Journal of Intellectual Capital IC disclosures in IPO prospectuses: evidence from Malaysia Azwan Abdul Rashid Muhd Kamil Ibrahim Radiah Othman Kok Fong See Article information: To cite this document: Azwan Abdul Rashid Muhd Kamil Ibrahim Radiah Othman Kok Fong See, (2012),"IC disclosures in IPO prospectuses: evidence from Malaysia", Journal of Intellectual Capital, Vol. 13 Iss 1 pp. 57 - 80 Permanent link to this document: http://dx.doi.org/10.1108/14691931211196213 Downloaded on: 12 November 2015, At: 18:48 (PT) References: this document contains references to 76 other documents. To copy this document: [email protected]The fulltext of this document has been downloaded 1294 times since 2012* Users who downloaded this article also downloaded: Abdifatah Ahmed Haji, Nazli A. Mohd Ghazali, (2012),"Intellectual capital disclosure trends: some Malaysian evidence", Journal of Intellectual Capital, Vol. 13 Iss 3 pp. 377-397 http:// dx.doi.org/10.1108/14691931211248927 Omar Farooq, Christian Nielsen, (2014),"Improving the information environment for analysts: Which intellectual capital disclosures matter the most?", Journal of Intellectual Capital, Vol. 15 Iss 1 pp. 142-156 http://dx.doi.org/10.1108/JIC-12-2012-0109 Per Nikolaj Bukh, Christian Nielsen, Peter Gormsen, Jan Mouritsen, (2005),"Disclosure of information on intellectual capital in Danish IPO prospectuses", Accounting, Auditing & Accountability Journal, Vol. 18 Iss 6 pp. 713-732 http://dx.doi.org/10.1108/09513570510627685 Access to this document was granted through an Emerald subscription provided by emerald-srm:507905 [] For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. Downloaded by SURABAYA UNIVERSITY At 18:48 12 November 2015 (PT)
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Journal of Intellectual CapitalIC disclosures in IPO prospectuses: evidence from MalaysiaAzwan Abdul Rashid Muhd Kamil Ibrahim Radiah Othman Kok Fong See
Article information:To cite this document:Azwan Abdul Rashid Muhd Kamil Ibrahim Radiah Othman Kok Fong See, (2012),"IC disclosures in IPOprospectuses: evidence from Malaysia", Journal of Intellectual Capital, Vol. 13 Iss 1 pp. 57 - 80Permanent link to this document:http://dx.doi.org/10.1108/14691931211196213
Downloaded on: 12 November 2015, At: 18:48 (PT)References: this document contains references to 76 other documents.To copy this document: [email protected] fulltext of this document has been downloaded 1294 times since 2012*
Users who downloaded this article also downloaded:Abdifatah Ahmed Haji, Nazli A. Mohd Ghazali, (2012),"Intellectual capital disclosure trends:some Malaysian evidence", Journal of Intellectual Capital, Vol. 13 Iss 3 pp. 377-397 http://dx.doi.org/10.1108/14691931211248927Omar Farooq, Christian Nielsen, (2014),"Improving the information environment for analysts: Whichintellectual capital disclosures matter the most?", Journal of Intellectual Capital, Vol. 15 Iss 1 pp. 142-156http://dx.doi.org/10.1108/JIC-12-2012-0109Per Nikolaj Bukh, Christian Nielsen, Peter Gormsen, Jan Mouritsen, (2005),"Disclosure of information onintellectual capital in Danish IPO prospectuses", Accounting, Auditing & Accountability Journal, Vol. 18Iss 6 pp. 713-732 http://dx.doi.org/10.1108/09513570510627685
Access to this document was granted through an Emerald subscription provided by emerald-srm:507905 []
For AuthorsIf you would like to write for this, or any other Emerald publication, then please use our Emerald forAuthors service information about how to choose which publication to write for and submission guidelinesare available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The companymanages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well asproviding an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committeeon Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archivepreservation.
*Related content and download information correct at time of download.
Department of Accounting, College of Business Management and Accounting,Universiti Tenaga Nasional, Malaysia
Muhd Kamil IbrahimCollege of Business, Taibah University, Al-Madina Al Munawarah,
Kingdom of Saudi Arabia
Radiah OthmanSchool of Accountancy, Massey University,
Palmerston North Manawatu/Wanganui, Palmerston North, New Zealand, and
Kok Fong SeeSchool of Economics, University of Queensland, Brisbane, Australia
Abstract
Purpose – This study aims to investigate the factors influencing the disclosure of intellectual capital(IC) information in the Malaysian initial public offering (IPO) prospectus using multiple regressionanalysis.
Design/methodology/approach – The sample consists of 130 companies in the technology andindustrial products sectors of Bursa Malaysia that went through an IPO between 2004 and 2008.Initially, the extent of the IC disclosure index is quantified using content analysis methodology. Themultiple regression analysis is then used to examine the associations of nine potential explanatoryvariables with IC disclosure level.
Findings – In general, the results provide evidence that board size, board independence, age, leverage,underwriter and listing board significantly influence the extent of IC disclosure in an IPO prospectus.Nonetheless, the effect of each explanatory variable may vary in each estimated parameter of themultiple regression models. Three variables, board diversity, size and auditor, were not significant.
Originality/value – Although many studies have examined the content of and reasons for ICdisclosures, this study provides empirical evidence in this specific area, i.e. to explore the determinantsof IC disclosure, particularly from the perspective of IPO prospectuses, in emerging countries such asMalaysia.
1. IntroductionThe shift toward a knowledge-based economy calls for recognition of new resourcesthat have not previously appeared in firms’ financial statements. In addition tophysical and financial capital, intellectual capital (IC) resources, such as knowledgeworkers, corporate culture and business strategies, are equally important forcompanies to remain competitive and sustain their growth. It is the unique blend
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IC disclosures inIPO prospectuses
57
Journal of Intellectual CapitalVol. 13 No. 1, 2012
pp. 57-80q Emerald Group Publishing Limited
1469-1930DOI 10.1108/14691931211196213
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between IC and tangible resources that drives the value of companies (Ashton, 2005),which, in turn, helps them to secure a sustainable competitive advantage. Factors suchas technological advancements, globalisation and increasing competition have resultedin increasing demand for narrative reporting (voluntary disclosure) and decreasingsignificance of financial reporting (Lev and Zarowin, 1999). Furthermore, theAccounting Standards Board (2007) has expressed growing dissatisfaction withtraditional financial reporting and called for improved IC disclosure. As such,disclosures of IC information can complement conventional financial disclosures, thusenhancing a company’s level of transparency.
