Intellectual capital and the capital market: the circulability of ...

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Intellectual capital and the capital market: the circulability of intellectual capital Jan Mouritsen

Copenhagen Business School, Frederiksberg, Denmark

Received April 2002 Revised September 2002 Keywords Intellectual capital, Intangible assets, Capital markets, Assets valuation Accepted November Abstract This paper argues that intellectual capital and intangible assets are difficult resources 2002 for two different reasons. First, intellectual capital and intangibles assets are not (yet) disentangled by the institutions of the capital markets, and therefore they are not (yet) translatable with any degree of confidence into predictions about stock price behaviour. Second, intellectual capital and intangibles are not absent from capital market intelligence; they are just typically translated into financial form, when they are presented to actors in the capital markets, even if in forms that are themselves ``invisible''. The capital market may have limited understanding of intellectual capital, but it is also always seeking to understand the complexity of business and (im)possible futures. Its appreciation of intellectual capital is therefore fragile.

Accounting, Auditing & Accountability Journal Vol. 16 No. 1, 2003 pp. 18-30 # MCB UP Limited 0951-3574 DOI 10.1108/09513570310464246

Introduction There is a widespread conviction that capital market participants do not appreciate information on intangible assets and intellectual capital, even if surveys suggest that they appreciate information on ``soft'' resources. This paradox was raised at a Symposium on Intellectual Capital and the Capital Market held at the European Accounting Association (EAA) Conference in Copenhagen (2002). The discussions of this Symposium presented a variety of views as to the reasons for this. In this special section of AAAJ, the views are given voice and the four presenters ± who all prepared a commentary for this special section ± present explanations ranging from the culture of the capital market, its possible inability to understand intellectual resources and its lack of time to attempt to comprehend business models which include intangibles and intellectual capital. Intellectual capital (IC) is a drama, because even if it is presently very difficult to make distinct boundaries around it, IC is presented as the intangibles stuff, out of which ``value'' in a knowledge society and therefore knowledge organisations are created. The drama is that the value is created which cannot be accounted for by traditional management and financial accounting means ± as the production function of the knowledge society is in the unknown ± and the ownership and control of intellectual capital are not clear. Intellectual capital is partly a problematisation of how the conventional balance-sheet is unable to present a convincing account of the resource value of firms that navigate in the knowledge economy and draw heavily on intangibles (e.g. knowledge systems, human competencies, relationships with customers The author wishes to thank James Guthrie for friendly and very helpful comments on an earlier draft of the paper. He cannot be blamed for omissions and errors.

and suppliers), rather than tangible traditional resources (e.g. plant and machinery, land and buildings). The meta-justification of this drama is found in the capital market because the existence of intangible resources, it is argued, can be made into a visible, from the (large) difference between the value of the firm's stock in markets and its traditional book value (e.g. Lev, 2001). The capital market has been a major player in the creation of stories about intellectual capital not least during the ``dot com boom'' and helps to justify the existence sources of wealth creation, which are not strongly accounted for by the traditional accounting rules and practices. However, the paradox is that capital market participants are typically not very interested in intellectual capital statements. They may be interested in more information generally, but when they face particular intellectual capital statements or reports on intellectual resources, they are often sceptical. Somehow, the circulability of intellectual capital information appears to be limited. It tends not to have a strong readership or understanding in capital markets, as suggested by the contributions to the 2002 European Accounting Association (EAA) symposium on intellectual capital (IC) and the capital market by Ulf Johanson (this Issue), John Holland (this Issue), Per Bukh (this Issue), and Manuel GarcõÂa-Ayuso (this Issue). These authors ask questions regarding why it may be that, by and large, the capital market is not comfortable with information on intellectual capital resources, even if such information is currently presented in certain firms' disclosure practices. They draw attention to the paradox that the financial markets, or more precisely the financial analysts and investors, in surveys say that they need more information on various kinds of intangibles, and yet they appear ``nonplussed'' with the actual specific propositions made by firms' intellectual capital statements. Why can this be? And does it make any difference? Why is it that intellectual capital information does not circulate freely and far? Why is it that the story about intellectual capital reporting does not have a happy ending? How to understand information on intellectual capital in the capital market? How are intellectual capital assets to be understood? One distinction is presented by the Eustace (2001) model which divides it into three categories: conventional assets (tangible assets) recognised in the contemporary balancesheet; ``new'' intellectual assets (intellectual goods) recognised (e.g. brand value and patent value); and innovation, structural, market and human resources (intangible competencies). This model defines a map of assets, where it adds new forms of assets in addition to conventional traditional assets, namely intellectual capital in two forms depending on whether it is recognised as a separable asset or not. This model develops or extends the well-known idea that to explain the ``true'' value of the firm it is necessary to supplement the financial value of the firm, with a value of the firm's intellectual capital (Edvinsson and Malone, 1997). The firm's market value is the sum of financial and intellectual capital,

