Intellectual capital disclosure and market capitalization
| Published date | 01 September 2005 |
| Pages | 397-416 |
| DOI | https://doi.org/10.1108/14691930510611139 |
| Date | 01 September 2005 |
| Author | Mohammad J. Abdolmohammadi |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Intellectual capital disclosure and
market capitalization
Mohammad J. Abdolmohammadi
Bentley College, Waltham, Massachusetts, USA
Abstract
Purpose – This paper aims to develop a descriptive framework of the components of intellectual
capital in annual reports. The paper also aims to investigate the effects of disclosure of intellectual
capital on market capitalization.
Design/methodology/approach – The components of intellectual capital are used as units of
analysis to content analyze the annual reports of a sample of 58 Fortune 500 companies over the
five-year period of 1993-1997.
Findings – The frequency of disclosure of information about brand and proprietary processes has
increased over the study period. The results also point to significant differences between the “new”
and “old” economy sectors with respect to intellectual capital categories of brand and partnerships
where there is more disclosure by “old” economy sector and information technology and intellectual
property where there is more disclosure by the “new” economy sector. Finally, the results show a
highly significant effect for the intellectual capital disclosure on market capitalization.
Research limitations/implications – The time period is limited to the years before the market
excesses of the late 1990s and the market decline of the 2000s. The results have significant
implications for setting standards of disclosure of intellectual capital in annual reports.
Originality/value – This is the first paperto provide information on disclosure of intellectual capital
by fortune 500 companies in the USA. Its results have value for various users of annual reports who
seek to understand the ways in which companies disclose information about their intellectual capital.
Keywords Intellectualcapital, Intangible assets, Disclosure,Capitalization
Paper type Research paper
Introduction
This paper has three objectives. The first is to explore the intellectual capital (IC)
literature and develop a descriptive framework of categories and components of IC.
This framework is more detailed in nature than those found in the literature (e.g.
Brooking, 1996; Guthrie et al., 2003). The development of the detailed framework is
important because it can be helpful to companies in their efforts to disclose voluntary
information, particularly under the Securities and Exchange Commission’s (SEC’s)
(2000) Regulation FD. It also responds to calls by current and former (e.g. Wallman,
1995, 1996) SEC commissioners for disclosure of IC information in annual reports. The
recent collapse of Enron, a giant energy trading company whose annual reports did not
adequately disclose certain accounting information about special purpose
partnerships, has fueled public, congressional, and regulatory attention on
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/1469-1930.htm
The author would like thank sincerely Mahendra Gujarathi, Darryl Poole, Alan Reinstein,
Jay Thibodeau, Catherine Usoff, Arnie Wright and workshop participants at Bentley College and
the Northeast Regional Meeting of the American Accounting Association for helpful comments.
Lynette Greenlay, Robert Schadt and Jaimin Shah provided able research assistance, and Jeanne
DiBona helped with editing.
Intellectual
capital disclosure
397
Journal of Intellectual Capital
Vol. 6 No. 3, 2005
pp. 397-416
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930510611139
disclosure of various types of information, including IC (see Lev, 2002)[1]. Finally,
while the Financial Accounting Standards Board (FASB, 2003) has recently tabled a
project on developing guidance on disclosure of intangibles that it had placed on its
technical agenda in 2002 (FASB, 2002), there are calls in the financial press (e.g.
Wallison, 2003) for disclosure of IC by public companies, and for FASB’s attention to
the issue.
The second objective of this research is to use the components of the descriptive IC
framework to content analyze a sample of Fortune 500 companies’ annual reports for
evidence of IC disclosure. Specifically, the paper presents evidence on the nature and
extent of disclosure of IC in annual reports over a five-year period. The data collected
provide evidence of changes in disclosure over the study period. The data also present
evidence on whether there are differences between “new” and “old” economy sectors.
This is important because the literature (e.g. Sullivan, 2000, p. 111) suggests that the
importance of IC has increased over the years, particularly for the companies in the
“new” economy in the 1990s.
The final objective of this research is to investigate the effects of IC disclosure on
firms’ market capitalization over the five-year study period of 1993-1997. This period is
appropriate for analysis because it predates the market excesses of the late 1990s, and
it is not affected by the market declines of the post 2000 years[2]. While voluntary
disclosure has been shown to be positively correlated with stock valuation in the past
(e.g. Lang and Lundholm, 2000; Healy et al., 1999), the relationship between IC
disclosure and market capitalization has not specifically been investigated. This
objective is important to document the effects of IC disclosure on the stock market’s
valuation of the firm.
In the remainder of this paper, the background literature leading to the research
hypotheses is discussed. This is followed by a description of the research method used
and the results. The final section provides a summary and conclusions of the findings,
as well as the study limitations.
Background and hypotheses
Definition and framework
It is difficult to provide precise definitions for intangible assets and IC (Blair and
Wallman, 2001, p. 9; Lev, 2001a, p. 5). Thus, the definitions found in the literature are
decidedly broad. According to Stewart (1994a, p. 24), IC is composed of the intangible
assets of knowledge, skill, and information systems. Based on a statement from Leif
Edvinsson, the then director of Intellectual Capital at Skandia AFS, Stewart (1994b,
p. 71) states that IC consists of two components of human capital and structural capital
where “Human capital captures the value of a company’s employees and their
knowledge, while structural capital is the information systems, knowledge of market
channels and customer relationships, and management focus”. However, a single
definition of IC adopted by one company may not generalize to other companies
because IC is closely tied to the industry and the specific company it serves (Upto n,
2001, p. 39).
Other definitions in the literature include Moore (1996, p. 36) who defines IC as
customer capital, innovation capital, and organizational capital. The Canadian
Imperial Bank of Commerce uses indices such as new ideas generated and
implemented, new products introduced, and the proportion of income from new
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