IC is recognised as an important topic for further research in the fields of financialand external reporting (Parker, 2007). Although many studies have examined thecontent of IC disclosures and the reasons for these disclosures, most data from priorstudies are restricted to developed nations (Abeysekera, 2007; Goh and Lim, 2004).Empirical evidence from emerging countries like Malaysia remains scarce becauseresearch on IC disclosure is rather new (Abdullah and Sofian, 2009), particularlyresearch focusing on initial public offering (IPO) prospectuses. This study aims tonarrow this gap in the IC disclosure literature by focusing on data from Malaysia. Thisstudy seeks to explore the factors influencing the disclosure of IC information in thecompanies’ prospectuses. The rest of the paper is organised in the following manner.Section 2 provides brief background information on the Malaysian economy. Section 3discusses the literature related to IC disclosure and its potential determinants. Section 4describes our sample selection, data, measurement of the IC disclosure index andmultiple regression analysis. Our empirical results are discussed in section 5, and theirimplications and limitations are offered in sections 6 and 7, respectively. Finally, ourconcluding comments are presented in section 8.
2. An overview of the Malaysian economyMalaysia has recorded remarkable economic development since gaining its independencein 1957. Based on the report titled The Growth Report: Strategies for Sustained Growthand Inclusive Development by the Commission on Growth and Development (2008), from1967 until 1997, Malaysia was one of 13 countries in the world to have gross domesticproduct (GDP) growth of 7 per cent or more per year. Nevertheless, the Asian financialcrisis in 1997-1998 considerably weakened this economic growth, with a record low of27.50 per cent in 1998 (Bank Negara Malaysia, 2002). The crisis also devalued theRinggit from RM2.50 to RM4.88 against the US$ and increased interest rates toapproximately 12 per cent per year. Likewise, the stock exchange composite indexplunged from 1,271 points to 262 points, corresponding to a decline in share value of aboutUS$225 billion. The financial meltdown has significantly increased the uncertainty in thecapital market and adversely affected investor confidence.
Several measures have been initiated to facilitate the recovery process. For example,the Malaysian Code on Corporate Governance (MCCG) (Securities Commission, 2007)was introduced in 2000 (latest revision 2007) to mitigate the crisis. In line with theagenda on reforms, the Capital Market Masterplan (CMP) was issued in 2001 by theSecurities Commission with the purpose of strengthening the standards of investorprotection by enhancing disclosure and governance standards. The Malaysiangovernment also promoted the idea of leapfrogging to a knowledge economy in April2001 through the Third Outline Perspective Plan 2001-2010 (OPP3).
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Although IC is increasingly becoming the key driver of the knowledge economy,Malaysian companies undervalue their IC or intangible assets (Brand Finance, 2008).The low proportion of intangible contributions implies that Malaysian companiescontinue to rely on tangible assets as their primary resources. Moreover, the recoveryof the Malaysian economy was much slower than that of other countries affected by theAsian financial crisis (Abdul Rahman and Salim, 2010), thus delaying Malaysia’s goalof becoming a developed nation by 2020. This delay has led to an increased need forcompanies to measure and report IC resources as part of the effort to push Malaysiaforward in the global economy, which is rapidly shifting towards knowledge-basedactivities.
3. Literature reviewSeveral empirical studies using the content analysis method in the field of IC disclosureare reported in Table I. Analyses of IC disclosure have employed several types ofcommunication media, such as annual reports (Abeysekera, 2007; Bozzolan et al., 2003;Cerbioni and Parbonetti, 2007; Guthrie et al., 2004), prospectuses (Bukh et al., 2005;Cordazzo, 2007; Rimmel et al., 2009; Singh and Van der Zahn, 2007), analyst reports(Garcia-Meca, 2005), management reports and chairman’s letters (Oliveira et al., 2006).Researchers such as Gerpott et al. (2008) and Striukova et al. (2008) have analysedmultiple communication media. It is also evident from Table I that prior studies havefocused mostly on companies in developed countries, such as Canada (Bontis, 2003),Ireland (Brennan, 2001), Australia (Guthrie and Petty, 2000) and the UK (Striukovaet al., 2008; Williams, 2001).
Although many studies have used annual reports to investigate IC disclosurepractices (Guthrie et al., 2004; Vergauwen et al., 2007), the focus on prospectuses isindeed limited (Singh and Van der Zahn, 2007), particularly in developing andemerging countries such as Malaysia. The study of IC disclosure in IPO prospectuses isunique for two reasons: most IPO companies are less acknowledged by investorsbecause they are relatively small and young, and IPO companies have limited publiclyavailable information on their financial results (Cordazzo, 2007) because they are onlyrequired to publicise financial information for the three financial years prior to the IPO(Securities Commission, 2005). As such, to promote the shares they are offering toinvestors, the companies use prospectuses to provide relevant information for makingan investment decision. Thus, it is anticipated that a higher level of IC disclosure willbe observed in prospectuses than in annual reports (Bukh et al., 2005).
The disclosure of IC information in a prospectus may give some insights intoinformation asymmetry problems that lead to suboptimal allocation of resources withinthe company. A disclosure of more IC information provides a potentially important meansto supplement the small amount of available information, thus reducing the problem ofinformation asymmetry. Indeed, the issue is important given that IPOs in Malaysia arequite underpriced compare to IPOs in other developing countries (Prasad et al., 2006).Also, this study has special relevance to Malaysia, where the economy is shifting frominput-driven to knowledge-driven. From 2001 to 2010, the IPO market grew strongly, witha total of 414 companies listed on the Bursa Malaysia and RM52.79 billion in funds raised(Bursa Malaysia, 2010). Based on the above arguments, coupled with significant growthin the equity market, it is important to recognise and understand the increasing need forIC disclosure by a company seeking access to capital markets via IPO.