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or ± as in the Eustace (2001) model ± the value is the sum of recognised conventional assets, recognised intangibles, and non-recognised competencies. These are conceptual models, which seek to create analytical distinctions in an attempt to represent in an increasingly refined form possible aspects of intellectual capital as a collection of items of separable assets. This is a useful accounting logic. Whether this will eventually be able to actually close the gap between market values and traditional accounting book values is highly questionable[1]. But what is ``value''? Is it a noun? Or is it a verb? It could be both. In conventional accounting values are created on the basis of a procedure found in and around the firm's accounting database. It is constructed by a disciplined, rule-based manipulation of business transactions that make up book values by assigning entries as expenses or assets; or as liabilities, revenues or capital. This story is typically a conservative form of accounting, even if market values can be used for certain non-current assets. It will hardly fill the contemporary significant gap between market and accounting book values of the company as such. The finance perspective story is different. Focusing on the possible net present value of the firm's cash flows, shareholder value is created as increments to the firm's capital market value. Here, value is dependent on a justified forecast of earning capabilities and cash flow projections. Gu and Lev (2001) value intangibles on this basis, but obviously the resulting value is highly dependent on the firm maintaining a stable earnings-generating ability. Therefore, in contrast with the conventional accounting statement, the focus here has changed from stability in the balance-sheet numbers, to stability in the P&L statement's numbers. Recent experience with large corporate collapses would suggest that earnings are fragile under traditional accounting. Both the conventional accounting and the finance perspectives are concerned to describe a set value of the firm's intellectual assets. What happens if it is a verb? In this situation, the value of intellectual capital is a process by which it is in construction and remoulding all the time (Mouritsen, 1998; Mouritsen et al., 2001a, b). In this drama, intellectual capital is in itself a process of value creation, and somehow it makes little sense to say that the future is a set function of the past, because, as knowledge grows in firms, new opportunities surface all the time. Knowledge and value are interconnected and, as it is impossible to predict the growth of knowledge, as Popper (1972) indicated, it is impossible to arrive at one finite and set value of intellectual capital. In contrast, intellectual capital is also a process of discovery and development. It is a concern to produce new attributes of the firm that allow it to develop, share and stabilise knowledge. In this story, value therefore means not (only) to measure or calculate value, but to understand the creation and development of value (Guthrie, 2001; Mouritsen et al., 2002a; Petty and Guthrie, 2000). This may be part of why the capital market participants have problems with understanding knowledge and its creation. Its trajectory into the future is hardly linear. But to understand the task that faces capital market participants,

