Drivers of voluntary intellectual capital disclosure in listed biotechnology companies
| Published date | 31 July 2007 |
| Date | 31 July 2007 |
| Pages | 517-537 |
| DOI | https://doi.org/10.1108/14691930710774894 |
| Author | Gregory White,Alina Lee,Greg Tower |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Drivers of voluntary intellectual
capital disclosure in listed
biotechnology companies
Gregory White, Alina Lee and Greg Tower
School of Accounting, Curtin Business School, Curtin University of Technology,
Perth, Australia
Abstract
Purpose – The paper seeks to investigate the key drivers and level of voluntary disclosures in
biotechnology company annual reports.
Design/methodology/approach – The paper uses an intellectual capital disclosure index score of
voluntary disclosures in a large sample of listed biotechnology companies, and tests the relationship
between voluntary disclosures of intangible firm value with traditional agency theory variables. The
relationships are tested statistically using correlation and multiple-regression analysis.
Findings – The key drivers of voluntary intellectual capital disclosures were the level of board
independence, firm age, level of leverage and firm size. Multiple regression analysis demonstrated that
board independence, leverage and size had a significant relationship with the level of voluntary
intellectual capital disclosure. Separate regression controlling for large-sized and small-sized firms
demonstrated that voluntary intellectual capital disclosure was only driven by board independence
and the levels of firm leverage in large firms. Small firms did not demonstrate this relationship.
Research limitations/implica tions – The implications of this re search are that smaller
biotechnology companies’ managers are not motivated by external debt-holder demands to make
voluntary disclosures about intangible firm value. In addition, large biotechnology companies, which
are better able to establish independent board oversight, appear more effective at driving voluntary
intellectual capital disclosures, perhaps in response to greater demand by owners. A limitation of this
study is its Australian context and that data is analysed only from 2005 financial year annual reports.
Originality/value – To the authors’ knowledge this is an original paper whose findings have
valuable implications for managing intellectual capital at the firm level. The paper clearly
demonstrates that disclosures about intangible firm value is being driven by traditional agency theory
variables and more contemporary corporate governance issues, and that small firms may be ignoring
the importance of disclosing more about their intellectual capital.
Keywords Intellectualcapital, Disclosure, Biotechnology,Australia
Paper type Research paper
Introduction
The aim of this research project is to investigate the nature and extent of voluntary
intellectual capital disclosures that are made by biotechnology companies. This is done
in the context of agency theory (Jensen and Meckling, 1976), and traditional agency
theory variables were used to investigate potential drivers of voluntary intellectual
capital disclosures by management of these firms.
Biotechnology companies are a fascinating example of firms with intangible value.
This intangible value can include:
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1469-1930.htm
The authors thank Bernard Marr and Stefano Zambon for their valuable comments and
contribution to the final draft of the manuscript.
Voluntary IC
disclosure
517
Journal of Intellectual Capital
Vol. 8 No. 3, 2007
pp. 517-537
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930710774894
.a skilled workforce;
.a highly collegial R&D oriented culture;
.public benevolent motivations and outcomes;
.registered intellectual property;
.proprietary techniques and IT applications; and
.highly innovative strategic alliances.
Intellectual capital reporting about the nature of a firm’s intangible assets is an
important way of bridging the information gap which may exist between managers
and firm owners (Eccles and Mavrinac, 1995). This information gap is very likely to
exist in young industries like the biotechnology industry, and is the inspiration for a
growing body of research on the importance of firm intellectual capital disclosures
(Mouritsen et al., 2004; Nielsen et al., 2006). There is a global trend and demand for
more useful and comprehensive non-financial information about the operating
activities of firms (Anderson and Epstein, 1996; Global Reporting Initiative, 2006).
Research has demonstrated that companies in industries like the biotechnology
industry need to bridge the information gap between managers and owners, as this can
be critical to future capital-raising potential (Aboody and Lev, 2000; Barth et al., 2001).
In the study of Aboody and Lev (2000), the importance of private information relating
to R&D intellectual capital was demonstrated since firm managers were shown to gain
because of their inside-information about this important knowledge commodity. More
than half of the listed Australian biotechnology firms today are actively engaged in
R&D-only activities. This could mean that there is potential within the Australian
biotechnology industry for a net transfer of wealth to be occurring in favour of firm
management over owners.
The intellectual capital statement, the meaning of its contents and its interpretation,
seems a valid academic intellectual pursuit to build and transfer information ab out
firm intangible value from managers to owners. The essential nature of an intellectu al
capital statement is that it attempts to disaggregate information that is not
traditionally disclosed in a firm’s balance sheet. A recent critical finding from the
intellectual capital literature is the importance of a “knowledge narrative” to explain
how knowledge is more than a token valuable, and how a knowledge management
strategy and investments in knowledge resources make a difference to firm success
(Mouritsen et al., 2005). It has been clearly demonstrated that non-financial disclosures
can positively impact upon management credibility, analysts’ understanding, and
investors’ patience over poor performance (Eccles and Mavrinac, 1995).
Firms’ failure to accept the importance of disclosing the value of their less tangible
assets has been associated with certain negative consequences, including:
.investors with small shareholdings having less access to information about a
company’s intangible assets than larger shareholders;
.opportunistic behaviour of firm managers if information about intangibles
remains private; and
.cost of capital may increase to non-disclosing firms because of risk assessment
by investors and banks, who can only value the company with information about
its tangible property (Marr et al., 2003).
JIC
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