Journal of Financial Reporting and Accounting

Intellectual Capital Reporting and Corporate Characteristics of

Public-Listed Companies in Malaysia
Foong Soon Yau Loo Sin Chun Rajeswary Balaraman
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Foong Soon Yau Loo Sin Chun Rajeswary Balaraman, (2009),"Intellectual Capital
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Journal of Financial Reporting and Accounting, Vol. 7 Iss 1 pp. 17 - 35
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J. Guthrie, R. Petty, K. Yongvanich, F. Ricceri, (2004),"Using content analysis as a
research method to inquire into intellectual capital reporting", Journal of Intellectual
Capital, Vol. 5 Iss 2 pp. 282-293 http://dx.doi.org/10.1108/14691930410533704
Richard Petty, James Guthrie, (2000),"Intellectual capital literature review:
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 Journal of Financial Reporting & Accounting Vol. 7 No. 1, 17-35, 2009

Intellectual Capital Reporting and

Corporate Characteristics of
Public-Listed Companies in Malaysia

Foong Soon Yau, Loo Sin Chun and Rajeswary Balaraman

Universiti Putra Malaysia
Email: syfoong@putra.upm.edu.my
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This study examines the extent and nature of voluntary intellectual capital
(IC) disclosure by public-listed companies in Malaysia and how the disclosure
may be explained by the economics or other rationale of corporate disclosure.
Those intangible assets that are required to be disclosed under the extant
accounting standards were specifically excluded from this study. The top 30
and the bottom 30 companies were selected from the list of top 100 largest
public-listed companies by market capitalization at the end of 2003. Content
analysis was used to measure the extent of voluntary IC disclosure in the 2003
annual reports of the selected companies. This study found that the voluntary
disclosure of IC information is generally not extensive among the public-
listed companies in Malaysia and narrative description of their IC attributes
is the most often adopted format. The findings suggest that the IC disclosure
behaviour of the sample companies may be explained based on both economic
and non-economic rationale. Implications of the findings are discussed.
Keywords: Intellectual capital, voluntary disclosure benefits, content analysis,
corporate characteristics.

Introduction

The advent of sophisticated network technologies, as well as the trade

liberalization movement, has significantly intensified competition and changed
the way businesses operate. Intellectual capital (IC) is gradually replacing the
traditional physical assets as the key driver or determinant of corporate future
performance and success. IC refers to intellectual resources such as knowledge,
applied experiences, organizational technology, customer relationships and
professional skills that could create and sustain competitive advantage for a

ISSN 1985-2517
© 2009 UiTM Financial Reporting Research Centre, Accounting Research Institute & Faculty
of Accountancy & UPENA, Universiti Teknologi MARA, Malaysia.

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 Journal of Financial Reporting & Accounting

company (CIMA, 2003). Unlike traditional tangible assets, IC, which cannot be
easily acquired and imitated by competitors, will underpin the growth and
success of businesses in the future. A company’s ability to create value is
increasingly dependent on its IC resources and less on its tangible assets, as
evidenced by the increasing discrepancy between the market value and the
book value of a company. Based on a study on US manufacturing and mining
companies, the tangible assets represented 62%, on average, of a company’s
market value in 1982, but the proportion had dropped to 38% by 1992 (Weatherly,
2003). The change was attributed to the emergence of the new knowledge-
based economy. Despite the increasing importance of IC, the current financial
reporting model, however, could not adequately capture the value of these
intellectual resources and present them in a concise and meaningful format in
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the conventional financial statements.

In view of the limitations of the existing financial reporting framework,
researchers are examining and finding new approaches of reporting decision
useful information such as IC-related information in corporate annual reports.
Disclosure of credible and useful information is crucial for efficient allocation of
economic resources in the capital market. Credible and relevant information
disclosure reduces information asymmetry between management and investors
and improves market efficiency. Greater extent of voluntary disclosure of relevant
corporate information implies greater market transparency and that attracts
global investments. The move toward IFRS convergence is similarly aiming at
reducing information risks to facilitate investment decision making.
As discretionary information disclosure is a form of corporate
communication made voluntary to external stakeholders, corporate management
would weigh the relative costs and benefits of disclosure before deciding on
the extent and nature of the information items to be disclosed. This study first
examines the extent and nature of voluntary intellectual capital (IC) disclosure
by public-listed companies in Malaysia and then explores how the disclosure
may be explained by the economics or other rationale of corporate disclosure
(see Verrecchia, 1990; Healy and Palepu, 2001). Intangible assets, such as
purchased goodwill, patents and copyrights, that are mandatory for disclosure
under the extant accounting standards are specifically excluded from this study.
The findings of this study may provide further insights to the existing IC
disclosure strategy and practices of public-listed companies in Malaysia, and
thereby, may aid investors and regulators in assessing the quality of IC
disclosure for investment decision purpose and the need for guidelines for
disclosure.