IC disclosures inIPO prospectuses
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Au
thor
sC
oun
try
Sam
ple
Yea
rM
ediu
mof
dis
clos
ure
Det
erm
inan
tsof
ICd
iscl
osu
re
Gu
thri
ean
dP
etty
(200
0)A
ust
rali
a20
1998
An
nu
alre
por
tN
A
Bre
nn
an(2
001)
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and
1119
99A
nn
ual
rep
ort
NA
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liam
s(2
001)
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3119
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000
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nu
alre
por
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izea
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du
stry
*,
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tin
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ysi
cal
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ital
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form
ance
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ever
age
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tis
(200
3)C
anad
a10
,000
–A
nn
ual
rep
ort
NA
Boz
zola
net
al.
(200
3)It
aly
3020
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nn
ual
rep
ort
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ust
ry&
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eb
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(200
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alay
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01A
nn
ual
rep
ort
NA
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eyse
ker
aan
dG
uth
rie
(200
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ank
a30
1999
-200
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nn
ual
rep
ort
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ain
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ket
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khet
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(200
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ark
6819
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spec
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ust
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ces
*,
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al.
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6)A
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ong
150
2002
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nu
alre
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ust
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ark
6020
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ual
rep
ort
NA
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eyse
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a(2
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ka
&A
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rali
a30
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-200
0A
nn
ual
rep
ort
NA
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daz
zo(2
007)
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y86
1999
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rosp
ectu
sS
izea
*,
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e,M
anag
eria
low
ner
ship
*,
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olog
yle
vel
&L
isti
ng
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gh
and
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der
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n(2
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gap
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334
1997
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rosp
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ud
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nd
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r*,
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icit
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xec
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ve
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pen
sati
on,
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ssp
roce
eds
from
IPO
*&
Ag
e
(continued
)
Table I.Summary of IC disclosurestudies using contentanalysis method
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Yea
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bio
ni
and
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bon
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nce
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mar
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5420
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nu
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ctu
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row
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itie
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ng
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us,
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alen
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t,B
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pos
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n*,
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rdst
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rdle
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ship
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&B
oard
size
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cia-
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aly
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tern
atio
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ing
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tab
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aly
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yp
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rok
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ouse
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gh
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der
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gap
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444
1997
-200
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ipre
ten
tion
*,
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pri
etar
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sts
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por
ate
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ctu
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dit
or,
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der
wri
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icit
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erag
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eco
mp
ensa
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ross
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omIP
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*
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pot
tet
al.
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8)E
uro
pe
&U
SA
2920
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nu
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tan
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teS
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ever
age,
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gio
n*,
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stem
ofh
ome
cou
ntr
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kov
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8)U
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age,
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nu
alre
por
t,A
nn
ual
rev
iew
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teri
mre
por
t,A
nal
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pre
sen
tati
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lim
inar
yre
por
tan
dC
SR
rep
ort
NA
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otan
gan
dW
inat
a(2
008)
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ones
ia22
2002
-200
4A
nn
ual
rep
ort
NA
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melet
al.
(200
9)Ja
pan
120
2003
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spec
tus
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ust
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-IP
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ized
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*
Notes:
NA
:Not
app
lica
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.aT
otal
asse
ts;b
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ket
cap
ital
isat
ion
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tota
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over
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urn
over
&n
um
ber
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ign
ifica
nt
var
iab
le
Table I.
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3.1 The determinants of IC disclosureAn important stream of IC disclosure studies in the IPO setting investigates thedeterminants of disclosure. Bukh et al. (2005) became the pioneer in this little-exploredarea by analysing the content of 68 Danish IPOs using a 78-item disclosure index. Thestudy investigated how IC disclosure changed from 1999-2001 and whether industrydifferences, pre-IPO managerial ownership, size and age can explain differences in ICdisclosure in Danish IPO prospectuses. IC disclosure increased substantially duringthe study period. IC-intensive companies and managerial ownership providedincentives to disclose IC information as a means to minimise information asymmetryfrom issuers to investors. Subsequently, the disclosure index of 78 items developed byBukh et al. (2005) has been either adapted or adopted by similar studies conducted inItaly (Cordazzo, 2007), Singapore (Singh and Van der Zahn, 2008) and Japan (Rimmelet al., 2009). Based on prior studies examining IC disclosure, this section discussespotential independent variables and their effects on IC disclosure.
Board size. Even though there is no agreed-upon number of members that shouldconstitute the board, the MCCG recommends that “every board should examine its size,with a view to determining the impact of the number upon its effectiveness”. A numberof empirical studies suggest that board size has consequences for both the process ofinteraction and management and the ability to control management ( Jensen, 1993;Yermack, 1996). Although a larger board has the advantage over a smaller board onmatters pertaining to information access and know-how (Pierce and Zahra, 1992), theformer is arguably less effective because its members are more difficult to coordinate( Jensen, 1993; Lipton and Lorsh, 1992; Eisenberg et al., 1998). Consistent with previousstudies, Vafeas (2000) contends that market players such as investors and analystsmay notice that the earnings of companies with larger boards are less informative thanthose of companies with smaller boards due to ineffective board monitoring. Althoughit seems logical that an increase in the number of directors could enhance a board’smonitoring capacities, the price of making delayed decisions could negate this benefit(Lipton and Lorsh, 1992), thus decreasing information disclosure (Cerbioni andParbonetti, 2007). This notion is supported by Yermack’s (1996) study, which foundthat a company with a larger board may find it more difficult to control topmanagement in an effective manner.
Board independence. Another important governance factor is the percentage ofindependent non-executive directors (INEDs) on the board. In Malaysia, the MCCG andthe Listing Requirements entail that one-third of the board should make up INEDs.Furthermore, the control of the highest management level is of significant importance;thus, the presence of a higher proportion of independent directors may help to ensureseparation between control and management of decisions (Fama and Jensen, 1983).Therefore, an independent director is viewed as a mediator whose basic aim is tosafeguard the interests of shareholders in managerial decision-making (Fama, 1980).Empirical studies on this topic show mixed results. For instance, although Eng andMak (2003) and Cerbioni and Parbonetti (2007) claimed that outside directors oftenmotivate companies to reveal more useful information to external investors, thepercentage of independent directors does not influence the compulsory disclosurequality of stock options (Forker, 1992). In contrast, Chen and Jaggi (2000) revealed thatthe percentage of INEDs and voluntary disclosure are significantly and directlyrelated. This is confirmed by Cheng and Courtenay (2006).
