Forward Looking Intellectual Capital Disclosure

Journal Jou rnal of Intellectu al Capital Capital Forward-looking intellectual capital disclosure in IPOs: Implications for intellectual capital and integrated reporting Tatiana Garanina John Dumay

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To cite this document: Tatiana Garanina John Dumay , (2017)," Forward-looking intellectual capital disclosure in IPOs Implications for intellectual capital and integrated reporting ", Journal of Intellectual Capital, Vol. 18 Iss 1 pp. 128 - 148 Permanent link to this document: http://dx.doi.org/10.1108/JIC-05-2016-0054

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JIC 18,1

128

Forward-looking intellectual capital disclosure in IPOs Implications for intellectual capital and integrated reporting Tatiana Garanina

Received 13 May 2016 Revised 23 August 2016 Accepted 29 August 2016

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 information asymmetry associated with agency theory, the purpose of this paper is to investigate the extent to which managers and owners disclose IC in initial public offering (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 2002 to 2013. Parallels are drawn to integrated reporting ( o IR W ), which was developed after the global financial crisis (GFC) because of the perceived shortcomings of regulated forms of financial reporting. Design/methodology/approach – The authors apply a two-stage methodology, using content analysis of prospectuses to determine the extent of IC disclosure, then combining this data with market data using regression 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 postissue 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 o IR W . If IC and non-financial disclosures contained in an integrated report are forward-looking and reduce information asymmetry then o IR W may 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 in the long run. However, the authors caution that disclosing IC information to investors is not the panacea for increased post-IPO share performance. 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 o IR W . Keywords Agency theory, Intellectual capital, Content analysis, Integrated reporting, Intellectual capital disclosure, Information asymmetry Paper type Research paper

Journal of Intellectual Capital Vol. 18 No. 1, 2017 pp. 128-148 © Emerald Publishing Limited 1469-1930 DOI 10.1108/JIC-05-2016-0054

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 ( o IR W ) guidelines (International Integrated Reporting Council (IIRC), 2013, p. 2). In its current form, o IR W is seen as a direct response to the global financial crisis (GFC) because of the perceived shortcomimgs of regulated forms of financial reporting (Adams and 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.


Simnett, 2011; Abeysekera, 2013; Dumay et al., 2016). However, it is not possible to study the impact of IC and non-financial disclosures in o IR W because the International Integrated Reporting Council (IIRC) only released the final o IR W guidelines 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 o IR W is also a key issue (de Villiers et al., 2014). We argue that o IR W and 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 o IR W literature 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 o IR W to 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.

Intellectual capital disclosure

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2. Literature review The issue of voluntary IC and/or non-financial disclosure has received significant attention in the accounting literature with over 110 studies published from 1999 to 2013 (Dumay and Cai, 2014, p. 273). However, as Dumay and Cai (2014, p. 279) outline, their “analysis found many conflicting research findings”, suggesting that the literature does not deliver any conclusive and consistent evidence relating to the benefits of IC disclosure. Companies voluntarily disclose IC and non-financial information in a variety of reports, including annual, IC (see Mouritsen et al., 2003), sustainability (e.g. Global Reporting Initiative, 2013), corporate social responsibility (e.g. United Nations Global Compact, 2009) and integrated reports (IIRC, 2013). Moreover, Atkins et al. (2015) argue that social and environmental reporting is starting to merge with private financial reporting because of o IR W . Specifically, from an IC perspective, there has been renewed interest in disclosing information about “capitals” in the latest development in corporate reporting – o IR W , which promotes the “creation of value over the short, medium and long-term” (IIRC, 2013, p. 2). Additionally, o IR W essentially links IC and forward-looking information because it has “a combined emphasis on conciseness, strategic focus and future orientation, the connectivity of information and the capitals and their interdependencies” (IIRC, 2013, p. 2). This firmly connects to the argument that including forward-looking information about how a company develops its IC is linked to future value creation. Additionally, investors are interested in any information that can assist them in assessing the value of the firm for making informed investment choices (Swartz et al., 2006). While IC reporting has been around since its first appearance at Skandia in the 1990s (Skandia, 1994; Mouritsen et al., 2001), o IR W is a new reporting framework, having just issued its first guidleine in 2013 (IIRC, 2013). Some innovative reporting organisations and countries are pioneering IR practices. For example, South Africa is an o IR W pioneer by mandating o IR W for companies listed on the Johannesburg Stock Exchange (de Villiers et al., 2014). The GFC in 2008 fundamentally changed the world’s economy and increased awareness of business risks. As a result, there is increasing concern with how companies disclose risks and the impact on performance (Mia and Al-Mamun, 2011; Napoli, 2014), and voluntary disclosure is an option companies use to reduce these concerns (Ienciu, 2014). For example, Wang et al.’s (2013) study of Chinese companies (2005-2009) reveals that voluntary information disclosure in annual reports increases significantly up to 2008, and then there is a significant drop in 2009 after the GFC. Similarly, in Mia and Al-Mamun’s (2011) research, a sample of 48 Australian companies shows an insignificant increase in social disclosure during the GFC. Thus, it appears that during the GFC voluntary disclosures did not significantly increase. Mia and Al-Mamun’s (2011), also do not link the increase in IC disclosure directly to the GFC, and outline that during the GFC companies’ social activities decrease, but the increase in IC disclosure is insignificant. However, after the initial GFC shock companies might resort to disclosing more information voluntarily to decrease risk perceptions associated with their activities in comparison to the pre-GFC period (Wang et al., 2013). As a reporting innovation, disclosing IC information is a role model for future-oriented reporting (see Dumay and Tull, 2007). Several studies support the advantages of disclosing IC to external stakeholders, especially to investors based on the argument that the market rewards companies that disclose IC information over the long term with better market valuations (Marr, 2003). Similarly, o IR W is targeted at disclosing information to the providers of finacial capital such as investors and banks (IIRC, 2013). Thus, the purpose of IC disclosure is aligned with that of o IR W . From an agency theory perpective an argument exists for disclosing IC based on reducing information asymmetry (Healy and Palepu, 2001). According to An et al. (2011, p. 573) “information asymmetry is another key concept of agency theory” and “it arises