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 Intellectual Capital Reporting and Corporate Characteristics

Prior Research on Discretionary Information

Disclosure

Intellectual Capital Disclosure

Conservatism in current financial reporting model has impeded the reporting of

IC in the financial statements of companies and that, in turn, has deprived
investors of the relevant information for assessing the economic potentials of
companies. Such omission of what is perceived to be the key determinant of a
firm’s future success has prompted many researchers (Bontis, 1998; Kanan and
Aulbur, 2004) and even corporations (Edvisson, 1997) to examine corporate
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reporting of IC. The number of empirical studies on IC reporting is growing

since late 1990s. Findings of IC disclosure studies are reported for countries,
such as Australia (Guthrie and Petty, 2000), Canada (Bontis, 2003), Ireland
(Brennan, 2001), Italy (Bozzolan, Favotto and Ricceri, 2003), Malaysia (Goh and
Lim, 2004), UK (Roslender and Fincham, 2004) and the US (Belkaoui, 2003).
Pablos (2002) even explored the factors regarding the dynamics of pioneer firms
in Asia, Europe and the Middle East in measuring and reporting their IC.
Even though there is no unanimous definition of IC, numerous IC disclosure
studies adopted Sveiby’s (1997) framework of measuring IC and categorize IC
into three key components: structural (internal) capital, relational (external or
customer) capital and human capital. Despite the prior studies being conducted
in different countries, their results consistently suggest that IC disclosure in
those countries is still at its infancy stage, and a systematic framework for
reporting the three key components of IC is lacking. Brennan (2001) even
concluded that there was little interest in and demand for improvements in
measuring and accounting for IC in Ireland based on his study of IC disclosure
in Irish annual reports. Roslender and Fincham (2004) found only limited evidence
of IC as being a major focus of interest of management in the six companies
examined, and they concluded that IC was not firmly rooted within the UK
companies and among their management. Pablos (2002), on the other hand,
found that most of the firms that he examined from Asia, Europe and the Middle
East were showing an increasing interest in learning how pioneering firms in
Denmark and Sweden were measuring and reporting of their valuable intangible
resources, even though they might not be working on IC reporting issues at
that moment. He, therefore, highlighted the need to homogenize the fields of
knowledge management and IC, and to establish a solid theoretical base for
advancing IC reporting. Belkaoui (2003) provided empirical evidence of the
value relevance of IC disclosure by showing a positive and significant
relationship between IC reporting and financial performance of 81 US
multinational firms. He identified IC, in particular, as a sustainable source of
superior wealth creation.

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 Journal of Financial Reporting & Accounting