it is useful to explore Eustace's (2001) model of assets around the distinction between recognised conventional assets, recognised ``new'' assets and complementary competency assets. The drama here is one of entanglement and disentanglement in the recognition of assets. Dis-/entanglement, framing, overflow, displacement How does this model of assets work? Eustace's (2001) model is an extension of Edvinsson's (Edvinsson and Malone, 1997) framework by creating several new distinctions. In effect, it attempts to re-create the boundaries between what is a separable, recognisable asset and what are ``merely'' organisational competencies. It pushes the traditional boundaries as to what can be put on the firm's balance-sheet and it includes more intangible items. This process of committing more items to the balance-sheet is a process of disentanglement, where a separation between entities is constructed, and where the framing of the phenomenon in question is established (Callon, 1998). This is how all kinds of balance-sheet assets are created ± conventional assets and ``new'' recognised intellectual assets, such as patents and brand assets. These are made visible by a procedure of inscription through which they are made recognisable and represented by names and numbers on paper. This is what happens when accounting transactions are added, subtracted, divided and multiplied with one another. To recognise assets is to show how they are separate from other assets, and therefore the process of disentanglement is one where the asset is ``taken away'' from the sphere of the firm's production process where in use it is complementary to other assets. To ``take items away'' is therefore also a transformation of the item because it is described not in action but on hold. In addition, it is typically mobilised by institutions ``outside'' the firm such as accounting rules defined in International Accounting Standards. These rules help identify the asset ± in fact, these are the only criteria that speak loudly for the asset. It is thus disentangled from the firm by accounting rules stipulated elsewhere, that the strength of disentanglement comes from the logic of inscription defined elsewhere. Disentangled assets come, according to Eustace (2001), in two types: the conventional assets and the ``new'' intellectual assets. How do they differ? Why is it that analysts consider conventional assets to be more trustworthy, far more understandable and better than the ``new'' intellectual assets? The point probably is that the two kinds of assets are located institutionally in different ways, which makes their overflow different. Overflow is a matter of how much a phenomenon can relate to other phenomena. If there is considerable overflow, then there are many ways in which the asset will flow and live, or die, for that matter. The conventional asset has relatively ``little'' overflow because the institutions interpret the ``value'' of the traditional asset as having a long history and thus a capability to understand it. Such institutions relate a reading to the asset just as it delivers the rules and procedures that control the inscription process. Therefore there is

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a close linkage between the traditional asset and the institution that produces it and there is little overflow. This stands in contrast with the ``new'', recognised intellectual assets. Here, there is more ``overflow'' because the story is less clear to readers on how to appreciate brand values and patent values. Even if there are rules for the inscription ± recognition rules, these are loosely coupled to a readership. No generally accepted procedures have been developed to appreciate the value of information (e.g. on the valuing of brands and patents). Therefore, there is no systematic experience with such indicators in the capital market, and this makes their interpretation a difficult one. As a consequence, to interpret them, presently the capital market has to couple them to other areas of interest (e.g. to consider a patent an option whose net present value depends on its application). There is considerable overflow because the ``new'' asset can move in many directions, or it can easily get lost as an element in a value-creating activity. It is not connected as clearly to institutions and therefore it is not as strong as the conventional assets. This difference in ``overflow'' explains some of the problems with the ``new'' intellectual assets. It is not that they are calculated in new ways, because the rules for their creation follow the rules used for conventional assets. The difference is that the institutions that make the calculation relevant are different. Or, more precisely, the institutions that can read conventional assets, cannot read the ``new'' intellectual assets, with similar confidence. These disentangled resources exist as separate entities in the form either of conventional or of the ``new'' assets. There is a third type of intellectual resource, according to Eustace (2001), consisting of the competencies found in the relationships between human, organisational and customer ``capitals''. These are all entangled resources or assets and are not separated. They exist in action ± as a competency mobilised on the basis of complementarity between various kinds of assets or resources. They are interesting for their joint effects. They are seen as not being individually calculable, because they exist only in instances of collective performance. In this way, the resource or asset does not conform with the requirements of an external rule-setting institution, but more with the idiosyncratic principles of value creation that can be found in the specific firm. This is often quite unsatisfactory, even to internal managers because, if all is connected to all, there is little way out. Therefore, inscriptions develop that to a certain degree disentangle the complementary resources, but they are often inscribed in collective kinds of outputs that stand out as local indicators, such as productivity or satisfaction. Entangled networks of resources exist as competencies. They have considerable overflow because they cannot be seen in any distinctive way because they function in connection with one another. They are bound to the place where they are put to use, and not only managers, but more so the capital market, may have difficulties not only in seeing how they work, but indeed also in merely seeing them. Also this is why, for this type of entangled resource, there is some kind of ``need'' to separate them, because otherwise they cannot be