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Board diversity. In this study, board diversity refers to ethnic diversity in boardcomposition, including Malay, Chinese, Indian and other members. Ethnic diversityprovides several positive effects for a company. Katzenbach et al. (1995) argue thatboard diversity provides better opportunities for flexibility and creativity that allow acompany to adapt much more quickly to an ever-changing business environment. If theboard members are fairly similar, there remains a possibility that the decision that ismade will be autonomous, expected and not flexible enough for all parties (Westphaland Zajac, 1998). On the other hand, a heterogeneous board has an increased ability totake action against the challenges that arise in an unpredictable and ever-changingbusiness environment (Gilbert and Ivancevich, 2000). The way in which ethnicdiversity is defined depends on the circumstances of each country. For example,although Chinese individuals account for only 37 per cent of the population inMalaysia, they have experienced better economic outcomes and participated in moremodern sector activities than Malays, who constitute 52 per cent of all residents(Athukorala and Menon, 1996). Hence, it is presumed that the majority of the directorsare of Chinese ethnicity. Based on the above arguments, board diversity is measured asthe proportion of Malay directors on the board.
Size. Size is a widely used explanatory variable in most empirical studies onaccounting disclosure. Many researchers (e.g. Oliveira et al., 2006; Cordazzo, 2007;Cerbioni and Parbonetti, 2007) have employed total assets as a proxy for company size.Alternatively, number of employees, turnover and market value of the company have alsohas been utilised to represent company size. Generally, large companies are oftenscrutinised by the public and are quite familiar with integrated information systems(Garcıa-Meca et al., 2005), thus allowing them to provide more comprehensive informationat relatively lower costs (Bukh et al., 2005; Oliveira et al., 2006). As suggested in previousstudies, there is a significant direct relationship between company size and the extent ofIC disclosures (Bozzolan et al., 2003; Cerbioni and Parbonetti, 2007; Cordazzo, 2007;Garcıa-Meca et al., 2005, Garcıa-Meca and Martınez, 2007; Guthrie et al., 2006; Oliveiraet al., 2006). Smaller companies, however, may also disclose more information on IC in anattempt to ease their capital costs (Singh and Van der Zahn, 2007).
Age. Early empirical studies often used company age as a proxy for risk. It isexpected that investors view older companies as less risky. For instance, Kim andRitter (1999) explain that younger companies tend to rely upon non-financialinformation in their valuation more than older firms do. Bukh et al. (2005) and Cordazzo(2007), however, found that age was not an explanatory factor for IC disclosure. Inmore recent studies (e.g. Singh and Van der Zahn, 2008; Rimmel et al., 2009), age isfound to be a significant factor influencing IC disclosure.
Leverage. Companies with higher leverage might increase their interest in observingthe capital market. Thus, it is expected that companies readily reveal plenty of ICinformation as a means to decrease the cost of capital ( Jensen and Meckling, 1976). Incontrast, signalling theory suggests that a company with relatively low leverage alsohas a motive to disclose more information on IC as a signal of its favourable financialstructure. The empirical results on the outcome of leverage on IC disclosure areinconclusive. For instance, whereas Garcıa-Meca and Martınez (2005) and Williams(2001) find a significant positive relationship, other researchers (e.g. Cerbioni andParbonetti, 2007; Oliveira et al., 2006; Singh and Van der Zahn, 2007) show no obviouslinkage.
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Underwriter. Firth and Liau-Tan (1998) assert that leading underwriters are veryconcerned about their reputation. They are strongly associated with firms to be listedand provide signals to investors about the quality of shares being issued (Chen andMohan, 2002) by voluntarily disclosing more information. This enables investors tomake a better valuation of firms, causing the underpricing to be reduced. In an IPO,underpricing is recognised as the major cost of capital to an issuer (Singh and Van derZahn, 2007). As such, leading underwriters seek to reduce underpricing as compared tonon-leading underwriters ( Jog and McConomy, 2003). Loughran and Ritter (2004),conversely, argue that successful underwriters are expected to exploit their name toelevate the level of underpricing, which, in turn, may be beneficial to them. Singh andVan der Zahn (2007), 2008), however, find no association between leverage and ICdisclosure.
Auditors. Auditors play an important role in strengthening the credibility ofdisclosures and narrowing the information gap between investors and issuers. For thatreason, auditing is viewed as one means of reducing agency costs ( Jensen andMeckling, 1976). Larger audit firms tend to provide high-quality audits (Abbott andParker, 2000) to preserve their reputation and to avoid litigation (Owusu-Ansah, 2005).Previous studies find that a company audited by a large audit firm is likely to beengaged in more audit activity (Collier and Gregory, 1999) and have a greater extent ofIC disclosure (Oliveira et al., 2006). In contrast, auditors might be more conservative indealing with IC-related items (Vergauwen and Van Alem, 2005) due to their subjectivenature and the absence of a regulatory framework, thereby reducing IC disclosure.Oliveira et al. (2006) and Singh and Van der Zahn (2007, 2008) revealed that the type ofauditor is not an important factor influencing IC disclosure.
Listing board. The industry type is expected to have an effect on levels of ICdisclosure, especially for companies involved in high-technology activities. In general,the amount invested in IC resources by these technology-oriented companies appearsto be significant, thus ensuring continued growth and competitiveness (Bozzolan et al.,2003). As a result, high-technology companies tend to have a higher degree of ICdisclosure than low-technology companies do. Whereas Bukh et al. (2005) and Oliveiraet al. (2006) find a significant association between industry type and level of ICdisclosure, other researchers (e.g. Garcıa-Meca and Martınez, 2005; Cordazzo, 2007;Rimmel et al., 2009) find no association. The positive influence of the level oftechnology on IC disclosure makes it likely that companies listed on the MESDAQmarket (the high-growth technology segment of the Bursa Malaysia, now known as theACE market) also have higher levels of IC disclosure.