Benefits and Costs of Voluntary Corporate Disclosure

According to Verrecchia (1990), a manager’s decision to discretionary disclose

or withhold information is motivated in part by the market’s expectations and
effect of the information asymmetry on value of his/her firm’s security. In a
review of research on voluntary disclosure, Healy and Palepu (2001) summarize
six economic forces that affect managers’ disclosure decisions. The economic
considerations that may be of particular relevance to IC disclosure are the
impact of disclosure on cost of capital, stock valuation, proprietary costs and
management talent signaling. For firms with high growth opportunities and
when information asymmetry is high due to low quality mandatory disclosure,
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managers of these firms have high incentives to make more voluntary disclosure
to benefit from lower cost of capital (Core, 2001). High growth potential firms
are likely to seek for new capital financing in the near future, and increased
voluntary disclosure improves information transparency that reduces
information risk and hence, cost of capital financing. Healy, Hutton and Palepu
(1999) argue that reduction in information asymmetry between managers and
investors reduces information costs to investors and that, in turn, brings benefits
to the firm in terms of a lower cost of capital, higher valuation multiples, increased
stock liquidity and enhanced interest of institutional investors. Empirical studies
(Botosan, 1997; Lang and Lundholm, 1993) on firms issuing new capital indicate
significantly higher voluntary disclosures and lower cost of capital. Firms that
adopt stock compensation plans for their employees are also likely to provide
more disclosures to reduce the risk of under-valuation of their stocks. Aboogy
and Kasznik (2000) found that managers making disclosure decisions would
time the release of “good” and “bad” news to maximize their stock based
compensation. Managers of profitable companies are also motivated to disclose
more information to justify their rewards/positions and to reduce agency costs.
On the other hand, information disclosure, in addition to information gathering
costs, also incurs proprietary costs that could weaken firms’ competitive
positions (Verrecchia, 1983).
Management disclosure decision may not be entirely influenced by economic
considerations. According to the stakeholder theory (Ansoff, 1965), a major
objective of the firm is to attain the ability to balance the conflicting demands of
various stakeholders of the firm. Freeman (1983) opined that the establishment
of the corporate plan and strategy should consider the interests of the various
stakeholder groups whose support is necessary for the corporation to continue
to exist. Chakravarthy (1986) quoted a Fortune magazine survey that took into
account stakeholder satisfaction in the measure of corporate reputation, and
argued that a “necessary condition for excellence” was the need for a corporation
to gain support of its multiple stakeholders. Institutional theory (Meyer and
Rowan, 1977) is also used to explain the establishment of rationalized formal
structures or bureaucracies in organizations to enhance their legitimacy and

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 Intellectual Capital Reporting and Corporate Characteristics

survival prospects. Dimaggio and Powel (1983) attributed the homogeneity of

organizational forms and practices to three forms of isomorphism; coercive
isomorphism, normative isomorphism and mimetic isomorphism. Coercive
isomorphism relates to conformity arising from coercive forces, such as rules
and regulations. Normative isomorphism stems from needs for recognition in
professional networks, while mimetic isomorphism occurs normally in situation
where there is no formal guideline and under such uncertain environment, an
organization will resemble itself closely to some successful organizations or
industry leaders. Management voluntary disclosure policy could, therefore, be
also influenced by the need to satisfy their stakeholders and to enhance the
legitimacy and political survival prospects of their organizations.
In the social corporate responsibility disclosure literature, legitimacy or
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institutional theory is often used to rationalize the significantly higher disclosure

of social and environmental information among high profile industry companies
as compared to those disclosed by low profile industry companies (Hall, 2002).

Research Hypotheses

The theoretical framework for formulation of the hypotheses to be empirically

examined in this study is based on the economics of voluntary disclosure that
consider the benefits and costs of voluntary information disclosures.
Institutional theory predicts that large companies will be making higher
discretionary information disclosure than the small companies. Large companies
experience lower information unit cost and they have the resources to
disseminate more information to their stakeholders to attain higher organizational
transparency to reduce agency conflict, attract investor and enhance reputation
(Barako, Hancock and Izan, 2006). The relationship between corporate size and
extent of voluntary IC disclosure is examined in Hypothesis H1 as follows:
H1: There is a positive relationship between corporate size and extent of
voluntary IC disclosure.
Stakeholder theory suggests that the “politically sensitive” companies,
such as the Government-linked companies (GLCs), are likely to disclose more
information than those companies (non-GLCs) whose major shareholders are
from the private sector. Managers of GLCs are expected to take into consideration
the interests of their major stakeholders, consisting of government agencies
and other government-related organizations, for the necessary support to
continue to exist. Hence, greater disclosure of their initiatives in developing
intellectual resources in these GLCs will enhance stakeholder support and
satisfaction. Hence, hypothesis H2 is formulated as follows:
H2: Government-linked companies (GLCs) have more extensive IC disclosure
than non-government linked companies (non-GLCs).

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 Journal of Financial Reporting & Accounting

The economic rationale of information disclosure is that companies that

reduce information asymmetry between managers and investors through higher
voluntary information disclosure are expected to benefit from lower cost of
capital, higher stock valuation and improved stock liquidity. Therefore,
companies with good growth potentials are likely to require additional funding
to finance their business expansions and therefore, are expected to voluntarily
disclose more information than companies with little or no growth potentials.
Thus, the following hypothesis H3 is formulated.
H3: There is a positive relationship between corporate growth potential and
the extent of voluntary IC disclosure.
In addition to lowering cost of capital, managers of profitable companies
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are also motivated to disclose more information to reduce the risk of under-
valuation of their shares or stocks. This is particularly so for those companies
that reward or compensate their managers with stock options. Hypothesis H4
is, therefore, formulated as below:
H4: There is a positive relationship between corporate profitability and the
extent of voluntary IC disclosure.