made manageable. To manage, somehow and to a certain extent, disentanglement is necessary. The more resources are disentangled, the more they become displaced or translated into a new form that has only little resemblance with its entangled form. This is important: the more disentangled the resource is, the more it is made separate; the more the resource has been made separate, the more it is different from the materials from which it gained its power and action. Therefore, the more the resource is disentangled, the more it is transformed into something quite different, governed not by the logic of the complementarity of assets, but by the logic of the institutional rules found outside the locus of complementarity. Coping with intellectual resources Disentangled resources are separated by other means than the resource ``itself''. In some sense, to disentangle is to bring away from the ``life'' of the resource. In a biological setting, as Latour (1999) has shown, to identify a plant means to separate it in order to make it discernible, and this is to separate it from other flowers and from the soil. The flower has to die to become disentangled! To a certain extent this is also the case for conventional and ``new'' assets. To be recognised, they have to ``die'' because they are taken out of context. This is the case when the financial value of an asset, conventional or ``new'', is calculated on the bookkeeping system's entries ± original expenses ± or from its market value, which only rarely will correspond to the net present value of the asset in the organisation's use. For entangled assets this is different, because they exist only in relation to the firm's production process. As ``competencies'', human, structural or customer-oriented, they exist in interaction. They exist in a different plane from conventional and ``new'' intellectual assets, and they are inscribed partly via various batteries of indicators, and partly via explicit recognition of the business model or the narrative of achievements that make the individual efforts to develop competences relevant. They are always related to a specific collective purpose, and the promise of the linguistic separation between human and structural capital will not work. Rather, the battery of indicators becomes relevant, if they can explain or support the path towards the proposed business model or narrative of achievement proposed. The problem for the manager or analyst is to create assurance that this development is unfolding[2]. There is an irony here, namely that, when it is acknowledged that there are entangled competency resources, these cannot be separated from the disentangled ones. When there are identifications of competencies in the firm, they draw also on the conventional, tangible assets and on the ``new'' immaterial goods or intellectual assets. They cannot be separated and therefore, even if the ``map metaphor'' dividing between recognised assets and competencies is beautiful and renders meaning, it is not the ground surface itself. There is a difference between the map and the road because the separation between the types of assets does not refer to the same plane of representation.

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There is a difference between how it is possible to cope with disentangled and entangled assets and resources. Disentangled resources require the support of powerful institutions. Conventional assets have strong institutions. Thousands of people spend their days interpreting traditional balance-sheets and P&L statements. Business schools and universities train people in becoming readers and, after years of practical experience, suddenly it is possible to read a balance sheet in a ``natural'' way. For many it is hard to gain literacy; it is a process where the language game played out around the balance-sheet and the P&L statement is rehearsed, acted on and re-visited again and again. Training is important here, because institutionalised readings are identified here: for instance, we are always interested in profitability, cash flows and resources. Irrespective of the situation, these problematising readings can always be mobilised ± they are institutional because they always count[3]. Disentangled assets may be the property of the institutions more than the property of the firm! When institutions do not have reading ability, the inscriptions made (e.g. about ``new'' recognisable assets such as brands and patents) will be weak. There is no consensus about their relevance and, even if firms say that such assets are integral to their future (and thus cash flows), the capital market reads the situation differently. It is conscious of the novelty of ``new'' assets and therefore they are not part of the flow of interpretations that are created automatically. It requires a reflexive moment, which is difficult, because experience does not in itself guide interpretation. It has to be explicit rather than intuitive. Resistance therefore is abundant. Critique is present, and opposition is in place often based on the rules created by the traditional accounting principles. Questions arise: Where are relevance and reliability? Where is conservatism? Where is ``true and fair''? Is it material? Can it be verified? Even if the asset can be recognised, it may not convey meaning, because meaning is not carried in the inscription of the asset itself, but rather by the way the asset is made part of certain other things, e.g. other assets. On the face of the balance-sheet the asset promises more than it can honour, because it does not have an immutable referent. It is part of a (language) game where first it has to be realised that the asset to be valuable has to be mobilised for some end. And when experience does not clarify how this is done, the asset is not directly interpretable. Therefore, the inscription made in ``new'' intellectual assets is not strong. It may abide with accounting rules, but the rules of interpretation are still not stabilised and made accessible. Coping with entangled resources is a completely different matter again. Here, the ``valuation'' of the individual asset is near to impossible, if by that we mean assigning a future financial value to it. Entangled resources co-exist and enter the story as bundles of assets. Instead, they have to be understood in their totality, which means that they have to be understood in their particular setting rather than in the context of rules of accounting suggested elsewhere. Therefore, the indicators of the asset have to be understood against their specific purpose. This typically means the purpose they are to serve in creating the business of the firm. Here, they are entangled not only with other assets, but

