Does intellectual capital disclosure affect the cost of equity capital? An empirical analysis in the integrated reporting context
| Pages | 985-1007 |
| DOI | https://doi.org/10.1108/JIC-12-2019-0283 |
| Date | 11 May 2020 |
| Published date | 11 May 2020 |
| Author | Antonio Salvi,Filippo Vitolla,Nicola Raimo,Michele Rubino,Felice Petruzzella |
| Subject Matter | Knowledge management,Information & knowledge management,HR & organizational behaviour,Organizational structure/dynamics,Accounting/accountancy |
Does intellectual capital disclosure
affect the cost of equity capital?
An empirical analysis in
the integrated reporting
context
Antonio Salvi, Filippo Vitolla, Nicola Raimo, Michele Rubino and
Felice Petruzzella
Department of Economics and Management, LUM Jean Monnet University,
Casamassima, Italy
Abstract
Purpose –The purpose of this study is to examine the impact of intellectual capital disclosure on the cost of
equity capital in the context of integrated reporting, which represents the ultimate frontier in the field of
corporate disclosure.
Design/methodology/approach –The authors employ content analysis to measure intellectual capital
disclosure levels along with a panel analysis on a sample of 164 integrated reports.
Findings –Empirical outcomes indicate that intellectual capital disclosure levels have a significantly negative
association with the cost of equity capital.
Originality/value –This study’s major contributionlies in its originality in terms of empirical examination of
the relationship between intellectual capital disclosure in integrated reports and the cost of equity capital.
Keywords Intellectual capital, Integrated reporting, Cost of equity capital, Disclosure
Paper type Research paper
1. Introduction
Integratedreporting (IR) has longbeen recognizes as a usefultool to represent interconnections
between the three types of intellectual capital (IC), in addition to the other forms of capitals
(IIRC, 2013).This study aims to analyse the impactof IC disclosure on the cost of equitycapital
(CEC) in the context of IR, which reflects the last frontierof corporate disclosure.
The analysis of both mandatory and voluntary corporate disclosure and its effects on firm
financial performance is one of the most debated topics in accounting and finance literature
(Beretta et al., 2019). Disclosure constitutes a critical element in the efficient functioning of
capital markets (Healy and Palepu, 2001). The interaction process through the exchange of IC
information between companies and their stakeholders has gained growing importance in
recent years; firms, as a consequence, have substantially increased the extent and quality of
their IC disclosure (Ousama and Fatima, 2012). According to Giacosa et al. (2017), in order for
corporate communication strategies to be truly effective, they should be open, honest,
transparent and comprehensive. Furthermore, as stated by Beretta et al. (2019), it is not only
the content but also the tone of voluntary disclosure that are pivotal factors in investors’
decision-making process. Bhasin and Shaikh (2011), consider IC a key driver of business
dynamics in the 21st century. Participation in IC and knowledge sharing has the potential to
enhance financial performance and allow for better understanding of technological
innovation in progress, improving managerial skills of individual companies involved
(Carayannis et al., 2014;Heisig et al., 2016). Past studies highlight the ability of disclosure to
affect equity costs, reduce information asymmetries and estimation risk, monitor costs for
Intellectual
capital
disclosure and
cost of equity
985
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 4 December 2019
Revised 30 January 2020
13 March 2020
Accepted 2 April 2020
Journal of Intellectual Capital
Vol. 21 No. 6, 2020
pp. 985-1007
© Emerald Publishing Limited
1469-1930
DOI 10.1108/JIC-12-2019-0283
investors and change investor preferences (Diamond and Verrecchia, 1991;Baiman and
Verrecchia, 1996;Richardson et al., 1999;Verrecchia, 2001;Easley and O’Hara, 2004;Lambert
et al., 2007). Nevertheless, this virtuous circle is hardly triggered by traditional financial
disclosure. As a matter of fact, traditional disclosure mainly assumes a short-term focus and
is not able to clearly depict the ability of a company to create value in the medium- and long-
term. This is primarily due to the lack of attention to the role of intangibles, which are,
however, key elements in the process of value creation.
From this perspective, the transition from an economy based on production to an economy
based on knowledge has significantly increased the importance of intangibles and, therefore,
of IC in the process of value creation (Barth and Clinch, 1998;Kallapur and Kwan, 2004;
Ousama and Fatima, 2012;Cabrilo and Dahms, 2018). With regard to a firm’s ability to
operate, Brooking (1996, p. 12) defines IC as “the combined intangible assets which enable the
company to function”. Stewart (2000, p. 11), instead, adopting a firm’s value creation
perspective, defines IC as “intellectual material –knowledge, information, intellectual property,
experience –that can be put to use to create wealth”. Today, IC is crucial for strengthening
competitive advantage and achieving financial objectives in the medium- and long-term
(Guthrie and Petty, 2000). More specifically, IC refers to all intangible resources involved in
the value creation process (Ashton, 2005). With such regard, current research provides
multiple definitions for IC, frequently used as a synonym for intangible assets (Keong
Choong, 2008).
Based on a definition linked to the representation of corporate value, IC represents the
difference between market and book value (Edvinsson and Malone, 1997;Sveiby, 1997;
Mouritsen et al., 2001;Curado, 2008;Joshi and Ubha, 2009). Bhasin and Shaikh (2011)
state that, especially when there is a large discrepancy between market and book value,
it is possible to attribute such difference to IC; this phenomenon has been further
accentuated since the advent of the so-called knowledge-based economy, further
increasing the magnitude of the underlying difference (Roos et al., 2007). This topic has
been extensively examined in accounting and finance literature, given that the aforesaid
gap may reduce access to financial resources for IC-intensive companies and enlarge
information asymmetries between firms and investors (Kim and Taylor, 2014). In
addition to the latter, according to previous studies in the field, accounting and financial
reports are not able to properly reflect a firm’s intangible assets, jeopardizing their
usefulness for external investors (Tasker, 1998;Gelb, 2002;Kim and Taylor, 2014). Firms
with in possession of superior intangible assets tend to improve their voluntary and non-
financial disclosure, in order to fill the information gap generated by generally accepted
accounting principles-based disclosure (Caputo et al., 2016). Following Gelb (2002),such
companies consider accounting and financial disclosure a weak instrument to
communicate with their investors, thus opting to additionally implement voluntary
non-financial disclosure.
From a managerial perspective, the definition of IC includes all non-monetary immaterial
assets capable of generating benefits for the company (Keong Choong, 2008;Lentju
senkova
and Lapina, 2016;Ginesti et al., 2018). Academics agree on the importance of IC disclosure,
regarded as an essential element to complement mandatory financial disclosure (Bukh et al.,
2005;Wang et al., 2019). To such end, Bhasin and Shaikh (2011), argue that IC disclosure
conveys precious information that helps investors better comprehend and evaluate a
company.
With regard to the limits of IC representation in financial disclosure, it is necessary to
stress the recent development of IR as a tool to provide a more articulated vision of
intangibles. As a matter of fact, the advent of IR, devised by the International Integrated
Reporting Council (IIRC), offers a new way for companies to provide IC-related
information (Ahmed Haji and Anifowose, 2017;Feng et al., 2017;Vitolla et al., 2018;
JIC
21,6
986
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