Methodology

Sample and Data Collection

This study used content analysis to examine the extent of IC disclosure in

corporate annual reports. Several researchers have in the past used content
analysis to evaluate information disclosure trends in annual reports of companies
(see Guthrie and Petty, 2000, Brennan, 2001; Bontis, 2003; Bozzolan, Favotto
and Ricceri, 2003). In this study, the unit of analysis was a sentence and the
analysis was carried out based on the 2003 annual reports of 60 selected
companies. The sample comprised the 30 largest and the 30 smallest companies
from the list of the 100 largest public-listed companies (by market capitalization)
at the end of 2003. The decision to select the top 30 and the bottom 30 companies
was to increase the variation in corporate size among the sample companies.
The IC disclosures were classified into three categories: narrative (general)
description, numerical information disclosure and monetary information
disclosure. A scoring scheme that was based on the presence or absence of
each disclosure item and the degree of specificity with which the information
item was disclosed was used to determine the extent of IC disclosure. This
study adopted a four-way scoring scheme as follows:
• 0 point – Information item was absent in the annual report;
• 1 point – Information item was disclosed in narrative format;

22
 Intellectual Capital Reporting and Corporate Characteristics

• 2 points – Information item was disclosed in numerical format;

• 3 points – Information item was disclosed in monetary format.
Monetary or other quantitative disclosures were awarded more weights
(or points) because such disclosures are more specific and hence, are of higher
quality. Information specificity is associated with decision usefulness. In
addition, disclosures in monetary or other quantitative forms normally enhance
the credibility of the information disclosed and these disclosures are also
verifiable. According to Wiseman (1982), these quantitative measures, as
opposed to narrative statements, have been recommended as the preferred
disclosure format. Several prior information disclosure studies (Cormier, et al.,
2009; Cormier and Magnan, 2003; Guthrie et al., 2006; Wiseman, 1982) had rated
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monetary or quantitative disclosures differently from narrative disclosures and

their rating schemes are very similar to the one adopted in this study.
In order to maintain coding reliability, at least two researchers were involved
in coding IC disclosures based on the pre-determined coding system. Any
discrepancy in the coding would be resolved by reviewing of the relevant
disclosure in the annual report based on the location indicated in the coding
sheet. Only the final coding mutually agreed by the researchers would be used
for subsequent analysis.

Measurements of Variables

Corporate size was measured by the log of total sales of the company. Total
asset measure was not used because costs of assets that are acquired at different
times are generally not comparable due to the effect of price changes. Market
capitalization was not used as the proxy measure of size because of the volatility
of share prices.
Percentage of anticipated sales growth was the proxy measure of growth
potential. Higher anticipated sales growth suggests higher funding requirements
needed to finance both the short-term working capital and the long-term capital
assets. Percentage of anticipated sales was computed by calculating the
difference between 2004 sales and 2003 sales as a percentage of 2003 sales.
Several measures for profitability, such as operating profit margin, net
profit margin, returns on assets (ROA) and return on equity (ROE), could be
used. Since the hypothesis to be tested related to share valuation and the
investor’s perspective on voluntary IC disclosure, ROE was used to measure
corporate profitability.
As the industry in which a company operates could to a certain extent
affect the need to develop intellectual resources for sustained competitiveness,
the importance of developing and nurturing IC for long-term survival may vary
with industry sector. Hence, sector was used as a control variable in the analysis.

23
 Journal of Financial Reporting & Accounting

IC Attributes

Twenty one IC attributes similar to those in Guthrie and Petty (2000) were
examined in this study. There is no consensus of the exact attributes that
should represent each of the three IC components. In Huang et al. (2007), 46 IC-
related items were analyzed using factor analysis and the results indicate strong
consistency between their empirical groupings of IC items and the conventional
three-category classification of IC. The groupings of the twenty one IC attributes
examined in this study are to a large extent consistent with the item groupings
reported in Huang et al. (2007). Hence, the issue of possible differences in the
perceived attributes under each of the three IC categories due to different
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cultural settings does not arise. In order to facilitate comparison of the results
of this study with prior studies, the IC attributes examined in Guthrie and Petty
(2000) were adopted for the content analysis in this study. Table 1 presents the
211 IC attributes under the three IC components.