when one party in a particular agency setting (or relationship) has an information advantage (so-called private information) over another party”. Information asymmetry is assumed to exist in most business settings where the manager (the agent) possesses an information advantage over the owner (the principal) since the manager tends to be more directly involved in the daily operation of the company. Additionally, some studies in the IC literature argue that reducing IC information asymmetry leads to a lower wieghted average cost of capital (WACC) and higher market capitalisation, because IC information creates trustworthiness with stakeholders, promotes a long-term perspective, and has use as a marketing tool (Bismuth and Tojo, 2008). In this way, preparing a “good” integrated report not only offers better quality information to the investor community, but actually signals that the respective organisations are taking steps to meet the information needs and expectations of stakeholder groups (Atkins and Maroun, 2015). Thus, reducing IC information asymmetry aligns with the goals of a prospectus – to influence investors to purchase the shares on offer and become owners. To support the information asymmetry argument, Abdolmohammadi’s (2005) study of the annual reports of Fortune 500 companies found that IC disclosure has an effect on market valuations. Abdolmohammadi (2005) also applies a two-stage analysis – first, measuring IC disclosure using an IC index and then applying regression analysis to define the relationship between IC disclosure and market capitalisation. As a result, managers might disclose IC information voluntarily, seeking a lower WACC, more accurate analyst forecasts, higher liquidity in capital markets and credibility among investors (Garcı´a-Meca, 2005). Another example is a study by La Rosa and Liberatore (2014), who conclude in their research based on panel data from 77 biopharmaceutical and chemical companies in seven Western-European countries, that the cost of capital decreases when more IC is disclosed in reports. Thus, even though enhanced disclosure entails costs, Bushee and Noe (2000) outlines that increased disclosure may attract institutional investors who actively manage their portfolios, reducing share price volatility and hence systematic risk. Therefore, companies might be more inclined to disclose voluntarily as much information as possible about how they manage their material risks to investors to reduce their WACC and become more profitable (An et al., 2014; Farooq and Nielsen, 2014; La Rosa and Liberatore, 2014). Thus, how and why companies voluntarily disclose IC and non-financial information and its consequences continues to interest researchers and investors due to the thesis that reducing information asymmetry between managers and shareholders (investors) results in a lower cost of equity capital (Abeysekera, 2014; La Rosa and Liberatore, 2014; Leuz and Verrecchia, 2000). Similarly, the IIRC (2013) guidelines outline in several places that o IR W has cost implications such as “cost reduction” (p. 17), a “cost/benefit” consideration (p. 22), and “financial considerations, like cost containment” (p. 26). The guidelines also highlight that o IR W materially affect the ability of an organisation to create value over time. Additionally, the IIRC argues that o IR W creates efficiencies through “integrated thinking” and as it becomes “embedded into an organisation’s activities, the more naturally will the connectivity of information flow into management reporting, analysis and decisionmaking” (p. 2). Therefore, the IIRC alludes to a link between external disclosures and better performance, which inevitably helps contribute to reducing costs (and thus higher profits) and higher share prices. However, researchers involved in analysing voluntary disclosures question the relevance of reports for disclosure purposes as companies usually issue reports on a periodic (e.g. annual) basis (Dumay and Tull, 2007). The new o IR W guideline is no different, calling for a “periodic integrated report by an organisation about value creation over time and related communications regarding aspects of value creation” (IIRC, 2013, p. 33). However, periodic reports might not be useful or timely for decision making (see Dumay and Tull, 2007, p. 254) and, therefore, some researchers question the relevance of these reports to investors because


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investors have the resources to obtain the required information to make investment decisions ( Jenkins, 1994). Moreover, the research of Stent and Dowler (2015) shows that current reporting processes lack integration, oversight and attention to future uncertainties. Powerful investors would already know about any material risks because they rely on other mechanisms, such as investor briefings, press releases, the financial media, required disclosures to stock exchanges and their market research, to inform them (Dumay, 2014a, b, 2016). Additionally, should a company disclose material information (usually bad news) in a periodic report that significantly affects its share price, then additional information would be asked by the local regulator or stock exchange. Similarly, this would likely increase an investor’s risk assessment of the company and have the opposite effect of increasing the WACC to that company because the market cannot rely on the firm’s managers to disclose, in a timely fashion, information at a time when the market should be informed. While o IR W is currently widely discussed in the accounting literature investigating the long-term impact of o IR W is not possible now because most companies issuing an integrated report have only done so recently, and most likely not in accordance with the o IR W framework issued in 2013. However, as a proxy, one document that companies issue specifically to inform investors of risks and potential future returns comes in the form of the prospectus as part of a company’s IPO for shares. In this case, managers intend to show the company in the best possible light and to show how the company creates value to attract financial resources from the market (Aharony et al., 1993; Mather et al., 2000; Rashid et al., 2012). Therefore, prospectuses may contain more non-financial information to present the company’s prospects in the best way possible (Singh and van der Zahn, 2009; Cumby and Conrod, 2001). According to Beattie (1999), Cumby and Conrad (2001) and Rashid et al. (2012), prospectuses are a role model for company disclosure because companies are willing to report more information in their IPO prospectuses to prevent underpricing. Therefore prospectuses are useful for investigating how forward-looking disclosures help create longterm shareholder value. Similarly, from an IPO and information asymmetry perspective, Jenkinson and Ljungquist (2001) found that by increasing voluntary IC disclosure the ex ante uncertainty surrounding an IPO reduces. Additionally, research by Abeysekera (2014) based on listed firms in Sri Lanka shows that voluntary disclosure of IC attracts more capital from shareholders. Therefore, IC disclosures in prospectuses are arguably a way companies can reduce information asymmetry by disclosing future-oriented information to investors that possibly has financial benefits for the company (An et al., 2011). As for the level of voluntary disclosure, there are studies arguing that economic crises may influence IC disclosure practices (Rashid et al., 2012; Loughran and Ritter, 2004; Singh and Van der Zahn, 2009). One explanation is that the trust in financial data decreases during times of, and after, financial crises (Arnold, 2009; Barth and Landsman, 2010; Bui, 2011). Therefore, using prospectuses as a proxy for o IR W , and considering some time has passed since the GFC occurred there should be an adequate amount of data available to ask the question: RQ1. Has IC disclosure in IPO prospectuses changed since the GFC? Therefore, we hypothesise that because investors might lack trust in financial disclosures since the GFC, managers preparing prospectuses will increase the extent of IC disclosure. Thus, we state the hypothesis as follows: H0. There has been no increase in IC disclosure in prospectuses since the GFC. Additionally, because companies issue prospectuses to promote their shares among investors, examining prospectuses offers a unique opportunity to study the amount and type of voluntary information chosen to reduce information asymmetry for capital markets

