. Abeysekera, I. and Guthrie, J. (2005), “An empirical investigation of annual reporting trends of intellectual capital in Sri Lanka”, Critical Perspectives on Accounting, Vol. 16 No. 3, pp. 151-63. Al-Ali, N. (2003), Comprehensive Intellectual Capital Management, John Wiley & Sons, New York, NY. Amilia, S.A.M. (2006), “Relationship between board composition and company performance: analysis of financial and intellectual capital measures”, master thesis, International Islamic University Malaysia, Kuala Lumpur. Amrizah, K. and Rashidah, A.R. (2009), “Enhancing organisation effectiveness through human, relational and structural capital: an empirical analysis”, Malaysian Accounting Review, Vol. 8 No. 1, pp. 1-17. April, K.A., Bosma, P. and Deglon, D.A. (2003), “IC measurement and reporting: establishing a practice in S.A. mining”, Journal of Intellectual Capital, Vol. 4 No. 2, pp. 165-80. Beaulieu, P.R., Williams, S.M. and Wright, M.E. (2002), “Intellectual capital disclosures in Swedish annual reports”, in Bontis, N. (Ed.), World Congress on Intellectual Capital Reading, Butterworth-Heinemann, Boston, MA, pp. 135-56. Bontis, N. (2003), “Intellectual capital disclosure in Canadian corporations”, Journal of Human Resource Costing & Accounting, Vol. 7 No. 1, pp. 9-20. Bontis, N., Keow, W.C.K. and Richardson, S. (2000), “Intellectual capital and business performance in Malaysian industries”, Journal of Intellectual Capital, Vol. 1 No. 1, pp. 85-100. Botosan, C. (1997), “Disclosure level and the cost of equity capital”, The Accounting Review, Vol. 72 No. 3, pp. 323-49. Bozzolan, S., Favotto, F. and Ricceri, F. (2003), “Italian annual intellectual capital disclosure: an empirical analysis”, Journal of Intellectual Capital, Vol. 4 No. 4, pp. 543-58. Brennan, N. (2001), “Reporting intellectual capital in annual reports: evidence from Ireland”, Accounting, Auditing & Accountability Journal, Vol. 14 No. 4, pp. 423-36.

Bursa Malaysia (2009), “Main market listing requirements”, available at: www.klse.com.my/ website/bm/regulation/rules/listing_requirements/main_market.html (accessed March 29, 2009). Chen, M., Cheng, S. and Hwang, Y. (2005), “An empirical investigation of the relationship between intellectual capital and firms’ market value and financial performance”, Journal of Intellectual Capital, Vol. 6 No. 2, pp. 159-76. Citron, D., Holden, J., Selim, G. and Oehlche, F. (2005), “Do voluntary intellectual capital disclosure provide information about firm’s intangible assets?”, paper presented at the 9th Financial Reporting and Business Communication Conference, Cardiff Business School, London, July 7-8. Cooke, T.E. (1998), “Regression analysis in accounting disclosure studies”, Accounting and Business Research, Vol. 28 No. 3, pp. 209-24. Cooper, D.R. and Schindler, P.S. (2003), Business Research Methods, 8th ed., McGraw-Hill, New York, NY. Drucker, P.F. (1992), The Age of Discontinuity: Guidelines to Our Changing Society, 2nd ed., Transaction Publishers, New Brunswick, NJ. Faridah, I. (2004), “Relationship between board structure and firm’s intellectual capital performance”, master thesis, Universiti Teknologi Mara, Kuala Lumpur. Goh, P.C. (2005), “Intellectual capital performance of commercial banks in Malaysia”, Journal of Intellectual Capital, Vol. 6 No. 3, pp. 385-96. Goh, P.C. and Lim, K.P. (2004), “Disclosing intellectual capital in company annual reports: evidence from Malaysia”, Journal of Intellectual Capital, Vol. 5 No. 3, pp. 500-10. Guthrie, J. and Petty, R. (2000), “Intellectual capital: Australian annual reporting practices”, Journal of Intellectual Capital, Vol. 1 No. 3, pp. 241-51. Hassan, O.A.G., Giorgioni, G., Romilly, P. and Power, D.M. (2011), “Voluntary disclosure and risk in an emerging market”, Journal of Accounting in Emerging Economies, Vol. 1 No. 1, pp. 33-52. Healy, P. and Palepu, K.G. (1993), “The effect of firm’s financial disclosure strategies on stock prices”, Accounting Horizons, Vol. 7 No. 1, pp. 1-11. Huang, C.C., Luther, R. and Tayles, M. (2007), “An evidence-based taxonomy of intellectual capital”, Journal of Intellectual Capital, Vol. 8 No. 3, pp. 386-408. Huang, C.C., Tayles, M. and Luther, R. (2010), “Contingency factors influencing the availability of internal intellectual capital information”, Journal of Financial Reporting and Accounting, Vol. 8 No. 1, pp. 4-21. Hussey, R. (1999), A Dictionary of Accounting, 2nd ed., Oxford University, New York, NY. Ibrahim, M.K., Raudah, D., Haslinda, Y. and Normahiran, Y. (2004), “Market value and balance sheet numbers: evidence from Malaysia”, in Khairul, A.K., Ibrahim, M.K. and Mohamed Zain, M. (Eds), Financial Reporting in Malaysia: Some Empirical Evidence, 1st ed., Utusan Publications & Distributors Sdn Bhd., Kuala Lumpur, pp. 40-51. Investors Digest (2003), “Classification of securities”, Investors Digest, January, p. 76. Lang, M.H. and Lundholm, R.J. (2000), “Voluntary disclosure during equity offerings: Reducing information asymmetry or hyping the stock?”, Contemporary Accounting Research, Vol. 17 No. 4, pp. 623-62. Leadbeater, C. (1999), “New measures for the new economy”, paper presented at the International Symposium on Measuring and Reporting Intellectual Capital: Experience, Issues, and Prospects, Amsterdam, June 9-11.