Table 1: Attributes of Intellectual Capital

IC components
Structural Capital Relational Capital Human Capital
Management Philosophy Brands Know-how
Corporate culture Customers Education
Management processes Customer loyalty Vocational qualification
Information process Company names Work related knowledge
Networking systems Distribution channels Work related competencies
Financial relations Business collaborations Entrepreneurial spirit
Favourable contracts
Licensing agreements
Franchising

Results and Discussion

The descriptive statistics of the entire sample and the sub-samples are presented
in Table 2. There were 18 GLCs in the sample, with 12 in the top 30 sample and
6 in the bottom 30 sample. The average annual sales and the average return on
equity (ROE) of the 60 sample companies were RM2,868.24 million and 14.56%,
respectively. The average anticipated sales growth was 18.02% for the entire
sample. Based on the scoring scheme adopted, the mean IC score of the entire
sample was 46.58, with a standard deviation of 63.96.
Table 3 shows the 4 sector groupings of the sixty selected companies and
the mean IC scores of the four sectors. Trading and services sectors accumulated
the highest IC score, followed closely by the Finance sector, and companies

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 Intellectual Capital Reporting and Corporate Characteristics

Table 2: Descriptive Statistics

Entire Sample Top 30 Bottom 30
No. of GLCs 18 12 6
Mean SD Mean SD Mean SD

Annual sales RM2,868.24m 3,531.50m RM5,000m 3,872.31m RM730m 1,028.62m

ROE 14.56% 17.04 19.76% 21.84 9.37% 7.59
% of sales 18.02% 59.97 6.69% 25.54 29.34% 75.41
growth
Overall IC 46.58 63.96 75.87 78.87 17.30 18.10
score
Structural 26.53 38.71 44.90 47.69 8.17 8.72
capital
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Relational 13.95 21.04 21.33 25.83 6.57 10.98

capital
Human capital 6.10 9.80 9.63 12.35 2.57 4.11

Table 3: Mean IC Score by Sector

Sector N Structural Relational Human Mean
Capital Capital Capital IC Score
Trading & Services 20 42.75 16.35 7.90 67.00
Finance 12 30.08 22.75 7.95 60.75
Manufacturing 13 19.23 13.08 4.54 36.85
Others 15 8.40 4.47 3.60 16.47
Overall 60 26.53 13.95 6.10 46.58

Table 4: Comparison of IC Disclosures

Countries Structural Relational Human
Capital Capital Capital
Australia (Guthrie and Petty, 2000) 30.0% 40.0% 30.0%
Italy (Bozzolan et al., 2003) 30.0% 49.0% 21.0%
Malaysia (Goh and Lim, 2004) 36.4% 41.4% 21.9%
Malaysia (This study) 57.0% 30.0% 13.0%

from the “others” sectors, which included plantation, construction, infrastructure

and property companies, provided the least IC disclosures.

Extent of Disclosure of Intellectual Capital

Discretionary IC disclosures of a company are principally found in either the

Chairman’s Statement or the Management’s Discussion and Analysis section

25
 Journal of Financial Reporting & Accounting

of its corporate annual report. Figure 1 shows the extent of reporting of the
three IC components. Almost 57% of the IC disclosures are related to the
structural capital component, while those related to the relational capital and
the human capital components accounted for 30% and 13% of the disclosures,
respectively. A large majority of the companies provided narrative descriptions
of their IC rather than presenting the information in specific quantitative
measures. In addition, there was no consistent or systematic framework used
by companies in presenting their IC attributes.

Human
C a p ita l
Capital
1 3 .0 %
13.0%
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Relational
Capital
30.0% Structural
Capital
57.0%

Figure 1: Extent of Intellectual Capital Disclosure

In comparison to the earlier IC disclosure studies (Guthrie and Petty, 2000;

