Do companies disclose intellectual capital in their annual reports? New evidence from explorative content analysis
| Pages | 853-871 |
| DOI | https://doi.org/10.1108/JIC-03-2019-0040 |
| Date | 07 April 2020 |
| Published date | 07 April 2020 |
| Author | Petr Parshakov,Elena Shakina |
| Subject Matter | Organizational structure/dynamics,Accounting & Finance,Information & knowledge management,Accounting/accountancy |
Do companies disclose intellectual
capital in their annual reports?
New evidence from explorative
content analysis
Petr Parshakov
National Research University Higher School of Economics, Perm, Russia, and
Elena Shakina
National Research University Higher School of Economics, Saint Petersburg, Russia
Abstract
Purpose –This study suggests an alternative to confirmatory content analysis (CA) and empirically
demonstrates that explorative CA enables new insights into the mechanism of intellectual capital (IC)
disclosure. In so doing, this research contributes to both methodological and empirical advancements in IC
disclosure research.
Design/methodology/approach –Employing the assumptions of positive accounting theory and taking
book value of intangible assets as a reference, our research design utilizes well-established text-mining (TM)
tools based on a least absolute shrinkage and selection operator regression. We assume that the degree of
cohesion between officially disclosed and evaluated intangible assets on balance sheets and those contextually
delivered in narrative form may affect how IC is ultimately disclosed in annual reports.
Findings –Our main finding is in line with the results and criticism of previous studies. We show that
companies do not extensively disclose IC in their annual reports. However, some narrative forms for IC
disclosure are identified and confirmed by several robustness checks.
Research limitations/implications –First, the findings provide internal validity only for large US
enterprises. These firms have similar, well-structuredreporting requirements. This analysis might be enriched
by an examination and a comparison of different institutional contexts, such as emerging countries. Second,
following previous studies, annual reports serve as the source of data. Consequently, the findings are relevant
only for mandatory and voluntary disclosure of IC, mitigating the relevance of this study for contexts of
involuntary disclosure.
Originality/value –This study makes two contributions. First, we add to the empirical literature by offering
one more piece of evidence on whether and, if so, the extent to which companies disclose IC in their annual
reports. Second, we provide further examination of confirmatory CA by proposing a number of statistically
validated codes and tokens that are indicators of IC communication by companies.
Keywords Disclosure, Content analysis, Intellectual capital, Text mining, Annual report, Explorative content
analysis
Paper type Research paper
Introduction
Disclosure as a phenomenon emerged due to a general dissatisfaction with traditional
financial reporting and growing information asymmetry. Bozzolan et al. (2003) note the
particular importance of information on intangibles, which are, according to corporate
stakeholders’interviews conducted by PricewaterhouseCoopers, among the five most
relevant types of information. As such, a vast literature on intellectual capital (IC) disclosure
has developed that identifies the important relevance of proper representation of corporate
competitive advantages created by intangibles (Abeysekera, 2006;Bontis, 2003;Branswijck
and Everaert, 2012;Br
€
uggen et al., 2009; Husin et al., 2012). In line with these prior studies, we
The
mechanism of
IC disclosure
853
Funding: This article is an output of a research project implemented as part of the Basic Research
Program at the National Research University Higher School of Economics (NRU HSE).
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1469-1930.htm
Received 1 March 2019
Revised 20 August 2019
9 November 2019
6 December 2019
8 January 2020
13 February 2020
Accepted 19 February 2020
Journal of Intellectual Capital
Vol. 21 No. 6, 2020
pp. 853-871
© Emerald Publishing Limited
1469-1930
DOI 10.1108/JIC-03-2019-0040
use intangibles,intangible resources and IC synonymously to define a company’s resources
that create value despite the absence of material goods (Edvinsson, 2000;Edvinsson and
Malone, 1997).
The theoretical foundation of IC disclosure has solid origins in stakeholder, agent and
legitimacy research. Castilla-Polo and Ruiz-Rodr
ıguez (2017) address at least three ways in
which companies can respond to challenges in IC disclosure. First, firms can increase
investors’awareness of IC by increasing information disclosure, making the company more
transparent and, consequently, more attractive to investors. Second, firms can seek to avoid
information overload by disclosing information selectivity. Thus, the firm only provides
relevant and, normally, less risky information to current and potential investors. Finally,
firms can base IC disclosure on legislation and not voluntarily disclosed any information
about IC apart from its balance-sheet value. However, research is very limited on why firms
choose a particular course of disclosure relative to IC due to methodological problems and
data availability.
Although over five decades of the analysis of disclosure incentives and outputs has
created a rich empirical literature, the lack of a validated methodological base severely limits
the continuity and the comparability of findings. Content analysis (CA) has been the
dominant technique for IC disclosure analysis. However, a substantial bias toward
confirmatory CA exists, and very limited research has attempted to use exploratory options.
This study sheds some light on recent developments in CA applications for IC disclosure.
Bridging the gap between theory and empirics, we develop a data-driven explorative
approach to reinforce the methodological validity of CA. We thus contribute to the further
empirical examination of CA by mitigating the most frequently raised concerns. Specifically,
we develop an explorative CA model based on text-mining (TM), which can serve as an
alternative to confirmatory CA. We also demonstrate that explorative CA techniques can
provide new insights into the mechanisms of IC disclosure. In so doing, this study
complements the existing mainstream literature, which is largely based on conventional
confirmatory CA, and provides both a methodological and an empirical advancement in the
literature on IC and CA.
The literature focusing on CA continues to increase despite criticism (Beattie and
Thomson, 2007;Dumay and Cai, 2014,2015). In fact, although the number of studies using CA
methodology to examine IC continues to increase, the impact of these studies, measured by
the number of citations per year, is decreasing (Dumay and Cai, 2014). In their review of the
most influential CA-based studies on IC disclosure, Dumay and Cai (2014) argue that the
future is quite dim for CA methodology relative to IC disclosure. And yet, CA-based research
continues to increase. Given this divergence in the literature, the validity of CA seems to be far
from a settled matter.
Criticism of confirmatory CA is challenging as only declarative and sometimes indirect
falsification can be proved empirically. Consequently, confirmatory CA continues to be the
most commonly accepted instrument for IC disclosure studies. However, an alternative
method to discover how and the degree to which companies disclose their IC is to conduct
explorative CA, rather than confirmatory CA. An explorative analysis avoids the ambiguity
and fuzziness of confirmatory CA precoding. The literature does not always draw a clear line
between confirmatory and exploratory CA; however, this often neglected distinction is an
important one as the differences in research designs and empirical examination of these two
variations of CA analysis is substantial.
This study leans predominantly on positive accounting theory, taking into account
agency and stakeholders’theoretical frameworks. Our goal is to determine whether and, if so,
to what extent companies disclose IC in their corporate reports. Companies narratively
disclose their IC in annual reports, confirming and clarifying at least officially disclosed and
evaluated intangible assets on their balance sheets.Thus, we assume a minimum required
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