99

JHRCA 15,2

100

NACRA Organising Committee (2008), NACRA 2008: National Annual Corporate Report Awards, Towards Accountability & Excellence, NACRA Organising Committee, Kuala Lumpur. Norman, M.S., Mara Ridhuan, C.A.R. and Mohamat, S.H. (2009), “Ownership structure and intellectual capital performance in Malaysia”, Asian Academy of Management Journal of Accounting and Finance, Vol. 5 No. 1, pp. 1-29. Ohlson, J. (1995), “Earnings, book values and dividends in equity valuation”, Contemporary Accounting Research, Vol. 11 No. 2, pp. 661-87. Olsson, B. (2004), “Intellectual capital disclosure through annual reports: A study of the Swedish retail industry”, Journal of Human Resource Costing & Accounting, Vol. 8 No. 2, pp. 57-72. Omar, I.H.J. (2008), Voluntary intellectual capital disclosure: evidence from Bahrain, working paper, University of Bahrain, Bahrain. Ordon˜ez de Pablos, P. (2003), “Intellectual capital reports in Spain: a comparative view”, Journal of Intellectual Capital, Vol. 4 No. 1, pp. 61-81. Orens, R., Aerts, W. and Lybaert, N. (2009), “Intellectual capital disclosure, cost of finance and firm value”, Management Decision, Vol. 47 No. 10, pp. 1536-54. Ousama, A.A., Fatima, A.H. and Hafiz Majdi, A.R. (2011), “Usefulness of intellectual capital information: prepares’ and users’ views”, Journal of Intellectual Capital, Vol. 12 No. 3 (forthcoming). Ragab, A.A. and Omran, M.M. (2006), “Accounting information, value relevance, and investors’ behavior in the Egyptian equity market”, Review of Accounting and Finance, Vol. 5 No. 3, pp. 279-97. Sanchez, P., Canibano, L., Covarsi, M.G., Chaminade, C., Olea, M., Escobar, C.G. and Pacheco, R. (2000), “Guidelines for the measurement and disclosure of intangibles”, working paper, MERITUM Project, Seville, Spain. Saudah, S., Tayles, M.E. and Pike, R.H. (2004), “Intellectual capital: an evolutionary change in management accounting practices”, Working Paper No. 04/29, Bradford University, Bradford. Seetharaman, A., Low, K.L.T. and Saravanan, A.S. (2004), “Comparative justification on intellectual capital”, Journal of Intellectual Capital, Vol. 5 No. 4, pp. 522-39. Shaniz Khan, M.B. and Daing Nasir, D.I. (2007), “The effect of intellectual capital on the perceived relevance of the balance sheet as an indicator of future financial performance”, International Journal of Knowledge Culture and Change Management, Vol. 7 No. 1, pp. 1-10. Stewart, T.A. (2000), Intellectual Capital: The New Wealth of Organizations, Nicholas Brealey, London (reprinted from first published in hardback, 1997). Sveiby, K.E. (1997), The New Organization Wealth: Managing and Measuring Knowledge Based Assets, Berrett-Koehler, San Francisco, CA. Wan Fadzilah, W.Y., Muhamad, J. and Daing Nasir, D.I. (2004), “The interactive effects of human capital, structural capital and social capital on firm performance”, Asian Academy of Management Journal, Vol. 9 No. 2, pp. 1-18. Welker, M. (1995), “Disclosure policy, information asymmetry, and liquidity in equity markets”, Contemporary Accounting Research, Vol. 11 No. 2, pp. 801-27. White, G., Lee, A. and Tower, G. (2007), “Drivers of voluntary intellectual capital disclosure in listed biotechnology companies”, Journal of Intellectual Capital, Vol. 8 No. 3, pp. 517-37. Whiting, R.H. and Miller, J.C. (2008), “Voluntary disclosure of intellectual capital in New Zealand annual reports and the ‘hidden value’”, Journal of Human Resource Costing & Accounting, Vol. 12 No. 1, pp. 26-50.

Williams, S.M. (2001), “Is intellectual capital performance and disclosure practices related?”, Journal of Intellectual Capital, Vol. 2 No. 3, pp. 192-203. Wong, M. and Gardner, C. (2005), “Intellectual capital disclosure: New Zealand evidence”, paper presented at the Accounting & Finance Association of Australia and New Zealand (AFAANZ) Conference, Melbourne, July 3-5. Zuliana, Z. (2007), Factors influencing intellectual capital disclosure: a Malaysian evidence, master thesis, International Islamic University Malaysia, Kuala Lumpur. Corresponding author Ousama Abdulrahman Anam can be contacted at: [email protected]

To purchase reprints of this article please e-mail: [email protected] Or visit our web site for further details: www.emeraldinsight.com/reprints


101