and the impact it has on investment decisions. Accordingly, Aharony et al. (1993) and Mather et al. (2000) argue that management has an incentive to present the company in the best possible light to maximise share issue proceeds. Thus, analysing IPO prospectuses provides insight into which types of information companies disclose to entice investors to purchase their shares. Additionally, Ang and Brau (2002) claim that higher company transparency before the IPO decreases IPO float costs and Schrand and Verrecchia (2004) further find that greater disclosure frequency in the period prior to the IPO leads to a lower underpricing effect. Therefore to build on question one, we would like to find out whether IC disclosure in IPO prospectuses influences post-issue stock performance and how, if this influence exists, it has changed due to the GFC. Therefore, we formulate research question two being: ) T P ( 7 1 0 2 y r a u n a J 0 2 0 1 : 0 0 t A r e d l u o B o d a r o l o C f o y t i s r e v i n U y b d e d a o l n w o D

RQ2. Does the influence of IC disclosure in IPO prospectuses on post-issue stock prices differ before and after the GFC?” In this case we formulate the following hypothesis: H0. There has not been a higher influence of IC disclosure in prospectuses on post-issue stock performance before the GFC.

3. Data collection To answer the research questions we analyse information technology (IT) companies listed on the NASDAQ because companies in industries such as IT and healthcare are more willing to disclose IC than others (Dumay, 2012, p. 11). Additionally, according to Bukh et al. (2005), Cordazzo (2007) and Rimmel et al. (2009) there are differences in IC disclosure content in IPO prospectuses, varying from 10 to 40 per cent in different industries, with higher disclosure levels for IT and R&D companies where arguably IC plays a more important role in value creation. In this case, technology companies make up the research sample companies because “intellectual capital is regarded as being especially important in high-tech industries” (Rimmel et al., 2009, p. 4). Johnson et al. (2001) support a single industry analysis, arguing that this provides for a sound analysis uninfluenced by other industry based factors. Therefore, IT companies would be useful to examine because they already have an IC disclosure track record. Furthermore, we analyse IPO prospectuses because companies prepare these documents to attract and convince potential investors to buy their shares. The documents that regulate the disclosure of information when listing on the NASDAQ are Forms 1-F and 20-F so we use these for our content analysis. When applying content analysis, researchers have the choice of starting with an a priori framework, or to use an a posteriori approach utilising a predefined disclosure index (Krippendorff, 2013). To make the research comparable and consistent with previous research utilising IPO prospectuses we use an a posteriori IC disclosure index. To determine the timeframe for the sample the research applies the following logic: (1) As the observation window equals 500 days the company has to list before April 2013 ( +500 days ¼ August 2014). (2) To avoid the effects of dot.com bubble, listings we only include IPOs after 2002. (3) To take into account the GFC of 2008 (officially the crisis continued from December 2007 to June 2009), all IPOs are divided into three groups: those that were listed before, during, and after the GFC (with consideration of a 500-day observation window that brings us to some intentional gaps reflected below): •

companies listed before the crisis – listing before August 2006;


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•

•

134


Table I. Description of the sample by years of observation

companies listed during the crisis – listing from December 2007 to February 2008; and companies listed after crisis – listing from July 2009 to April 2013.