Bozzolan et al., 2003; Goh and Lim, 2004), as summarized in Table 4, the IC
disclosure among sample companies in this study varies slightly in emphasis
from those of prior studies. This study found that attributes of the structural
capital component were most extensively disclosed, while the other three studies
(in Australia, Italy and Malaysia) which reported the relational capital attributes
were most extensively disclosed. Nevertheless, all the studies consistently
found that the human capital attributes were least reported.
The earlier study by Goh and Lim (2004) was based on IC disclosures of the
20 most profitable Malaysian public-listed companies in 2001, while this study
was based on the top 30 and the bottom 30 public-listed companies in 2003.
Guthrie and Petty (2000) examined only the 20 largest Australian listed companies
by market capitalization, while companies examined in Bozzolan et al. (2003)
consisted of only 30 non-financial, high tech traditional Italian listed companies.
In addition, the scoring system used in the earlier studies also differed from that
used in this study. This study used ‘sentence’ as the unit of analysis and
points were awarded based on presence or absence of each IC disclosure and
the degree of specificity with which the information item was disclosed. Guthrie
and Petty (2000) and Goh and Lim (2004) awarded one point for each IC
disclosure, irrespective of the disclosure format. Bozzolan et al. (2003), on the
other hand, gave one point for qualitative (narrative) disclosure and two points

26
 Intellectual Capital Reporting and Corporate Characteristics

for quantitative (numeric) disclosure. Trademarks, copyrights and patents were

included in the list of IC attributes examined in the three earlier studies, while
these three attributes, whose disclosures are mandatory under the current
financial reporting framework, were specifically excluded in this study.
The surge in the number of companies in Malaysia that had embarked on
business reengineering and restructuring exercises after the financial crisis in
1998 and the economic slow down in the early 2000s might be used to explain
the extensive disclosure of the structural capital attributes in this study. Most
of such structural capital disclosures were on “upgrade of ICT facilities through
more advanced or sophisticated networking systems to integrate internal
operations” and “adoption of new procedures/processes resulting from
business process re-engineering (BPR) efforts”.
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Disclosure of IC Attributes

As shown in Table 5, the three most reported structural capital attributes were
Management Process (32.13%), followed by Information Process (13.42%) and
Networking System (7.66%). All these attributes are associated with efforts to
enhance corporate information systems and procedures. For relational capital,
the three most reported attributes were Distribution Channel (9.84%), followed
by Customer (6.19%) and Business Collaboration (5.51%). The three most
reported attributes of human capital were Education (5.8%), followed by Work-
related Competency (3.79%) and Work-related Knowledge (2.9%).
Attributes that were rarely mentioned were Know-how (0.39%), Company
Name (0.25%), Financial Relation (0.21%) and Entrepreneurial Spirit (0.21%).
Attributes on Possession of Franchising Agreement and Vocational Qualification
were not reported at all in the 2003 annual reports of the sample companies.
IC attributes were rarely reported in numeric or monetary terms. Only about
6.8% and 2.3% of the IC scores were derived from numeric and monetary IC
disclosures, respectively. Table 6 shows the extent of numeric and monetary
disclosures in the 2003 annual reports of the sample companies.
Relational capital attribute, Distribution Channel, recorded the highest
number of numeric disclosures and the most common disclosure on this attribute
was in the form of “number of service outlets” or “number of distribution
taskforce”. Monetary disclosures were stated in the form of total expenditures
incurred on a particular attribute, such as network systems (structural capital
attribute) and education (human capital attribute). With only 9.1% of the IC
disclosures reported in quantitative terms and the balance being described in
often vague and general terms, the IC disclosures in 2003 may not be very
useful in helping investors to assess the future earnings potentials of these
listed corporations.

27
 Journal of Financial Reporting & Accounting

Table 5: Extent of Disclosure of IC Attributes

Category of IC Attribute IC Score Extent of
Intellectual Capital Disclosure (%)
Structural Management Philosophy2 62 2.2
Capital Corporate Culture 37 1.3
Management Process 898 32.2
Information Process 375 13.4
Network System 214 7.7
Financial Relation 6 0.2
Sub-total 1592 57.0
Relational Brands 120 4.3
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Capital Customer 173 6.2

Customer Loyalty 13 0.5
Company name (reputation) 7 0.3
Distribution Channel 275 9.8
Business Collaboration 154 5.5
Favourable Contracts 75 2.7
Licensing Agreement 20 0.7
Franchising Agreement 0 0
Sub-total 837 30.0
Human Know-how 11 0.4
Capital Education 162 5.8
Vocational Qualification 0 0
Work-related Knowledge 81 2.9
Work-related Competencies 106 3.7
Entrepreneurial Spirit 6 0.2
Sub-total 366 13.0
Total 2795 100.0

IC Disclosure and Corporate Characteristics

Table 7 summarizes the regression results of IC score on the independent and

control variables. The analyses consisted of regression run on the entire sample
and additional regression runs on the top 30 companies and the bottom 30
companies. Results based on the entire 60 companies show that the relationships
between corporate size and the total IC score and scores of the individual IC
components are all positive and highly significant. Hence, hypothesis, H1, is
supported. The results also show that GLCs are positively associated with
more extensive overall IC disclosures (p ≤ 0.05) and in particular, with disclosures
of structural capital attributes (p ≤ 0.05) and human capital attributes (p ≤ 0.01).
Hypothesis, H2, is supported with respect to overall IC disclosure and disclosures
of structural and human capital.

