Strategic information disclosure, integrated reporting and the role of intellectual capital
| Pages | 125-143 |
| DOI | https://doi.org/10.1108/JIC-02-2018-0048 |
| Date | 07 December 2018 |
| Published date | 07 December 2018 |
| Author | Renato Camodeca,Alex Almici,Umberto Sagliaschi |
| Subject Matter | Organizational structure/dynamics,Accounting/accountancy,Accounting & Finance,Behavioural accounting,HR & organizational behaviour |
Strategic information disclosure,
integrated reporting and the role
of intellectual capital
Renato Camodeca and Alex Almici
Department of Economics and Management, Università degli Studi di Brescia,
Brescia, Italy, and
Umberto Sagliaschi
Quaestio Capital SGR S.p.A., Milan, Italy
Abstract
Purpose –The purpose of this paper is to use a theoretical and empirical model to investigate the adoption of
the integrated reporting (IR) framework as a strategic choice to signal intellectual capital (IC) to equity
investors, with specific reference to the pharmaceutical industry.
Design/methodology/approach –The choice of drafting an integrated report is modelled as a means for
managers to strategically disclose price-relevant information related to IC. The voluntary disclosure model
developed by Verrecchia (1983) is used, also introducing the role of financial analysts to derive a directly
reproducible empirical equation.
Findings –Theoretically, as IR requires managers to exert an effort in reporting activity, this work shows
that in equilibrium, only firms with sufficient IC have decided to adopt IR, resulting in rational investors’
willingness to pay more only for the forecasted earnings of integrated reporters. This theory is tested in the
pharmaceutical sector, where the modelling choice is probably more valid, with mixed results.
Research limitations/implications –When compliant with the International Integrated Reporting
Council’s(IIRC) standards, IR providesthe means to discloseIC in a perfectly verifiable way.Furthermore, since
the IIRC has only recently been established, the conclusions haveonly been tested on a limited data set.
Originality/value –This work connects the value relevance of IR to IC by adopting an equilibrium
approach, which, in turn, provides specific indications of how to build a consistent empirical test of the theory.
Keywords Value relevance, Integrated reporting, Intellectual capital, Equilibrium, Pharmaceutical sector,
Strategic information disclosure
Paper type Research paper
1. Introduction
The value relevance of intellectual capital (IC) and integrated reporting (IR) has been
extensively studied in the literature. With a few exceptions (e.g. Garanina and Dumay, 2017),
prior works have mostly considered them in isolation, either focussing on the impact
of IC disclosure on a firm’s value and financing cost or on the value relevance of IR.
The theoretical foundations underlying a manager’s choice to disclose IC and its relation to
IR have been mostly left untouched. IC is largely subject to voluntary disclosure, which this
paper considers a strategic communication decision to influence investors’perception of a
company[1], as discussed in Verrecchia’s (1983) and Dye’s (1985) seminal works.
If a manager is concerned with his or her company’s market value and discloses
“non-fundamental”information to offer its best representation, measuring the value
relevance of IR and IC disclosure could be more difficult than expected, as the estimation of
a standard linear regression model could be invalidated by self-selection (Heckman, 1978;
Leuz and Verrecchia, 2000).
Based on the previous considerations, this paper aims to establish a concrete link
between IC and IR and verify whether companies adopting the latter to disclose the former
have, ceteris paribus, higher valuations, given their expected profits (consensus earnings).
Combining different elements from the strategic accounting disclosure literature, this paper
attempts to answer the following three research questions, specifically referring to sectors
Journal of Intellectual Capital
Vol. 20 No. 1, 2019
pp. 125-143
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-02-2018-0048
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
125
The role of IC
such as the pharmaceutical industry, where IC could be considered the key value-relevant
information disclosed in an integrated report:
RQ1. (Theory): can IR be represented as an equilibrium phenomenon related to
voluntary IC disclosure?
RQ2. (Theory-empirics): what are the consequences of the empirical testing of IR-IC
value relevance?
RQ3. (Empirics): do the data support the conjecture that IR is a means to strategically
disclose IC price-relevant information? Are companies that adopt IR valued more,
ceteris paribus, given their short-term outlook (consensus earnings estimates)?
To provide concrete answers, this study builds an empirically testable general equilibrium
model with imperfect information. The interaction between managers and investors is
modelled as a persuasion game, where the former can withhold “unfavourable”information
related to IC, but any disclosure must be truthful (Stocken, 2013). The roles of equity
research firms and financial analysts are also introduced. This feature of the model relates
to the consistent use of consensus estimates to assess the value relevance of IR, as stock
market prices should reflect current unreported earnings rather than those already realised.
Hence, when measuring the value relevance of IR/IC disclosure in terms of higher pricing of
consensus earnings through simple linear regressions, it should also be considered whether
analysts already include IC in their forecasts. In this case, observing a further “pricing
effect”in regression coefficients could be less likely, especially if investors could be modelled
as risk-neutral or minimally risk-averse.
From a theoretical perspective, this study’s model provides formal support to traditional
arguments related to the value relevance of IR and IC disclosure, also explaining why only
some firms decide to adopt the IR framework (RQ1). The model presumes that managers
gain direct benefits from their companies’market value and that IC positively contributes to
the success of a company’s business. Furthermore, IC is viewed as managers’private
information, which can be credibly disclosed by adopting the IR framework. This, in turn,
requires managers to put more effort into administrative, reporting and compliance
activities; thus, only firms with sufficiently high IC decide to adopt the IR in equilibrium.
Consequently, firms without sufficient IC should be, ceteris paribus, valued identically, while
the others will be worth more, the higher their IC is (RQ1 and RQ3).
From an empirical perspective, the model suggests that managers’strategic behaviour
introduces a self-selection bias in standard linear regression models, which have been used
extensively in prior empirical studies. If not properly treated, such bias eventually
invalidates any statistical result, and this study’s theoretical framework provides a solution
consistent with the hypothesis to be tested (RQ2). Furthermore, explicitly introducing the
role of financial analysts in its model, this paper shows that their forecasts hardly consider
the effects of IR and IC disclosure. In this way, this paper provides additional support to
several empirical strategies, including this study’s(RQ2). In particular, this study suggests
that the market value of companies adopting IR should be more sensitive to analysts’
earnings forecasts, as a consequence of IC disclosure (RQ2–RQ3).
As a productive factor, IC is fundamental in knowledge-based industries (Hansson, 1997;
Ellis and Seng, 2015). Thus, the assumptions used to build this study’s equilibrium
model are more likely to occur in the pharmaceutical industry, where IC plays a key role in
successfully developing new drugs and obtaining approval from regulatory authorities
(e.g. Zucker et al., 1994; Boekestein, 2006; Kamath, 2008; Ghosh and Mondal, 2009; Kim and
Kumar, 2009). Therefore, this study tests its model on large pharmaceutical companies and
finds both positive and negative evidence regarding the value relevance of IR as a device to
strategically disclose IC (RQ3).
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