These time dimensions are in line with several recent GFC studies (Ahmed Haji and Mohd Ghazali, 2012; Claessens et al., 2010; Fidrmuc and Korhonen, 2010; Mia and Al-Mamun, 2011; Wang et al., 2013). Taking into account these constraints our search finds 154 technology firm prospectuses fitting the criteria. Table I presents information about the sample. For our research, we propose that the more information disclosed about IC in technology companies listed on NASDAQ (and the higher the IC index is) the more influence this will have on post-issue stock performance. The sample companies are from the NASDAQ stock exchange because the NASDAQ is famous as an exchange for technology companies and uses the classification “Technology companies[1]”. Price data analysed in the research is considered in several ways. First, we take very shortterm event study data that is taken for a two-day window, reflecting the buy-and-hold return for a very short period of time – the day of announcement (day 0) and the day immediately following trading day (day +1). This period shows the market response to the IPO immediately. Second, we take a longer period of +5 days after the IPO took place that reflects a short-term window for the buy-and-hold return. Third, we analyse the period of + 30 days after the IPO when the market gets more information about the company because of some price sensitive announcements that are made during this period. Fourth, we take two long-term windows – +250 days after the IPO and +500 days. This will allow us to understand whether the effect of disclosure information on IC is a long-term effect or it disappears in a long run. The previous literature shows that there is often a negative post-issue stock performance due to several reasons, including not being able to access the risks fairly, the measurement of the stock performance in a long run and inappropriate benchmark selection (Singh and Van der Zahn, 2009). According to the same research the IPO shares are bought only by optimistic investors and then when some additional information about a company appears the optimistic price falls to the mean market expectations. Due to a high level of information asymmetry between managers of a company and potential investors further difficulties in price valuation appear. Managers can open different information about the company, sometimes boosting the results in financial statements to attract potential investors. After the GFC not all investors trust the figures represented in financial statements because reality reveals that the figures provided are sometimes overly optimistic. Therefore, non-financial information is important from our point of view because it helps reduce information asymmetry, especially the gap left behind from the lack of trust in financial information. We use content analysis and regression analysis to answer the research questions. This research project applies them separately because each method produces different kinds of results. According to Krippendorff (2013, pp. 94-97) content analysis is separate from subsequent regression analyses and must be completed first to ensure data reliability. Once we establish the reliability of the content analysis data, we then utilise the data to “investigate the worlds of others” and “other phenomena”. Therefore, to present the methodology and results we present the content analysis results first and the regression analysis second (Dumay and Cai, 2015, pp. 143-145).

Characteristic Number of companies

2002

2003

2004

6

5

12

Year 2005 2006 12

13

2007

2009

2010

2011

2012

2013

3

5

29

26

28

15

4. Methodology 4.1 Content analysis methodology This section answers the first research question:


RQ1. Has IC disclosure in IPO prospectuses changed since the GFC? by testing the related hypothesis being: H0. There has been no increase in IC disclosure in prospectuses since the GFC. vs H1. There has been an increase in IC disclosure in prospectuses since the GFC. ) T P ( 7 1 0 2 y r a u n a J 0 2 0 1 : 0 0 t A r e d l u o B o d a r o l o C f o y t i s r e v i n U y b d e d a o l n w o D

Additionally, because there is no universally accepted IC index we base our research on previous research papers to ensure our results are comparable. The same approach for constructing the IC index was used in related research (Abeysekera, 2006; Beattie and Thomson, 2007; Guthrie and Petty, 2000; La Rosa and Liberatore, 2014; Singh and Van der Zahn, 2009). Thus we argue, this is a valid approach to developing an IC index. An IC disclosure index is a method for identifying and scoring particular information disclosures using either 0 for “no” or 1 for “yes” for each item. This categorical record is the basis for calculating a percentage disclosure index for each company by dividing the sum of disclosures by the denominator of total items measured. We specifically do not use a quality of IC disclosure measure, for example 0 for “no”, 1 for “yes, narrative” or 2 for “yes, quantitative” because of the continued debate in the IC literature about what is a quality disclosure. As Dumay and Cai (2015, p. 139) ask “What makes one form of disclosure different from another or more valuable than another and how does one justify attaching a higher value to the disclosure?” Therefore, we are first interested in whether companies disclose or not to answer our first research question, not in the quality of the disclosure. Additionally, Dumay and Cai (2015, p. 139) reveal that IC quality disclosure indexes have up to six different quality classifications and “ what merits a score of 0, 1, 2, 3, 4 or 5 is subjective and inconsistent”, which arguably “suggests that using different weighting scales will also give different results”. Therefore, we directly answer RQ1, to avoid subjective inconsistencies and to develop research that is comparable we only score IC disclosures as 0 for “no” or 1 for “yes”. As a result, we use a disclosure index based on the prior literature consisting of six higher and 81 lower IC categories (Abeysekera, 2006; Beattie and Thomson, 2007; Guthrie and Petty, 2000; Singh and Van der Zahn, 2009). Because this study examines voluntary disclosures and the disclosures required when listing on NASDAQ, it is necessary to remove two lower IC categories, being R&D expenses (20-F, item 5-c) and organisational structure of the firm (20-F, item 4-c part 1). Therefore, the eventual disclosure index consists of 79 items (Table II). 4.2 Regression analysis methodology As the second stage of our research we answer the following research question: RQ2. Does the influence of IC disclosure in IPO prospectuses on post-issue stock prices differ before and after the GFC? and test the resultant hypothesis: H0. There has not been a higher influence of IC disclosure in prospectuses on post-issue stock performance before the GFC. vs H1. There has been a higher influence of IC disclosure in prospectuses on post-issue stock performance after the GFC.

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The elements of IC index Human resource capital

136


Customer capital

IT capital

Processes capital

Table II. The structure of the IC disclosure index

The items included Employee breakdown by age Employee breakdown by seniority Employee breakdown by gender Employee breakdown by nationality Employee breakdown by department Employee breakdown by job function Employee breakdown by level of education Rate of employee turnover Comments on changes in the number of employees Comment on employee health and safety Employee absenteeism rate Comments on employee absentee rate Discussion of employee interviews Statements of policy on competency development Description of competency development programs and activities Education and training expenses Education and training expenses by number of employees Employee expenses by number of employees Recruitment policies of the firm Separate indication firm has a HRM department, division or function Job rotation opportunities Career opportunities Remuneration and incentive systems Pensions Insurance policies Statements of dependence on key personnel Revenues to employee Value added by employee Number of customers Sales breakdown by customer Annual sales per segment or product Average purchase size by customer Dependence on key customers Description of customer involvement in firm ’s operations Description of customer relations Education/training of customers Value added per customer or segment Absolute market share of the firm within its industry Relative market share (not expressed as a percentage) of the firm Market share breakdown by country, segment, or product Repurchases by customers Item category and item description Description of investments in information technology Reason(s) for investments in information technology Description of existing information technology systems Software assets held or developed by the firm Description of intellectual technology facilities Information technology expenses Information and communication within the company Efforts related to the working environment Working from home Internal sharing of knowledge and information External sharing of knowledge and information