also with strategy and organisational visions. This is a different story that capital markets have to understand, and this is why it may be necessary to include a statement on how the bundling of the resources, as it develops over time, is an ingredient in managing the firm towards a future. Can the capital market do this? Nobody suggests that the capital market is stupid, but the question is whether it can take on information that is not institutionalised? If it cannot, then there will continue to be contests in attempting to develop the boundaries of accounting. The capital market, analysis of intellectual capital, and the language of finance The capital market can to a certain degree accommodate information on intangibles, as shown by Lev and Sougiannis (1996). Capital market participants may be able somehow to figure out how the ``potentialities'' of intellectual capital can be made interesting and relevant. A few observations, which are to be described further below, suggest that the capital market to a certain degree can perform conditional analysis, and that indeed, because intangible resources are often entangled, they will also make conditional statements about their decisions to fund activities. This suggests that the capital market is aware of the intricacies of intellectual resources as potentialities. Potentialities require conditional statements and, consequently, the future cannot be predicted simply from the firm's past. How can the capital market perform conditional analyses and produce conditional propositions? One attempt to understand this is a study of how financial analysts make decisions about whether to finance immaterial technological ideas often in the context of venture financing (Mouritsen et al., 2002b,c). This study analysed the procedures followed and materials used by analysts to come to decisions about such potentialities. It appeared that analysts are committed to finding and developing ``alternative'' representations of these potentialities. They actively engage in dividing the technological ideas into parcels and circulate them to specialists in areas of technology, markets, and public institutions in order to gain expert insights into aspects of the projects. The analysts then combine these various kinds of feedback and produce their opinions about the projects. And then they embark on restating their conclusion in terms of financial models. This financial modelling is a framework to re-tell the story of the project in order to make it presentable not only to the project maker and the analyst himself, but also to his superiors. They want a financial story and not a story of technology. The effect is a conditional answer to the request for finance. Financial capital will never just be passed on. Additional wise capital, network capital and social capital are also passed on. This required the project maker to reorganise his technology, his business and his network of collaborators. The technological project is transformed into a techno-commercial enterprise. The above study shows that analysts are concerned not only to understand the firm and project they are to investigate. The position from which analysis arises is not only an analytical one. The analyst is much more involved in

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developing the conditions under which the financial capital will work than could be expected. The additional wise capital, which reorganises the project, network capital, which positions the project in relationship to cooperation, and social capital, which creates a milieu for the project, are conditions that have to be in place. Such conditions constitute a process of entangling. Even if the project stands forward as a framed and disentangled technological project, the analyst performs a re-entangling, that will allow the project as a whole to live. The whole translation from a technological project into a techno-commercial agenda is a process of entanglement. Another study of the Swedish capital market (HaÈgglund, 2001) explored analysts who follow listed companies. The findings indicate that the financial models are important references to establish a coherent narrative of the firm's prospects, but typically as an organising mediator. To make sense of the firms, analysts attempt to evaluate strategies and compare projections and actual results. Strategy, however, is a notoriously nebulous concept. It is badly related to cash flows, and therefore this link is produced as some form of inspiration. Even if strategy is important, it is stronger if it be communicated and justified in the framework of financial models. The financial models are the descriptions and performance devices that generally allow utterability, and that strategic analysis ± for want of a more precise word ± is the game. Both these studies suggest that the capital market in various ways makes sense of more than financial insights and knowledge. They suggest that analysts perform a series of mechanisms to account for conditional values of intangibles. They collate various kinds of materials, and many of them are about ``intangibles'' and ``intellectual capital'' but they report them in financial language. The financial analyst knows that the financial models are organising devices. When evaluating intangibles and intellectual capital assets they attempt to grasp their dynamic character via a procedure for probing. This includes extending the concepts and methods used to identify the strength of ideas and intellectual capital and adding to them hypothetical conditions that show when the idea could be successful. The financial instruments are used as rationalising and organising devices of particular importance in showing that the analyst did a good job ± s/he is also accountable to a manager who has to accept the analysis. The analyst has to convince not only her-/himself; s/he also has to convince a set of superiors that may favour the language of finance. In this way, the capital market minds intangibles, but this is a ``hot'' forum where lots of tacit knowledge are manoeuvred and mobilised. The rules used do not pass ordinary tests of rationality and are thus difficult to stabilise in public[4]. The circulability of intellectual capital The four following papers in this special section of AAAJ on intellectual capital and the capital market each in its own way address the problem of how it may be possible for the capital market to understand intellectual resources and to act on information about them. This is about the circulability of intellectual capital. Is it possible to learn about a firm's intangibles and intellectual capital