4. Data and methodsThis section discusses the sample selection process and data collection procedure usingcontent analysis methodology. The following sections present the measurement of thevariables and the analytical procedure used in this study.
4.1 Sample selectionThe sample of this study consists of companies in the technology sector (68 companies)and industrial products sector (62 companies) that went through an IPO on BursaMalaysia between 2004 and 2008. While these two sectors have the most companies togo public among all sectors in the period under review, IC disclosure is likely to be
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more vital in technology industries than it is in traditional manufacturing andcommercial companies (Bukh et al., 2005). This study provides valuable insights on ICdisclosure in Malaysian IPO prospectuses in both technology and non-technologysectors of Bursa Malaysia. The data for all independent and dependent variables in thisstudy are extracted manually from the prospectus of each company, downloaded fromthe Bursa Malaysia database.
4.2 Content analysisContent analysis of the companies’ prospectuses is used as the main research methodin this study. This study develops its own disclosure index because there is nogenerally acknowledged IC disclosure index or public IC disclosure indicator currentlyavailable (Singh and Van der Zahn, 2007). The method permits researchers to classifyqualitative and quantitative information into predefined categories with the purpose ofunderstanding the disclosure practices with regard to a particular theme (Guthrie et al.,2004). The choice of IC categories and items is based on prior indices developed byBukh et al. (2005), Cordazzo (2007) and Singh and Van der Zahn (2007) to measure ICdisclosure in prospectuses.
Consistent with prior studies of IC disclosure in an IPO setting (e.g. Bukh et al., 2005;Cordazzo, 2007; Singh and Van der Zahn, 2007), this study classifies IC in six differentcategories: human resources, IT, R&D, process, strategy and customers. Disclosureitems are discussed with investment analysts to ensure that they are tailored to theMalaysian context. Additionally, the Prospectus Guidelines for Public Offerings andFinancial Reporting Standard 138 Intangible Assets (Malaysian Accounting StandardsBoard, 2005) are reviewed to confirm that only voluntary information is included.Finally, six IC disclosure categories with 84 items are proposed for this study (seeAppendix A for more details on the disclosure items).
Another important aspect of content analysis is the choice of recording unit. Severalresearchers (e.g. Beattie and Thomson, 2007; Unerman, 2000; Milne and Adler, 1999)have described the benefits and drawbacks of using words, sentences, paragraphs,portions of pages and clauses/phrases as the specific recording unit to capture themeaning of content being analysed. Likewise, as highlighted by Campbell and AbdulRahman (2010), disclosure indices have become the preferred approach of someresearchers (e.g. Bukh et al., 2005; Cordazzo, 2007; Singh and Van der Zahn, 2007) whenexamining IC disclosure in IPO prospectuses. While each recording unit has its ownadvantages and disadvantages, Campbell and Abdul Rahman (2010) further argue thatdisclosure indices can provide researchers with extensive analysis on the level ofdisclosure. As such, the study employs disclosure index as the recording unit foranalysing the IC-related information in IPO prospectuses.
The process of capturing IC information from the prospectuses is as follows:
(1) the entire prospectus is read at the beginning to acquire a basic understandingof the IC information being disclosed; and
(2) each IC disclosure is identified based on a predetermined list, as per thedisclosure index, and recorded in the coding sheet.
This study adopts a dichotomous scoring system (1 if the item appeared in theprospectus and zero otherwise) to facilitate the recording process[1]. The results fromthe coding process in any content analysis study need to demonstrate rigorous
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reliability to ensure that the results can be replicated and that any inferences drawnfrom the results are valid (Milne and Adler, 1999; Krippendorff, 2004). For that reason,two researchers used data from five IPO companies (not included in the sample) to pilottest the disclosure index and scoring system. The results were then compared to assessthe coders’ error rates. Any differences identified in the coding process were reviewedthrough several subsequent iterations to eliminate ambiguous, irrelevant andoverlapping items. The extent of the IC disclosure index is quantified using thefollowing formula.
IC Disclosure Score ðICDSÞ ¼Xmi¼1
di=M
!£ 100%:
where di can be taken as a dummy variable equal to one if the respective intellectualcapital items are disclosed on an IPO prospectus and zero otherwise; and M representsthe total number of items in the IC framework.
4.3 Regression modelIn the IC disclosures literature, the associations among the IC disclosure level and itspotential indicators are commonly estimated using multiple regression analysis. Thefollowing OLS regression model is used to evaluate the association between ICdisclosure and potential explanatory variables:
b6 AGEi þ b7 þ LEVi þ b8 UNDi þ b9 AUDi þ b10 LISTBi þ 1i
where:
ICDS ¼ Represents the ratio of the number of IC items disclosed by IPOs to thetotal number of IC items.
BSIZE ¼ Represents the total number of directors.
BIND ¼ Represents the percentage of independent non-executive directors on theboard.
BDIV ¼ Represents the proportion of Malay ethnic directors on the board.
SIZE ¼ Represents the total sales as a proxy for company size.
AGE ¼ Represents the duration between the founding date and the IPO date.
LEV ¼ Represents the book value of total debt divided by the book value oftotal assets.
UND ¼ Is a dummy variable equal to one if the IPO engaged one of the top twounderwriter firms (based on frequency) in the year of its listing and zerootherwise.
AUD ¼ Is a dummy variable equal to one if the IPO engaged a Big Four auditfirm and zero otherwise.
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LISTB ¼ Is a dummy variable equal to one if the IPO listed in the Mesdaq Marketand zero otherwise.
1 ¼ Represents the residual.
5. Empirical analysisThis section presents the results of the study. First, the trend of disclosing ICinformation in Malaysian IPO prospectuses during the period from 2004 to 2008 isdescribed. This is followed by descriptive statistics. Finally, the results of the multipleregression analysis are presented.
