Does intellectual capital disclosure reduce an IPO's cost of capital?. The case of underpricing
| DOI | https://doi.org/10.1108/14691930710774885 |
| Date | 31 July 2007 |
| Pages | 494-516 |
| Published date | 31 July 2007 |
| Author | Inderpal Singh,J.‐L.W. Mitchell Van der Zahn |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Does intellectual capital
disclosure reduce an IPO’s cost of
capital?
The case of underpricing
Inderpal Singh and J.-L.W. Mitchell Van der Zahn
Curtin University of Technology, Perth, Australia
Abstract
Purpose – The pivotal aim is to examine the association between underpricing and intellectual
capital (IC) disclosures amongst Singapore initial public offerings (IPOs). A secondary aim is to
elaborate on the research by Bukh into IC disclosures by Danish IPOs.
Design/methodology/approach – Using a theoretical framework based on the notions of ex ante
uncertainty and information asymmetry, the study examines empirically 334 Singapore IPO
prospectuses between 1997 and 2004.
Findings – Contrary to theoretical predictions and much of the prior financial disclosure/underpricing
research, we find a positive association between underpricing and the extent of IC disclosure. Additional
sub-sample analysis shows that the positive association holds across the market’s broader industry
base, but is strongest amongst IPOs that are heavily reliant on IC resources.
Research limitations/implications – The research studies Singapore IPOs only, within a specific
timeframe (1997-2004), and concentrates on a single disclosure mechanism (though the one considered
most significant to an IPO).
Practical implications – Empirical analysis suggests issuers may not use IC disclosures effectively
to reduce their cost of capital. Rather, they use IC disclosures as a strategic tool to complement
underpricing. Further, findings suggest policymakers may need to introduce minimal uniform IC
disclosure requirements to prevent a speculative IPO market from developing as the significance of IC
increases.
Originality/value – Study is the first to provide empirical evidence of the association between IC
disclosures and underpricing. Further, it is one of the very first to examine the consequences of IC
disclosures and thereby provide a new path for future IC disclosure research.
Keywords Pricing, Intellectual capital, Disclosure, Cost of capital,Singapore, Denmark
Paper type Research paper
1. Introduction
Whilst still very much in its infancy, the study of intellectual capital (IC) disclosure is
an important emerging field of research contributing to the legitimization of IC as an
independent discipline within its own right. Current IC disclosure research is generally
The current issue and full text archive of this journal is available at
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The authors thank Greg Tower, Alistair Brown, Manfred Bornemann, Niklas Strom, Per Nikolaj
Bukh, Gunnar Rimmel, Jan Mouritsen, Emma Garci-Meca and Phil Hancock for their helpful
comments on earlier versions of the paper. The authors also thank participants at the AFAANZ,
EAA, Asia-Pacific International Accounting and Edge Entrepreneurship conferences, and
workshop participants at SMU, NTU, Curtin University and Edith Cowan University for their
comments and advice in developing this paper. They gratefully acknowledge the SMU-Wharton
Research Center and CIERA (Curtin University) for their financial support in enabling them to
conduct this study. Please note that both authors contributed equally to this research paper.
JIC
8,3
494
Journal of Intellectual Capital
Vol. 8 No. 3, 2007
pp. 494-516
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930710774885
restricted to focusing on two of three major issues surrounding corporate disclosure.
These are the presumed objectives of disclosure of IC information, and the
determinants of the extent and nature of IC disclosure. Research of IC disclosure as it
relates to the third major issue – the consequences of IC disclosure – has at best only
garnered minimal attention from IC scholars. The objective of this study is to address,
in part, this void in the IC disclosure literature by examining empirically the
association between the extent of IC disclosure in initial public offering (IPO)
prospectuses and the degree of underpricing[1]. A major contribution our study
provides is that findings can assist in determining if IC disclosure can (and is) be used
as a strategic mechanism to enable an IPO issuer to “leave less money on the table” at
the time of listing.
One central and still largely unanswered question in corporate disclosure research
is whether a firm’s disclosure policy has economic consequences and, if so, whether
these consequences are economically significant (e.g. Lang and Lundholm, 2000).
Access to capital markets at the lowest cost of capital is viewed to be of critical
importance to a firm. For an IPO, underpricing is viewed as a major cost of capital to
an issuer. Various theoretical models routinely cite asymmetrical information as a
pivotal underlying determinant of un derpricing (Ljungqvist, 2005). Incre ased
disclosure of financial and non-financial information by an IPO is mentioned as a
potential mechanism for reducing asymmetrical inform ation. Reporting more
information to reduce information asymmetry is considered most effective if the
additional disclosure relates to topics that explicitly contribute to an information gap
between issuers and investors. Due to the underlying nature of IC resources (such as
their intangible nature), conflicts with the underlying principles of the traditional
reporting model and lack of regulatory oversight it is our conjecture ex ante that
uncertainty surrounding IC is a ma jor contributing factor to asy mmetrical
information between issuers and investors, particular in the current Information
Age. Furthermore, we consider IC disclosures to be imperative to (and of interest to)
investors in the Information Age when valuing an IPO given scholars, practitioners
and policy makers alike recognize IC as the pivotal driver of a firm’s value creation in
this new economic era (Bontis, 2001). Based on these views it is our conjecture that if
an IPO discloses more IC-related information in its listing prospectus then this will
reduce asymmetrical information concern, and thereby the level of underpricing.
Hence, the research hypothesis we test empirically is that of an inverse association
between the level of IC disclosure and underpricing.
To analyze our research hypothesis, data was collected from a sample of 334
Singapore IPOs listing on the Stock Exchange of Singapore (SGX) between 1 January
1997 and 31 December 2004. Besides being a naturally interesting IPO market to study,
we focus on Singapore for a variety of reasons. For example, Singapore’s economic
prosperity is largely built on the development, management and use of IC resources
given the nation’s lack of natural and physical resources. Investors, therefore, require
knowledge of IC resources when valuing an IPO, and will be interested in IC-related
information. Also, prior research indicates underpricing in Singapore is historical high
(Firth and Liau-Tan, 1998; Ljungqvist, 2005) implying the potential high information
asymmetry and the need for more disclosure.
Descriptive statistics for our sample data indicates that the amount of IC disclosure
in IPO prospectuses increased annually from 1997 to 2003 before declining in 2004.
Intellectual
capital disclosure
and IPOs
495
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