at a distance? Will it be possible to read intellectual capital statements and pass their information on? Ulf Johanson (2003) indicates that there are four types of problems that inhibit the circulation of intellectual capital. There are problems regarding knowledge about how knowledge works, uncertainty about the validity of information, lack of ownership of intellectual resources particular in the area of human capital, and lack of insight into problems of implementation. These obstacles are about the ability of people to understand how knowledge resources are to work in a knowledge society. Johanson points out that it is clear to managers and analysts that knowledge society requires new modes of analysis and insight. He is also adamant about the possibilities of changing a lot, because, as he describes, the mentality of the capital market appears to be so numbers-oriented that it is difficult to see how it may be possible to reframe the perspective currently taken on by capital market participants. He suggests as follows: Perhaps the most important deterrent to account for capital market actors' reluctance toward human capital indicators is related to the general mentality of the capital market actors as a group . . . [This] is of specific importance for highlighting the apparent lack of understanding of the importance of knowledge and human capital in-value creation process (Johanson, 2003, p. 36).

There may be a cultural barrier to the appreciation of information on intellectual resources, Ulf Johanson argues. John Holland (2003) suggests that funds managers are in fact attempting to use information about intangibles in their decision-making activities. They are concerned to understand the firm's hierarchical, horizontal and network value creation processes. He explains how it is that exchanges of information often take place in other forms than numerals and more in the form of narratives, sketches etc. There seems to be an increasing attention to such information in their activities to understand the value of their investments. However, there are problems with understanding and thus utilising information. The barriers are primarily in terms of understanding, as Johanson also points out, and therefore more attention to the value creation process is needed. He explains: The knowledge-intensive changes in corporate value creation processes have altered and increased the information asymmetry between corporate users and fund manager suppliers of equity and bond capital. This is because the intangibles concerned are difficult to categorise, to define, to set up indicators of, to measure, as well as to measure costs and assign benefits to (Johanson, 2003, p. 40).

This is particularly interesting, John Holland adds, because it appears that fund managers are not proficient in developing and sharing knowledge among themselves. There are differences between Ulf Johanson's and John Holland's arguments. They concern the degree to which numbers speak for themselves in the capital market. There is evidence pro et contra, and a valuable avenue for research is exactly to develop more of an appreciation of how it is that capital market participants become knowledgeable about the projects they investigate. Such a

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process view may add significantly to our understanding of the role of intangibles and intellectual capital in valuing firms and projects. Per Bukh (2003) discusses the content of Initial Public Offerings (IPOs) and identifies a paradox. In spite of analysts saying that they are not conformable with ``soft'' information on intangibles and intellectual capital, the IPOs flow over with such information. He also suggests that this type of information has been increasing throughout the 1990s. Comparing the content of intellectual capital statements with the content of IPOs, Bukh identifies a remarkable similarity. He also suggests, however, that it may be a problem that there is no recognised way to interpret this information. Again the knowledge problem arises: what to do with information on intangibles and intellectual capital. Here Bukh proposes that the business model, the strategy for managing intellectual capital, must be a corner-stone: Value creation based on knowledge resources, i.e. intellectual capital, is complicated and more research into how knowledge intensive companies create value, how knowledge-based business models work and how their functioning and value creation could be disclosed is needed (Bukh, 2003, p. 54).