5.1 IC disclosure trendTable II summarises the annual breakdown of each IC disclosure category disclosed inthe prospectuses. To provide further analysis of IC disclosure patterns over the periodof 2004-2008, the study also developed six different indices to represent specificcategories of IC disclosure. As indicated by the average disclosure in 2004 and 2008,there is a small increase in the IC information disclosed in the human resource, processand strategy categories. IC disclosures relating to information technology, R&D andcustomers experienced a slight decrease during the same period. The average total ICdisclosure score (ICDS) follows the same trend and shows a minor decrease over time.
In regard to the disclosure pattern (refer to Table II), the study discovers that R&Dis the most cited category at 64.10 per cent, or 5.95 out of nine items. This reflects theimportance of R&D as a means for companies to innovate and develop new products orservices. The second and third most commonly cited attributes are process andstrategy, with averages of 37.69 per cent (3.02 of eight items) and 34.66 per cent (5.53 of16 items), respectively. These categories provide valuable insights into the company’sability to use intellectual resources that contribute to its competitive advantage.Disclosures on customers are ranked in fourth position, with an average of 31.54 per
cent (5.34 of 17 items). Although much attention has been given to human capital in IC,human resources disclosures were limited at 30.91 per cent, or 8.66 items (out of 28items). Finally, disclosures on IT information are ranked last, with an average of 17.44per cent (1.05 of six items). The most and least disclosed items by disclosure categoryare shown in Table III.
5.2 Descriptive statisticsThe descriptive statistics for the explanatory variables are presented in Table IV. Thedisclosure score varies between 20.2 per cent (17 items) and 47.6 per cent (40 items)between 2004 and 2008. Out of the total number of items in the disclosure scoreframework (84 items), the IPO companies disclose, on average, more than 34.9 per cent
Category Most disclosed Second most disclosed Least disclosed
Human resource Statements of policyon competencydevelopment
Statements ofdependence on keypersonnel
Comments onemployee absentee rate
Information technology Description ofinformationtechnology facilities
Description of existinginformationtechnology systems
Informationtechnology expenses
Research and development Statements of policy,strategy and/orobjectives of R&Dactivities
Number of patents andlicenses
R&D invested intobasic research
Process Internal sharing ofknowledge andinformation
Measure of internalprocessing failures
Discussion of fringebenefits and companysocial programs
Strategy Future plans andstrategies
Statements ofcorporate qualityperformance
Corporate culturestatements
Customer Competitors Marketing Ratio of customers toemployees
Table III.Overall disclosure patternin prospectuses by ICdisclosure category
(29 items). The low frequency of IC disclosures suggests that some factors may restrainIPO companies from disclosing more information on IC and may vary betweendifferent company sectors and business environments.
The average number of Directors on a Board is six, and approximately 36.7 per centof board members are independent. The average proportion of Malay ethnic directorson the boards is approximately 24.6 per cent. Descriptive statistics for the threecontinual variables, “size”, “age” and “leverage,” are also shown in Table III. Withrespect to the underwriter firms, 38 per cent of the companies employed the top twounderwriter firms (based on frequency) in the year of the companies’ IPO.Approximately 42 per cent of the companies in the sample are audited by Big Fourfirms, whilst 64 per cent are listed in the MESDAQ market.
Table V presents the Pearson correlation matrix to examine the interrelationshipsbetween the variables in the samples. The results confirm that, except for a fewsignificant correlations observed between independent variables, the correlationcoefficients is not higher than 0.8, and thus, multicollinearity is not a major problem(Hair et al., 2010). As a further precaution, the researchers calculated variance inflationfactor (VIF) scores to establish that the regression model does not suffer frommulticollinearity. None of the VIF scores exceeds ten (the highest calculated VIF is1.621), indicating no serious problems with multicollinearity (Hair et al., 2010).
5.3 Multiple regression resultsThree different models (according to sample coverage) were run to explore the factorsinfluencing the disclosure of IC information in IPO prospectuses for companies to belisted in the technology and industrial products sectors. Table VI presents the empiricalresults for the multiple regressions using the IC disclosure score as the dependentvariable for the sample companies. The F-test is used to test whether the variablescontribute to the fit of the model. The test indicates that Model 1 and Model 3 (significantat the 5 per cent level) are sufficiently robust. Although Model 2 was not significant,further discussions on the explanatory variables are still deemed beneficial. Overall, theresults suggest that the factors with the most influence on the level of IC disclosure areboard size, board independence, company age, leverage, underwriter and listing board.Board diversity, company size and auditor type do not affect the disclosure level.
The present study finds that the size of board is positively associated with ICdisclosure score ( p , 0.05) in Model 2 (i.e. the technology sector), implying that thedisclosure of IC information in the prospectus is enhanced by having more directors inan IPO company. Although this finding is not consistent with Cerbioni andParbonetti’s (2007) argument that larger boards disclose less about their IC, it supportsPierce and Zahra’s (1992) notion that larger boards have the advantage over smallerboards in terms of having access to more information and expertise from a mixture ofbackgrounds. At the same time, the presence of larger boards is more important forcompanies seeking IPOs in the technology sector. Due to rapid changes in technology,the possession of technological know-how is critical to companies’ business operations.Hence, a company with more members on the board has more people who caneffectively contribute their know-how to assist in the decision-making process.
For board independence, the study finds that IC disclosure score is negativelyrelated to the proportion of INEDs on the board only in Model 3 (i.e. the industrialproducts sector) ( p , 0.05). Although the presence of more independent directors is
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ICD
SB
SIZ
EB
IND
BD
IVS
IZE
AG
EL
EV
UN
DA
UD
LIS
TB
ICD
S1
BS
IZE
0.16
81
BIN
D2
0.07
02
0.44
0*
*1
BD
IV0.
008
0.07
90.
226
**
1S
IZE
0.07
40.
348
**
20.
118
0.22
1*
1A
GE
20.
103
0.00
52
0.05
60.
143
0.23
2*
*1
LE
V0.
267
**
0.07
80.
032
20.
002
0.25
1*
*0.
106
1U
ND
0.11
30.
182
*2
0.14
62
0.00
30.
138
20.
022
20.
028
1A
UD
20.
014
0.06
02
0.07
60.
110
0.08
20.