The total amount of items included 28 items

14 items

6 items

9 items

(continued )

The elements of IC index

R&D capital


Strategic capital

The total amount of items included

The items included Measure of internal processing failures Measure of external processing failures Discussion of fringe benefits and company social programs Outline of environmental approvals, statements and policies Statements of policy, strategy and objectives of R&D activities Ratio of R&D expenses to sales R&D invested into basic research R&D invested into product design and development Details of future prospects regarding R&D Details of existing company patents Number of patents and licenses Information on pending patents Description of new production technology Statements of corporate quality performance Information about strategic alliances of the firm Objectives and reason for strategic alliances Comments on the effects of the strategic alliances Description of the network of suppliers and distributors Statements of image and brand Corporate culture statements Statements about best practises Utilisation of energy, raw materials and other input goods Investment in the environment Description of community involvement Information on corporate social responsibility and objective Description of employee contracts

137

8 items

14 items

Total

Table II.

79 items

The subsample of the companies that listed during the crisis is too small (three companies) for testing, so the analysis is conducted only for companies listed before (51 companies) and after the GFC (103 companies). The research applies a 500 trading day observation window. The following procedures measure various buy-and-hold returns. First, the raw buy-and-hold return for IPO j ( R j ) is computed as: T

R jT ¼

Y 

1þr jt 1

(1)

t ¼1

where T is the daily trading day holding period (for main observations 500 days); and R jt the return on IPO share j during the trading period t inclusive of cash dividends paid during the trading period t (Singh and Van der Zahn, 2009). The average buy-and-hold return for the trading period t ( R t ) is computed as: N

1 R t ¼ R (2) N j¼1 where N is the number of IPOs included in the portfolio. Consequently, the mean market-adjusted buy-and-hold return MBHAR ( ) for the daily trading period t (denoted as MBHAR T ) is calculated based on the formula:

X

X Y   Y N

M BHAR T ¼

1 N j¼1

T

T

1þr jt 

t ¼1

t ¼1


!

ð1 þr mt Þ

where r mt is the return on the market portfolio during the trading period t .

(3)

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MBHAR measures the compounded buy-and-hold returns an investor could earn from a portfolio of IPO stocks held till a given trading day T in excess of the buy-and-hold return the investor could have earned if holding the market portfolio for the same trading day period. For further multivariate regression analysis the dependent variable proxies denoted BHAR j1, BHAR j5, BHAR j30, BHAR j270, BHAR j500 are the 1, 5, 30, 250 and 500 trading days compounded market-adjusted buy-and-hold return for the IPO j. In order to test our hypotheses, five sets of data with different dependent variables were used as the bases for further statistical tests. This study uses multivariate regression analysis as the main statistical test of the study to answer the second research question. We posit the following regression model: BH AR Day ¼ l0 þ l1  I CDisc j þ l2  P 1 þ l3  P 2 þ l4  FSize j þ e j j

(4)

Day

where BHAR j is the 1st, 5th, 30th, 270th and 500th trading days compounded marketadjusted buy-and-hold return for the IPO j (thus we run the regression with five different dependent variables); ICDisc j the number of IC items disclosed voluntarily in the prospectus of IPOj divided by the total number of items from the 79-item index relevant to IPO j; P is equal to 0 if the IPO took place during the pre-crisis period and equal to 1 if the IPO took place after the GFC; FSize j the natural logarithm of companies’ assets as a control variable; ε j the error factors not included in the model. 5. Results 5.1 Results of content analysis The question of data reliability is important when conducting content analysis research (Dumay and Cai, 2015). It is necessary that content analysis coders understand what they interpret, how they should categorise the items and how to examine unequal units of analysis. In this case, two research students analysed the IPO prospectuses. We checked the data reliability using Krippendorff ’s α (Krippendorff, 2013, p. 278), a statistical measure of the agreement achieved when coding a set of units of analysis in terms of the values of a variable. Using an SPSS macro, we calculated an α coefficient equal to 0.83, which means that data coding reliability is high (see Krippendorff, 2013, p. 278) and justifies using the data in the subsequent regression model from a reliability perspective (Dumay and Cai, 2015). Additionally, by establishing the reliability of the content analysis we also develop internal validity because we seek to establish a causal relationship between IC disclosure and share prices (Yin, 2014). Table III presents the content analysis results based on the disclosure index. As the results show, on average, companies disclose about 24 per cent of the total information, which fits the IC disclosure index. From this result, we infer that companies disclose a significant amount of non-financial information and thus IC information is relevant as part of the process of influencing investors to buy the company’s shares, and might be relevant to post-issue stock performance. Prior to the GFC, the overall disclosure level does not have a particular trend. However, in 2012 and 2013 companies on average disclose more IC information than during all other years. Table IV presents the descriptive statistics for the disclosure index for the pre- and post-crisis periods. Table IV shows that the mean for the post-crisis period is much higher in comparison to the pre-crisis period. A one-way ANOVA analysis confirms the descriptive statistics results, and Table V presents the findings. As Table V shows, there is a statistically significant difference between group means with a 0.0002 ( p ) significance level, which is below the 0.05 threshold.