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 Intellectual Capital Reporting and Corporate Characteristics

Table 6: Extent of Numeric and Monetary IC Disclosures

Intellectual IC Attribute Numeric Monetary Quantitative
Capital Disclosure Disclosure Disclosure
Component (Sentence (Sentence Score
count) count) (% of total
score)
Structural Management Process 0 3 0.3
Capital Information Process 8 4 1.0
Network System 15 1 1.2
Sub-total 23 8 2.5
Relational Brands 5 0 0.4
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Capital Distribution Channel 34 1 2.5

Business Collaboration 9 0 0.6
Favourable Contracts 1 4 0.5
Licensing Agreement 0 2 0.2
Sub-total 49 7 4.2
Human Education 15 6 1.7
Capital Work-related Competencies 8 1 0.7
Sub-total 23 7 2.4
Total 95 22 9.1

Based on the entire sample, results of the analysis reject both hypotheses,
H3 and H4. However, the results that were based on the analyses of the sub-
samples reveal some interesting findings. Among the top 30 public-listed
companies, corporate size is the significant determinant of IC disclosure,
suggesting that the key determinant of voluntary disclosure among the largest
companies listed in Bursa Malaysia is less of economics but more of meeting
investors/stakeholders’ expectations of greater transparency and of conforming
to the expected role of good corporate management that develop and nurture
intellectual resources for future success. Anticipated sales growth and
profitability were not significant determinants of IC disclosure among the large
public-listed companies. The larger companies are “more visible” and “politically
more sensitive” and would use more extensive voluntary disclosure policy to
improve “investors’ relationship” and reduce “political costs” (Albert, Briones
and Cardoso, 2003). The large companies, together with the GLCs, are normally
on the radar screen of investment analysts and hence, the need to reduce
information asymmetry to benefit from reduced cost of capital is less critical as
compared to the smaller and “less well-known” companies.
The results based on the analysis of the bottom 30 companies are more
consistent with the economics of discretionary information disclosure. In this
small company sample, companies with high anticipated sales growth were

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Table 7: Results of Regression of IC Disclosure on Corporate Characteristics

Control & Entire Sample Top 30 Companies Bottom 30 Companies

Independent Dependent Variables Dependent Variables Dependent Variables
Variables IC score SC RC HC IC score SC RC HC IC score SC RC HC
Sector .003 .046 -.092 .033 -.064 .022 -.179 -.116 -.012 -.139 -.167 212
(.024) (.429) (-.720) (.291) (-.357) (.128) (-.909) (-.696) (-.734) (-.775) (-.940) (1.182)
LogSales .563*** .586*** .450*** .389*** .470** .477*** .437** .243 .120 .334* -.152 .228
(4.709) (5.111) (3.294) (3.235) (2.727) (2.870) (2.291) (1.509) (.699) (1.769) (-.813) (1.209)
ROE -.076 -.097 -.019 -.073 -.077 -.063 -.085 -.071 .334** .116 .476** -.049
(-.668) (-.885) (-.145) (-.640) (-.436) (-.370) (-.435) (-.429) (2.080) (.658) (2.739) (-.281)
GLC .223** .254** .030 .385*** .264 .310* .032 .423** -.106 -.014 -.220 .152

30
(1.993) (2.369) (.234) (3.424) (1.486) (1.806) (.162) (2.546) (-.718) (-.089) (-1.376) (.943)
% Sales .131 .091 .119 .242** .048 .028 -.070 .342** .546*** .481*** .303* .572***
Growth (1.185) (.852) (.942) (2.173) (.285) (.175) (-.377) (2.177) (3.593) (2.894) (1.842) (3.435)
Journal of Financial Reporting & Accounting