027
0.12
12
0.02
51
LIS
TB
–0.
201
*2
0.30
2*
*0.
095
20.
056
20.
523
**
20.
209
*2
0.17
9*
20.
195
*2
0.11
31
Notes:
* Cor
rela
tion
issi
gn
ifica
nt
atth
e0.
05le
vel
(2-t
aile
d);
** C
orre
lati
onis
sig
nifi
can
tat
the
0.01
lev
el(2
-tai
led
)
Table V.Pearson correlationmatrix
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Mod
el1
Mod
el2
Mod
el3
IPO
com
pan
ies
inth
ete
chn
olog
yse
ctor
and
ind
ust
rial
pro
du
cts
sect
orIP
Oco
mp
anie
sin
the
tech
nol
ogy
sect
orIP
Oco
mp
anie
sin
the
ind
ust
rial
pro
du
cts
sect
orE
xp
lan
ator
yv
aria
ble
sC
oeffi
cien
tS
tan
dar
der
rors
t-st
atis
tic
Coe
ffici
ent
Sta
nd
ard
erro
rst-
stat
isti
cC
oeffi
cien
tS
tan
dar
der
rors
t-st
atis
tic
CO
NS
TA
NT
0.33
650.
0460
7.31
10.
2277
0.05
534.
1165
0.43
890.
0693
6.33
39B
SIZ
E0.
0032
0.00
350.
8902
0.01
050.
0050
2.09
28*
*2
0.00
340.
0050
20.
6795
BIN
D2
0.03
870.
0754
20.
5137
0.08
850.
0950
0.93
122
0.30
360.
1282
22.
3682
**
BD
IV0.
0141
0.02
230.
6331
0.00
910.
0294
0.31
100.
0218
0.03
430.
6344
SIZ
E2
8.15
E-0
57.
12E2
052
1.14
502
9.56
E-0
50.
0001
20.
5860
22.
18E
-05
7.57
E2
052
0.28
76A
GE
20.
0020
0.00
112
1.75
56*
20.
0009
0.00
302
0.30
252
0.00
290.
0013
22.
2832
**
LE
V0.
0700
0.02
193.
1946
**
*0.
0576
0.02
542.
2611
**
0.12
710.
0468
2.71
48*
**
UN
D0.
0078
0.00
990.
7844
20.
0129
0.01
482
0.87
520.
0269
0.01
351.
9827
*
AU
D2
0.00
800.
0097
20.
8258
20.
0085
0.01
402
0.60
722
0.01
900.
0138
21.
3724
LIS
TB
20.
0237
0.01
182
2.00
35*
*
n13
068
62R
20.
1517
0.15
500.
2599
F-v
alu
e2.
3859
**
1.35
372.
3273
**
Notes:
* ,*
* ,*
**
Ind
icat
essi
gn
ifica
nce
atth
e10
per
cen
t,5
per
cen
tan
d1
per
cen
tle
vel
resp
ecti
vel
y
Table VI.Multiple regression
analysis
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deemed to provide an incentive to disclose voluntary information extensively (Cerbioniand Parbonetti, 2007; Chen and Jaggi, 2000; Cheng and Courtenay, 2006; Eng and Mak,2003) to benefit the shareholders at large, the results of this study suggest otherwise. Aplausible explanation is that more companies are listed in the industrial productssector than in the technology sector, and more of the former are established inMalaysia. As such, the competition in the industrial products sector is likely to be moreintense. Considering the importance of information and knowledge as valuable assetsin the knowledge economy, there is increased need for the company to limit itsdisclosure even with a larger proportion of INEDs. As highlighted by Vergauwen andVan Alem (2005), many companies will refrain from revealing too much information toprotect its strategic importance.
In line with Rimmel et al. (2009), the present study finds that company age has anegative and significant influence on the IC disclosure score in Model 1 (i.e. bothsectors) ( p , 0.1) and Model 3 (i.e. the industrial products sector) ( p , 0.05). Theresults also are consistent with Kim and Ritter’s (1999) conclusion that older companiesare less reliant upon non-financial information than younger companies. Despite theconcern about future uncertainties such as threats of new entrants and rapidtechnology changes, the results imply that older companies have less incentive todisclose IC-related information than younger companies do over the long term. Oldercompanies may disclose less IC-related information to safeguard their strategicinformation from competitors who could jeopardise their competitive advantage.Nevertheless, the study finds no significant association between company age and ICdisclosure score in the technology sector. This finding indicates that the level of ICdisclosure in technology-oriented companies is not influenced by how many years thecompany has been in business, but it may be affected by involvement inhigh-technology activities that demand disclosure of more IC information.
The findings of the present study suggest that leverage is the most importantexplanatory variable. Leverage and IC disclosure score are significantly and positivelyrelated in all models. Although the results are not in line with most studies on ICdeterminants, which show no association between these variables, they are consistentwith findings by Garcia-Meca and Martinez (2005) and Williams (2001). The resultsindicate that companies with high levels of debt have an incentive to disclose moreIC-related information as a signal of their favourable financial standing (Ahmed andCourtis, 1999). This is because most IPO companies are likely to incur significantstart-up costs that decrease both their assets and their earnings, in turn increasing theirdebt level.
There is a positive and significant relation at the 10 per cent level betweenunderwriter and IC disclosure score in Model 3 (i.e. the industrial products sector). Theresults are contrary to Singh and Van der Zahn’s (2007, 2008) studies, which find nosignificant relationship. The present study confirms the arguments made by Chen andMohan (2002). They argue that, because the underwriting firms are closely linked toIPO companies, it is imperative especially that the leading underwriters influencemanagement to disclose more information voluntarily. Consequently, the supply ofadditional information could assist the investors in making a more accurate valuationof the company (Botosan, 1997) and eventually preserve their reputation as aprestigious underwriting firm (Firth and Liau-Tan, 1998). However, no significantrelationship exists between underwriter type and IC disclosure score in the technology
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sector. Because high-technology companies are facing greater risk due to technologychanges, they have more incentive to disclose IC information regardless of underwritertype.