) % ( e g a r e v 3 a 1 e r 0 2 6 5 2 1 5 5 - 4 u 2 s 2 0 o 0 l c s 2 i d l l a r e v O


139

3 1 3 8 6 4 1 6 8 0 3 2 ) T P ( 7 1 0 2 y r a u n a J 0 2 0 1 : 0 0 t A r e d l u o B o d a r o l o C f o y t i s r e v i n U y b d e d a o l n w o D

2 d 1 0 o i 2 r e p s 1 1 i s 0 i 2 r c t s 0 o P 1 0 2

1 7 7 3 2 5 7 3 8 7 6 3 2 4 6 2 8 7 5 3 1 6 6 2

9 0 2 5 4 3 0 4 6 0 2 2 r a e Y

7 0 5 6 3 1 2 7 6 0 2 2

6 0 0 2 d o 5 i r e 0 p 0 2 s i s i 4 r c - 0 0 e r 2 P 3 0 0 2

0 4 4 2 1 4 5 2 2 6 5 2 0 4 5 2 4 6 5 3 1 4 5 2 9 4 5 2 0 5 3 1

2 0 2 6 6 2 1 4 3 0 2 2 ) ) % % ( ( l s l a m r e ) ) ) e t v i % % o l ( % ( a s ( ) s s t i m s % m ( m e ) m e p e t a i t t % i e s i c l ( t m i l e a s l e a x e c i t m a i t t d r t l i e u p i n t p a p i o a t a c i s c i a l e c p c r r e a r t e i s a i u s n m p s c g e o a o a e t l D a c c c m t s o s r & i u u T r t d h c I p R s r r r r r r r o f o f o f o f o f o f o f e e e e e e e g g g g g g g m a a a a a a a e r t e r e r e r e r e r e r e i v v v v v v v C I A A A A A A A

Table III. Average number of disclosure Index items disclosed (per cent)


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In general, the results are consistent with Wang et al. (2013) as there is a slight drop in IC disclosure during the year 2009, and then there is an increase after the GFC. In this case, we can reject H 0 and abductively infer (see Krippendorff, 2013, p. 38) that, based on the evidence, there is an increase in IC disclosure in prospectuses since the GFC. However, does this influence the post-issue stock performance?

140

5.2 Regression analysis results The proposed model (4) itself and all the variables are significant as detailed in Table VI. The explanatory power of the model is from 39 per cent to almost 43 per cent for different periods of analysis, inferring that disclosing IC information in IPO prospectuses explains post-issue stock performance up to 43 per cent. The model is significant for all periods of analysis according to the results of F -statistics. We can see that based on our analysis the IC disclosure influence on post-issue stock performance is positive for all observation windows – in the short term and long term. It means that generally for the whole sample of technology companies listed on NASDAQ the higher disclosure about IC positively influences the post-issue stock performance. To answer the research question relating to the GFC we analyse the dummy variable P (period). According to the regression analysis of the dummy variable we conclude that the period is a significant factor that influences the market return. The β coefficient attained for Pre-crisis period

Table IV. Descriptive statistics

Mean (%) SE Median (%) Mode (%) SD Sample variance

Table V. One-way ANOVA: pre-crisis and post-crisis period

Level Pre-crisis period Post-crisis period Source Between groups Within groups Total

14.936 0.988 16 13 6.765 45.800

n 51 103 Ss 1,359.781 4,394.012 5,753.793

Dependent variable BHAR j1

Table VI. Regression analysis results of the model (4) with different dependent variables

Post-crisis period Mean (%) SE Median (%) Mode (%) SD Sample variance

Mean 14.93617 21.42718 df 1 153 154

Dependent variable BHAR j5

Variance 45.80019 22.42357 ms 1,359.781 29.68927

21.427 0.468 21 21 4.733 22.424

f 45.80041

p 0.0002

Dependent Dependent Dependent 30 270 variable BHAR j variable BHAR j variable BHAR j500

Intercept 1.0506 (1.1363) 1.0223 (1.1421) 1.1636 (1.2527) Disclosure 0.0103 (2.9253)* 0.0198 (2.8321)* 0.0739 (2.7945)* 0.4415 (3.4023)** 0.2426 (3.4651)** 0.5043 (3.6936)** P 0.0151 (1.1365) 0.0465 (1.3529) 0.0447 (1.6274) FSize 2 0.3953 0.3892 0.4102 R Adj. R 2 0.3742 0.3761 0.3897 0.0000 0.0000 0.0000 F -stat Note: *,**Significant at 5 and 10 per cent levels, respectively

1.2628 (1.0268) 0.2793 (2.9931)* 0.3368 (4.0283)** 0.0058 (2.8585)** 0.3987 0.3719 0.0000

1.3820 (0.0451) 0.3223 (2.9123)* 0.8214 (3.7103)** 0.0034 (2.5396)** 0.4382 0.4104 0.0000


the dummy variable P is always positive (varying from 0.2426 to 0.8214 for the models with different dependent variables), which means that for companies listed after the GFC the IC disclosure is a more significant factor in comparison to the pre-crisis period. The finding can be explained by increased awareness among investors about IC in recent years and the lack of trust in financial data that decreases during the times of, and after, financial crises. Our dummy variable for firm size is significant on a long-term basis for the periods when the dependent variable is the return in 250 and 500 days. In a short-term run ( +1, +5 and +30 days after IPO) the size of the company that reveals information about IC has no influence. Previous studies did not take into consideration the difference between a shortterm and long-term run while evaluating market returns. But, in general, there are two groups of studies – where size is considered as a statistically significant factor (Bozzolan et al., 2003; Nurunnabi et al., 2011; Singh and Van der Zahn, 2009) and studies that proved that the size of the company affects disclosure on IC (Bukh et al., 2005; Wallace et al., 1994; Stanga, 1976). In our case we can conclude that, for bigger companies disclosure information on IC can bring additional value, especially in a long run. To analyse the relationship between the disclosure index and the post-issue stock performance in more detail the companies were divided into quartiles, according to level of disclosure (Table VII). As mentioned above, MBHAR T reports returns for the IPO portfolio at key intervals across the 500 trading day observation window. Figure 1 reports MBHAR T returns for ICDisc j quartiles. The findings show a consistent positive association between the level of IC disclosure in IPO prospectuses and market-adjusted buy-and-hold returns. As Figure 1

