Forward-looking intellectual capital disclosure in IPOs. Implications for intellectual capital and integrated reporting
| DOI | https://doi.org/10.1108/JIC-05-2016-0054 |
| Pages | 128-148 |
| Date | 09 January 2017 |
| Published date | 09 January 2017 |
| Author | Tatiana Garanina,John Dumay |
| Subject Matter | Information & knowledge management,Knowledge management,HR & organizational behaviour,Organizational structure/dynamics,Accounting & Finance,Accounting/accountancy,Behavioural accounting |
Forward-looking intellectual
capital disclosure in IPOs
Implications for intellectual capital and
integrated reporting
Tatiana Garanina
Graduate School of Management, St Petersburg University,
St Petersburg, Russia, and
John Dumay
Department of Accounting and Corporate Governance,
Macquarie University, Sydney, Australia
Abstract
Purpose –This study contributes to intellectual capital (IC) disclosure research. Focussing on reducing the
informationasymmetry associated with agencytheory, the purpose of this paperis to investigate the extent to
which managersand owners disclose IC in initial publicoffering (IPO) prospectuses.In particular, it examines
the influence on post-issue stock performance based on the IPOs of technology companies listing on the
NASDAQ from 2002to 2013. Parallels are drawn to integrated reporting( oIRW), which was developedafter
the globalfinancial crisis (GFC) becauseof the perceived shortcomingsof regulated forms of financialreporting.
Design/methodology/approach –The authors apply a two-stage methodology, using content analysis of
prospectuses to determinethe extentof IC disclosure, thencombining this datawith market data usingregression
analysis to determine the influence of IC disclosure in IPO prospectuses on post-issue stock performance.
Findings –According to the content analysis results, these IPO prospectuses contain significant amounts of
IC disclosure for the subsequent analysis. The authors find that after the GFC technology companies disclose
more IC information. The econometric analysis also reveals that IC disclosure has a higher influence on post-
issue stock performance after the GFC than before.
Research limitations/implications –The research shows how IPO prospectuses are a valid form of
disclosure to investigate the impact of reducing IC information asymmetry because they contain significant
amounts of forward-looking non-financial information about the company’s development. Additionally, the
results are relevant to discussions about the impact of oIR W. If IC and non-financial disclosures contained
in an integrated report are forward-looking and reduce information asymmetry then oIR Wmay have value
relevance to a firm.
Practical implications –The research confirms that more IC disclosure information in prospectuses may
positively influence companies’post-issue stock performance, especially inthe long run. However, the authors
cautionthat disclosing IC informationto investors is not the panaceafor increased post-IPO shareperformance.
Originality/value –This paper is novel because it shows the value relevance of IC disclosures to
reduce information asymmetry through its focus on prospectuses, which helps to understand of the potential
impact of oIR W.
Keywords Agency theory, Intellectual capital, Content analysis, Integrated reporting,
Intellectual capital disclosure, Information asymmetry
Paper type Research paper
1. Introduction
IC disclosure is widely debated in accounting literature and has become more topical
because of its inclusion, along with other related capitals, in the latest integrated reporting
(oIRW) guidelines (International Integrated Reporting Council (IIRC), 2013, p. 2). In its
current form, oIR Wis seen as a direct response to the global financial crisis (GFC) because
of the perceived shortcomimgs of regulated forms of financial reporting (Adams and
Journal of Intellectual Capital
Vol. 18 No. 1, 2017
pp. 128-148
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-05-2016-0054
Received 13 May 2016
Revised 23 August 2016
Accepted 29 August 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
Tatiana Garanina would like to acknowledge financial support from Russian Science Foundation grant
(project No. 15-18-30048) for conducting the empirical part of the research.
128
JIC
18,1
Simnett, 2011; Abeysekera, 2013; Dumay et al., 2016). However, it is not possible to study the
impact of IC and non-financial disclosures in oIR Wbecause the International Integrated
Reporting Council (IIRC) only released the final oIR Wguidelines in December 2013. Thus,
there is not a sufficient corpus of intgrated reports available over time to enable any
longitudinal studies examing the impact of IC and other non-financial diclosures on the
value creation and/or the price of a firm’s equities. At the same time the question of whether
financial markets react or reflect a value premium in any way based on oIR Wis also a key
issue (de Villiers et al., 2014). We argue that oIR Wand its association with value creation
has important implications for managing companies and how managers disclose
information to investors. Additionally, the findings contributes to the IC disclosure and
oIRWliterature from an information asymmetry and agency theory perspective.
In this paper, we argue that prospectuses are a better medium for disclosing IC because there
is a material difference between information in annual reports and prospectuses. As Cordazzo
(2007) reveals, companies provide investors with more voluntarily disclosed information devoted
to strategy, future options for development and risk in prospectuses than in annual reports.
Comparisons show that annual reports focus more on company historical data and performance
while prospectuses focus more on future perspectives (Branswijck and Everaert, 2011). While
both reports provide consolidated financial statements, the main difference between them is the
significant disclosure of non-financial information in prospectuses, that is absent from annual
reports. Additionally, prospectuses are timely and relevant disclosures for investors because
companies design them to influence imminent investment decisions. Therefore, researchers
cannot analyse prospectuses using the same reasoning as for annual reports.
Our paper is novel because it contributes to IC disclosure research by investigating the
extent of IC disclosure to reduce information asymmetry in initial public offering (IPO)
prospectuses and its influence on post-issue stock performance based on IPOs of technology
companies listing on the NASDAQ from 2002 to 2013. The research uses a two-stage content
analysis research approach (Krippendorff, 2013, p. 97; Dumay and Cai, 2014, p. 144).
First, we measure the extent of IC disclosure using an IC index to show that IPO
prospectuses contain enough IC to justify combining this data with market data. In the
second stage, we find that IC disclosure has a higher influence on post-issue stock
performance after the GFC than before the GFC. We use the GFC as a significant
comparison point because the IIRC developed oIR Wto overcome the shortcomings of
regulated financial reporting (Dumay et al., 2016). In order to find the relationship between
voluntarily disclosed information about IC and share prices (as a measure of company
value). Accordingly, we investigate two main research questions:
RQ1. Has IC disclosure in IPO prospectuses changed since the GFC?
RQ2. Does the influence of IC disclosure in IPO prospectuses on post-issue stock prices
differ before and after the GFC?
We conclude that managers who increase the level of IC disclosure in IPO prospectuses can
positively influence the firm value especially in the long term. However, at the same time, we
argue that while disclosing IC indicates the likelihood of better post-issue stock performance,
managers should put IC into practice to ensure the long-term efficiency of their companies.
We also argue that the more managers reduce IC information asymmetry, the greater potential
there is for attracting financial resources from potential investors, especially in the long run.
The paper is organised as follows. Section 2 presents a literature review concerning IC
disclosure and the main benefits companies obtain from doing so and discusses how the
GFC might influence IC disclosure. From these discussions, we develop hypotheses based on
IPO prospectuses as a data source. Sections 3 and 4 outline data collection and the research
methodology. The research results are in Section 5. To conclude, Section 6 discusses the
main implications for practice and research.
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capital
disclosure
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