The sample companies were grouped into two segments according to their listingboard, high-growth technology (MESDAQ market) and non-high growth technology(main board and second board), as a proxy for listing location. The findings indicatethat the IC disclosure score is significantly related to the listing board in the combinedsector (Model 1) ( p , 0.05). However, the sample in Technology sector isover-represented by companies classified as high-growth technology (97.1 per cent).Conversely, the sample in Industrial Products sector is underrepresented by companiesgrouped as high-growth technology (27.4 per cent). This reflects that the sample differsmarkedly between high-growth technology and non-high-growth technologyclassifications in both sectors and the results have the potential to becomeerroneous. Consequently, the variable is dropped from Model 2 and Model 3 due toconcerns about sampling bias. The present study supports the view that the level of ICdisclosure and industry type are significantly associated, as expressed by Bukh et al.(2005), Bozzolan et al. (2003) and Oliveira et al. (2006). It is estimated thathigh-technology companies disclose more IC information than low-technologycompanies do because the former tend to rely heavily on IC resources. Nevertheless,this study detects a negative association implying that well-performed IPOs are likelyto reduce a company’s level of voluntary disclosure in the longer term to safeguard itscompetitive advantage (Williams, 2001).
6. Implications for managers, practitioners and researchersThis paper offers significant implications in the following ways. First, the findings ofthe study help to extend the previous research on IC disclosure in this specific area,i.e. to explore the determinants of IC disclosure in an emerging country, particularly inthe IPO setting. Recognising the growing importance of IC in the knowledge economy,the presence of IC information is an important supplement to conventional financialdisclosure for revealing the company’s value creation potential. The issue is ofparticular important to Malaysia as it shifts to a knowledge-based economy. Hence,this study provides an overview of the progress of IC disclosure practices, especially inIPO prospectuses.
Second, the regulators and policy makers may find the results informative indealing with factors that enhance IC disclosure. In view of the Malaysian corporategovernance reforms agenda, the present study is timely in providing much-neededempirical support of the efforts to improve transparency and promote higher standardsof disclosure to increase investor confidence. The low level of IC disclosure indicatesthat the progress of IC reporting in Malaysia is limited due to the absence of specificguidelines for IPO companies on how to incorporate various IC disclosures into theirprospectus. Increased disclosure of IC information is anticipated to allow for moremeaningful decision making on resource allocation by potential investors.
Finally, this study also developed a disclosure index specifically customised toMalaysian IPOs. As such, the index can be employed as a basis for companies to reporttheir IC information, which, in turn, will increase the probability of companies’reporting IC in the prospectuses. The index can also act as a catalyst for developingnew approaches to corporate reporting that include greater disclosure of IC.
IC disclosures inIPO prospectuses
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7. Limitations and future researchAlthough the study contributes to an understanding of IC disclosure in the MalaysianIPO setting, it is limited in three ways. First, this study only examines IPOprospectuses in one country. Future research should seek to enlarge the current sampleto further investigate the precise nature of IC disclosure and enhance the comparabilitybetween nations or sectors. Second, the method of analysing the content ofprospectuses merely detects the presence or absence of a particular IC item from apredetermined checklist. A more robust method should be utilised to measure both thequantity and the quality of IC disclosures. Finally, although multiple regressionanalysis is the most common regression model used in analysing the determinants ofIC disclosure, it is interesting to observe the results from using different methods, suchas censoring or truncated regression models or Bayesian estimation.
8. ConclusionsThis study provides valuable insights on the factors affecting the disclosure of ICinformation using multiple regression analysis. The population of interest comprises130 companies in the technology and industrial products sectors that applied for initiallisting on Bursa Malaysia over the period from 2004 to 2008. The study investigatedthe effects of nine potential determinants of IC disclosure level. In general, the resultsprovide evidence that board size, board independence, company age, leverage,underwriter and listing board significantly influence the extent of IC disclosure in anIPO prospectus. Nonetheless, the effect of each explanatory variable may vary in everymodel estimated, perhaps due to different sectors and environments. On the otherhand, the study finds no significant association with board diversity, size or auditortype. The study also presents the trend on disclosure of IC information in MalaysianIPO prospectuses. It reveals the following:
. the extent of IC disclosure seems to be relatively low (34.99 per cent, or 28 itemsout of 84); and
. R&D information is disclosed most frequently, followed by process, strategy,customer, human resource, and IT information.
Despite the low level of IC disclosure, the presence of IC information in the prospectusis a signal that urgent needs exist, first, to create a mutually agreed-upon frameworkfor IC and, second, to understand what IC exactly is.
Note
1. It is important to note that if a disclosure item was stated repeatedly in a prospectus, it wascaptured once on the scoring sheet.
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Appendix: Framework for the collection of intellectual capital information
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Table AI.Intellectual capital
information disclosureitems (di)
IC disclosures inIPO prospectuses
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About the authorsAzwan Abdul Rashid is a Senior Lecturer at the Department of Accounting, Universiti TenagaNasional, Malaysia. He is currently pursuing his PhD at Universiti Teknologi MARA, Malaysiain the field of intellectual capital disclosure. A member of the Malaysian Institute of Accountants,and his research interests include intellectual capital, corporate governance and financialreporting. Azwan Abdul Rashid is the corresponding author and can be contacted at:[email protected]
Muhd Kamil Ibrahim served as a Professor with the Faculty of Accountancy, UniversitiTeknologi MARA, Malaysia before joining Taibah University, Kingdom of Saudi Arabia. Hisresearch articles appear in academic journals such as Journal of Intellectual Capital, Journal ofFinancial Reporting and Accounting, Corporate Governance, The International Journal ofBusiness in Society, International Journal of Business and Economics and Asian AccountingReview.
Radiah Othman was an Accounting Lecturer with the Faculty of Accountancy, UniversitiTeknologi MARA, Malaysia since 1997. She has published more than 20 articles in academic andprofessional journals such as Corporate Governance, Corporate Social Responsibility andEnvironmental Management, International Journal of Disclosure and Governance, and Journal ofFinancial Regulation and Compliance. She currently serves as a Senior Lecturer with the Schoolof Accountancy, Massey University, New Zealand.
Kok Fong See is based at the School of Economics, University of Queensland, Brisbane,Australia.
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