Quartile groups 1st quartile group 2nd quartile group 3d quartile group 4th quartile group

Number of companies

Level of disclosure (mean, %)

25 33 57 39

16 22 27 32


141

Table VII. The division of the companies into disclosure quartiles groups according to the level of IC disclosure

1 1st 0.8

0.6

2nd 3rd 4th sample

0.4

0.2

0

–0.2

1 5 0 0 0 0 5 0 5 0 5 0 5 0 5 0 5 0 5 0 R R 3 5 0 5 7 0 2 5 7 0 2 5 7 0 2 5 7 0 A A R R 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 H H A A R R R R R R R R R R R R R R R R B B H H A A A A A A A A A A A A A A A A H H H H H H H H H H H H H H H H M M B B B B B B B B B B B B B B B B B B M M M M M M M M M M M M M M M M M M

Figure 1. Interrelation between IC disclosure (with division of sample in four quartiles) and the post-issue stock performance

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shows, the highest return is for the fourth quartile companies – companies that disclosed more information on IC and the lowest return within 500 days is for the companies with the lowest level of IC information disclosure. This result confirms the findings of the model that IC disclosure has a positive effect on the post-issue stock performance. It is interesting, however, that this effect becomes visible (obvious) after 100 days (approximately three months) – before this period the fourth quartile (the companies that disclosed the highest level of IC) showed worse results when compared to other companies and the overall sample. This means that in a short-term run, disclosure of information about IC does not bring additional value to companies because in a short-term run the investors are still oriented on financial data and vivid financial results, while in a long run the companies from the fourth quartile perform better the others greatly. In this case, we can also conclude that if the managers are oriented to short-term results, disclosure of IC information will not bring much value, but if they are interested in creating long-term value, voluntary disclosure of IC will help them to show better financial results in comparison to other companies in the industry. The results also support the argument that financial and non-financial information reported in IPO prospectuses is captured in the initial IPO share price. Figure 1 shows that investors pay slightly higher for IPO shares of companies that disclose more than the average IC levels because the IPO prices at the time of the IPO are higher for companies of second, third and fourth quartiles in comparison to the companies in the first quartile. However, the difference in share prices is small and the short-term effect of disclosing information on IC in IPO prospectuses is not very significant. What is more important is that IC information has a long-term effect on share prices. The overall effect starts after 100 days (approximately three months) and increases at the period of about 400 days after the IPO. It means that from a value creation and value-based management perspective, those investors who are interested in the long-term effect should focus their investment strategy on companies that are eager to disclose more information on IC in their IPO prospectuses. 6. Conclusions and implications 6.1 Implications for practice This research contributes to the IC disclosure literature by investigating how the GFC may have influenced IC disclosure to reduce information asymmetry. By determining that IPO prospectuses continue to contain significant IC information we argue that prospectuses are a valuable source of IC information. We recommend to managers that higher level IC disclosure can help drive firm value by having a positive influence on future share prices especially in a long run. From an information asymmetry and agency theory perspective, this has an impact on the nature of the contracts managers have with the owners of the companies placing the IPOs (Deloitte, 2014; Hearn, 2013; Yablon and Hill, 2000). In the case of many IPO companies the senior managers who control the disclosure of IC information may also be substantial shareholders pre and post the IPO and their shareholdings are likely to increase upon the successful completion of an IPO. This situation tends to blur the delineation between managers (agents) and owners (principles) and subsequently the agency relationship. Considering that these managers will most likely need to wait a considerable amount of time before they can sell their shares due to vesting, it is in their best interest from a self-interested wealth maximisation perspective to ensure their shares increase in value over the long run. We see the disclosure of IC information as one way that managers can reduce information asymmetry to the market and to convince future investors that they have the long-term interests of the company in mind. However, we caution that disclosing IC information to investors is not the panacea for increased post-IPO share performance. Rather, we argue that managers who genuinely believe IC contributes to value creation are able to reduce IC information asymmetry to tell