Manuel GarcõÂa-Ayuso (2003) analyses the analysts' difficulties in making forecasts and suggests that the market for financial analysis is hardly effective in its entirety, even if analysts on average perform a good job. However, he suggests that there is a need to develop a varied set of methods to be used in valuation processes, and he points out that an increased understanding of firms' specific strategies has to be put in place. However, looking into the knowledge problem does not solve all issues: . . . unethical behaviour of market participants [may be] the most suitable source of inefficiencies . . . Managers, auditors and analysts must undertake efforts aimed at improving their credibility in the eyes of investors. Codes of good governance and codes of ethics in audit and financial firms are not sufficient. Market regulatory frameworks and accounting standards must be improved to ensure the efficient functioning of capital markets and any that guarantee conduct causing damage to the financial system is identified and punished (GarcõÂa-Ayuso, 2003, p. 65).

Manuel GarcõÂa-Ayuso and Per Bukh share the view that the capital market is able to mobilise a lot of information, but they also suggest that the barrier to advancing the use of information on intangibles and intellectual capital is to understand the firm's business model for knowledge. They thus suggest that the process of entanglement is important and that, to advance insight into the usefulness of knowledge resources in firms, probably analysts have to entangle themselves with rather than disentangle themselves from intellectual capital. It may be added, GarcõÂa-Ayuso says, that there are also fundamental problems in the regulation of the capital markets that need to be looked into. All four authors help us ask questions that make us just a little bit uncertain about the ways in which the capital market may or may not reflect information on intellectual capital. The limits to the intelligibility of such information are indeed there. The question to ask is whether it is possible to invent a readership for whom information on intellectual capital will eventually make a systematic difference?

Conclusion Intangibles and intellectual capital are probably the resources of the ``new'' economy and knowledge society. However, how such resources work is not understood and the micro-drama of valuation creation is not clear yet. There are two elements in the process towards a higher institutional appreciation of information of such assets that have to be contemplated and brought together. One element is the process of disentanglement. This is the process where ``new'' intellectual assets are identified and recognised as separable assets. The second element is the process of entanglement, which should make visible to analysts (and managers) how it is that intangibles and intellectual resources work in practice. This will increase the appreciation of how to deal with complementary assets. The first process towards increased disentanglement goes via accounting rules and standards. The second process, via increased entanglement, goes through an appreciation of the production function and the business model of knowledge creation. Notes 1. There are several reasons why the model can only function as a conceptual scheme and not a representation of the world. First, by defining intellectual capital as the difference between market and book value, then a change in book value via, for example, accelerated depreciation, would impact on the value of intellectual resources. This is obviously absurd and intellectual capital is argued to be outside conventional assets. Second, if it were possible to close the gap between market and book values, then there would be no information problem, and therefore there would be no need to disclose information on intellectual capital. This model is therefore not interesting because it describes the world of intellectual capital accurately; it is interesting because it connects intellectual capital and financial value. The models developed on this basis attempt to define a new conceptual space which will not explain the difference between market and book values, but which will direct attention to new possible ways in which to account for assets. It is a prescriptive rather than a descriptive endeavour. 2. It is possible to develop a general analytical method that can help accomplish this so that the battery of indicators can be ``tested'' for its relationship to the firm's business model or narrative of achievement (Mouritsen et al., 2001a). 3. In addition, it is clear now, that it is also ``natural'' that people disagree on the reading of the balance-sheet, and it is clear that investors in capital markets may actually fail to understand the balance-sheet correctly and make losses. Therefore, the institutions also can justify mis-readings. 4. But they are probably not irrational. Behavioural finance suggests that there are cognitive limits to the information-processing abilities of capital market participants (Cohen, 2001; Tvede, 2002). This does not make them irrational, however. It merely suggests that one has to understand the decision-making mechanisms which make it possible for people situated in time and space to overcome information overload. References Bukh, P.N.D. (2003), ``The relevance of intellectual capital disclosure: a paradox?'', Accounting, Auditing & Accountability Journal, Vol. 16 No. 1, pp. 49-56. Callon, M. (1998), ``Introduction: an essay on framing and overflowing: economic externalities revisited by sociology'', in Callon, M. (Ed.), The Laws of the Market, Blackwell Publishers, Oxford. Cohen, D. (2001), Fear, Greed and Panic. The Psychology of the Stock Market, John Wiley & Sons Ltd, Chichester.

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