Adj R2 = .344 .395 .143 .337 .262 .312 .097 .354 .387 .265 .280 .264
F-Value = 7.201 8.710 2.964 6.999 3.061 3.632 1.625 4.173 4.659 3.092 3.251 3.076
p-value = .000 .000 .020 .000 .028 .014 .192 .007 .004 .027 .022 .028
IC score = total IC disclosure score; SC = structural capital disclosure score; RC = relational capital disclosure score; HC = human capital disclosure
score.
Standardized coefficient (t-statistics are shown in parentheses)
***, ** and * represent sig. at 0.01, 0.05 and 0.10 levels, respectively.
 Intellectual Capital Reporting and Corporate Characteristics

positively associated with the overall IC score and the individual IC components.
The relationships are highly significant (p ≤ 0.01), except for the marginal
significant relationship between % sales growth and relational capital component
((p ≤ 0.10). Information asymmetry problem is likely to be more serious for the
small companies due to little or absence of analysts’ tracking of their
performances. For these companies, more extensive IC disclosures could reduce
information asymmetry, mitigate share undervaluation and reduce cost of capital.
Companies with high anticipated sales growth are likely to need additional
capital to finance their business expansion, and lowering cost of capital through
more extensive voluntary disclosure is certainly beneficial to these companies.
Based on the small company sample, hypothesis H3, is supported. The more
profitable companies among the smaller-sized companies are also providing
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more IC disclosures as indicated by the significant relationships between ROE

and the overall IC score and the relational capital component. Managers of
these profitable companies are disclosing more IC information possibly to reduce
share undervaluation and improve liquidity of their shares. Hypothesis H4, is
supported based on the small company sample.

Conclusion

The findings of this study with regard to the extent of voluntary IC disclosure
among public-listed companies in Malaysia are consistent with those reported
in prior studies. The key findings are: the extent of IC disclosures is low and the
disclosures are mainly narrative descriptions with no systematic or consistent
reporting framework. Guthrie and Petty (2000) attributed the low proportion of
quantitative disclosure of IC information to companies which are still trying to
comprehend and to quantify values of these value-creating items. In this study,
the structural capital attributes were most extensively disclosed and the human
capital attributes were least reported. Both the economic and non-economic
rationale could be used to explain IC disclosure behaviour of the sample
companies. The top 30 companies, being “more visible” and “politically more
sensitive”, provide more extensive discretionary IC disclosure to meet investors/
stakeholders’ expectations of greater transparency and to conform to the
expected role of good corporate management that develop and nurture
intellectual resources for future success. The positive relationship between
corporate size and IC disclosure has been well-reported in earlier studies
(Bozzolan et al., 2003; Hackston and Milne, 1996; Hall, 2002), except that the
theoretical rationale for such relationship has not been well articulated. Due to
the more serious information asymmetry problem among the smaller companies
from the bottom 30 category, the more extensive voluntary IC disclosure by the
smaller-sized companies would reduce information asymmetry and “correct”
share under-valuation. The reduction of information asymmetry for the smaller

31
 Journal of Financial Reporting & Accounting

companies reduces their information risk that, in turn, lowers their cost of capital
to facilitate cheaper financing for their future business expansion.
Low level of awareness of the importance IC information, as well as the lack
of proper guidelines for its disclosure, might have contributed to the scarcity of
IC-related information in annual reports of public-listed companies. The
regulatory authorities, such as Bursa Malaysia and the Securities Commission,
may consider formulated guidelines or a framework for IC reporting by public-
listed companies to facilitate inter-firm comparison for more efficient valuation
of securities. Despite the importance of human capital development for future
competitiveness, human capital attributes were least disclosed among the sample
companies in this study. If the low level of human capital disclosure reflects the
lack of enthusiastic efforts in developing human resources in those public-
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listed companies, then regulatory intervention or incentives may be needed to

encourage Malaysian companies to invest more extensively in their human
resource development.

Endnotes
1
Three IC attributes from Guthrie and Petty’s 24 IC attributes were omitted
because they represented intangibles that required mandatory disclosure
under the extant accounting standard in Malaysia. The IC attributes omitted
were patents, copyrights and trademarks.
2
Management philosophy refers to the corporate thinking or way of approach
that guides business operations. An example of disclsoure on management
philosophy is “We recognised that the only way we can attract and retain
customers is by exceeding their expectations’. IOI Corporation Bhd, 2003, p.
30.

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