that story through disclosures in their prospectuses. But at the same time, we argue that while disclosing IC indicates the likelihood of post-issue stock performance, managers must also back this up by putting IC into practice to ensure the long-term efficient performance of their companies. This finding also adds weight to the thesis that investors are interested in IC information and reward companies that respond to investor demands for relevant nonfinancial information through higher share prices. Similarly, the above implications are relevant for o IR W . However, the IIRC advocates issuing an integrated report on an annual basis, which might then relegate some of the information about IC and the other capitals as irrelevant from an investor perspective because by the time the integrated report is released the forward-looking information becomes backwards looking (see Dumay and Tull, 2007). Hence the challenge for managers is to ensure that the forward-looking information in an integrated report remains relevant for at least some time after releasing the report – the information must remain relevant to the providers of financial capital because, unlike a prospectus, an integrated report does not have an expiry date (Dumay, 2016). Additionally, even though information about IC and other capitals is included in an integrated report, it does not automatically translate into increased share prices, because managers still need to put their forward-looking proclamations into action and deliver the expected or above returns on invested financial capital. Reporting is not a panacea. 6.2 Implications for research In this paper, we analyse the influence of reducing information asymmetry through IC disclosure in IPO prospectuses on post-issue stock performance for the short and long run. There are different information sources where companies can disclose IC and traditionally researchers use annual, IC, sustainability, corporate social responsibility and integrated reports. In previous research, annual reports are often used as the main source of information about IC, which is now being openly critiqued (Dumay and Cai, 2014). On the contrary, we argue that the IPO prospectuses contain valuable IC information because they feature significant amounts of forward-looking non-financial information about the company’s development. Additionally, the main reason for issuing an IPO prospectus is to attract money from potential investors. Therefore, we argue that IPOs are a more relevant source of IC disclosure from the perspective of impacting share prices and potentially WACC. From our research we argue that the more managers reduce IC information asymmetry, the more potential there is for attracting financial resources from the market, especially in the long term. Additionally, we question the transparency and immediacy of disclosures and reports as most of the information released is not designed to influence share prices directly as these other disclosures and reports contain considerable amounts of backwards-looking information. Therefore, researchers are encouraged to look at more relevant and immediate ways that companies disclose information through the market. For example, in many markets, stock exchanges require companies to disclose material information to the market, especially if that information is potentially price sensitive (see Dumay and Tull, 2007). Therefore, we argue these kinds of material disclosures are more important than annual and/or other periodical reports such as o IR W , and warrant further research. Our results confirm that for technology companies, the more they reduce IC information asymmetry, the more likely they will have better post-issue stock performance results, especially from a long-term perspective, meaning that the forward-looking information disclosed in IPO prospectuses creates value for managers and their companies. Our results are also relevant to scholars investigating the potential impact of o IR W . As discussed above, if IC and non-financial disclosures contained in an integrated report are forward-looking, and have not been disclosed through other communication channels, there


143

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is the possibility that o IR W could have value relevance to a firm. However, should a firm only disclose backwards looking information about IC and the other capitals, then we argue that this will have little, if any, impact on firm value because the market will have already priced in this information (Dumay and Tull, 2007; Dumay, 2016). Thus scholars investigating o IR W need to assess whether the information about IC and the related capitals is forward-looking and whether it reveals previously secret or unknown information that has the potential to convince providers of financial capital that the firm is managing its risks and opportunities effectively. If researchers do not make the distinction between providing information (reporting) and disclosure then findings about o IR W and its impact may be erroneous (see Dumay, 2016). This paper also contributes to knowledge about the methodology applied. To analyse the IPO prospectuses, we apply a two-stage methodology: content analysis and regression analysis. This is required because the research needs to ensure the data from the content analysis is reliable before passing the data into the regression analysis (Krippendorff, 2013). To check the data reliability we calculated Krippendorff ’s α coefficient obtaining a 0.83 confirming data reliability so we could conduct further analysis. Additionally, by establishing the reliability of the content analysis we also develop internal validity because we seek to establish a causal relationship between IC disclosure and share prices (Yin, 2014). This two-stage approach to content analysis, where rigorous results from content analysis intertwine with other data “ from the worlds of others and other phenomenon”, is uncommon in the IC disclosure literature (Dumay and Cai, 2015, p. 144). As such, this paper presents a more rigorous approach to content analysis based IC disclosure studies that intertwine with market data. 6.3 Implications for policy As indicted earlier, there are few non-financial disclosures required in the IPOs we use in our analysis. However, the evidence shows how increases in IC disclosures lead to higher stock valuations, which signals that these companies are performing better over the long run, otherwise their stock price performance would be lower. This does not mean that just disclosing more IC causes higher valuation, but rather that managers are aware that IC drives their business models and subsequent market valuations. By managing their IC they may create economic value. The implication for policy is that if more companies are required to disclose IC related non-financial information, then this will create increased IC awareness and a better understanding of how to use IC to create economic value. There is no guarantee that creating IC awareness will eventually cause managers to create more profitable companies. However, we argue that our results show that managers who are aware of how IC is needed to create value and align this with the agency relationship are likely to reduce IC information asymmetry, which in turn attracts investors and ultimately is rewarded by higher share prices through higher returns. 6.4 Limitations The main limitation of this study is that, regardless of the rigour of applying our research methodology, all a posteriori approaches to content analysis utilising a predefined disclosure index can be criticised for using predetermined categories rather than serve the true purpose of content analysis, which is to “find the hidden meanings of texts” (Krippendorff, 2013, pp. 41-2). However, in this case, IPO prospectuses have a specific purpose, which is to influence investor decisions. Therefore, the meaning of an IPO prospectus is overt and not hidden. Using a disclosure index helps reveal known information categories. As such, hidden categories might not be exposed.

Additionally, this study does not use a quality IC disclosure measure because of the increased subjectivity that including such a measure would create. However, including a quality measure “might reveal new insights that may otherwise have gone unnoticed” (Dumay and Cai, 2015, p. 139). There is no standard quality measure recognised in the IC disclosure literature so this opens up an additional research opportunity to investigate the impact of using different quality IC disclosure measures on the same data set to understand whether they reveal significantly different results.

Note


1. The list of technology companies listed on NASDAQ can be found on: www.nasdaq.com/ screening/companies-by-industry.aspx?industry=Technology

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Further reading Garanina, T. and Dumay, J. (2014), “Intellectual capital disclosure impact in IPOs pre and post GFC: evidence from NASDAQ ”, in Rooney, J. and Murthy, V. (Eds), Proceedings of 11th International Conference on Intellectual Capital, Knowledge Management and Organisational Learning , Sydney.

Corresponding author Tatiana Garanina can be contacted at: [email protected]

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