The relation of intellectual capital disclosure strategies and market value in two political settings
| Published date | 19 April 2011 |
| Pages | 319-338 |
| Date | 19 April 2011 |
| DOI | https://doi.org/10.1108/14691931111123449 |
| Author | Indra Abeysekera |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
The relation of intellectual
capital disclosure strategies and
market value in two
political settings
Indra Abeysekera
School of Accounting and Finance, University of Wollongong,
Wollongong, Australia
Abstract
Purpose – The purpose of this paper is to investigate whether the political setting (civil war versus
temporary truce) in a country has an influence on firms’ current narrative, visual, and numerical
intellectual capital disclosure being included in the current market value of equity.
Design/methodology/approach – Using content analysis for data generation, this study identifies
narrative, visual, and numerical intellectual capital disclosure in firms’ annual reports. Financial data
were obtained from firms’ annual reports and the stock exchange. Fixed effect panel regression was
conducted separately for the civil war period and temporary truce period.
Findings – The paper finds that during the period entirely beset by civil war, the current market
value of equity includes net book value and current earnings only, and does not include narrative,
visual, or numerical intellectual capital disclosure. During the period of temporary truce, the current
market value of equity includes net book value, current earnings, and narrative disclosure, but not
visual or numerical intellectual capital disclosure.
Practical implications – The findings provide insights into the effectiveness of disclosure
strategies in politically unstable environments.
Originality/value – This study analyses the disclosure strategies in a civil war and temporary truce
context.
Keywords Intellectualcapital, Capitalization, Politicaleconomy, Narratives
Paper type Research paper
1. Introduction
This study investigated whether an unstable political setting in a country (i.e., civil war
environment, and temporary truce environment) has an influence on narrative, visual,
and numerical intellectual capital disclosure being included in the current market value
of equity. It explored the research question using the top 30 listed firms in Sri Lanka
from 1998 to 2004, a period dominated by the civil war which began in 1983. In late
2001 a formal ceasefire was declared, and in 2002 the Sri Lankan government entered
into a temporary truce with the rebel forces through a memorandum of agreement
mediated by the Norwegian government. The temporary truce period ended in 2005,
and the civil war resumed. This study examined the association between the current
market value of equity in firms and intellectual capital disclosure strategies (measured
as narrative, visual, and numerical disclosure) in two distinct unstable political periods:
The current issue and full text archive of this journal is available at
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The author is indebted to two anonymous referees and the Editor for their comments. The
responsibility for the contents of this paper nonetheless remains entirely that of the author.
IC disclosure
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Journal of Intellectual Capital
Vol. 12 No. 2, 2011
pp. 319-338
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691931111123449
the period entirely beset by civil war (1998 to 2000), and the temporary truce period
(2002-2004). The year 2001 was excluded from investigation, as it was during this year
that transition from civil war to temporary truce period took place.
The term “strategy” has diverse meanings and there are several definitions in the
literature. According to Porter (1996), strategy means deliberately choosing a different
set of activities to deliver a unique mix of value. Strategy is involved with the
competitive positions of firms, and with differentiating the competitive position of one
firm against another. This paper adopts Porter’s (1996) perspective of strategy, as each
disclosure type – narrative, visual, and numerical intell ectual capital disclosure –
informs investors about a firm’s competitive position in unique ways.
It was expected that during both periods, investors would not include intellectual
capital disclosed as future earnings in the current market value of equity of firms. Due
to greater stress resulting from political instability in the business environment, it was
expected that investors would have a short-term outlook, and determine the current
market value using historical financial information such as net book value and current
earnings. However, during the temporary truce period, it was hypothesised that
investors would become somewhat optimistic about future prospects of firms due to
less stress imposed by the political environment, but that investor confidence would be
less than optimum, as it was known to be only a temporary truce. As a result, this
study expected that in addition to the net book value and current earnings, investors
would include narrative intellectual capital disclosure only as future earnings in the
current market value of equity of firms. They would not include visual and numerical
intellectual capital disclosure, nor the information about future earnings resulting from
the interaction of the narrative, visual, and numerical intellectual capital disclosure.
The findings of this study add a quantitative dimension to a previous qualitative
examination of intellectual capital disclosure strategies in a stable political setting
(Mouritsen et al., 2001). Using case studies, Mouritsen et al. demonstrated that
narrative, visual, and numerical strategies of intellectual capital disclosure, and their
interaction, were able to inform investors about “value relevance” of resources
unaccounted for in financial statements.
This paper is organized as follows. Section 2 outlines the stock market and the Sri
Lankan political setting during the study period, while section 3 outlines the literature
and introduces the hypotheses. Section 4 describes data collection using content
analysis with annual reports as source documents, and provides details of the sample.
The final section analyses results and provides concluding remarks.
2. Colombo Stock Market and the Sri Lankan situation
The Colombo Stock Market is the only stock exchange in Sri Lanka, and is largely
dependent on foreign investors for liquidity. During the period of this study, the two
indicators of market liquidity, namely market capitalisation as a percentage of GDP
and trade volume as a percentage of market capitalisation, were the lowest in the South
Asian Region (CSE, 1998; World Bank, 2002; De Silva, 2006). The Colombo Stock
Exchange lists 237 firms with a US$6 billion total market capitalisation (Lanka
Newspapers, 2005; De Silva, 2006). The civil war that formally erupted in 1983 between
the rebel forces and the government continued for more than two decades. Although
the fighting between the rebel forces and the government was in the northeast region of
the country, the entire country felt the effect of the war, with sporadic and frequent
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