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In the new economy which is knowledge-based or knowledge economy; value creation become one of the crucial issues in the world and tends to be based on intangible rather than tangible assets. According to Al-Ali (2003), in the knowledge economy, companies' capital and resources consists of 80% of intangible assets and resources and 20% of tangibles. This high percentage reflects the importance of intellectual capital as companies' capital and resource in which has attracted researchers to study it.
In Malaysia, the development of human capital like empowerment of the human mentality and intellectual capacity of the nations is one of the targeted area or government focus under the Ninth Malaysia Plan.
Intellectual capital is defined as intangible assets which include technology, customer information, brand name, reputation and corporate culture that are invaluable to a firm's competitive power (Low and Kalafut, 2002),). Hence, from the definition, Low and Kalafut conclude that, intellectual capital consists of three components. The first component is tacit knowledge and innovativeness of the employees. The second component is infrastructure of human capital such as good working system, innovation and improvement processes of structural capital and the last components is external relationships of the firm such as customers' capital.
Intellectual capital has been regarded as a prominent source of competitive advantage of various organizations, which influence the level of innovativeness and creativity that lead to the increase of business performance and a country's economic growth.
Thus, to be competitive in the global market, a progressive developing Asian country like Malaysia has to effectively transfer from just being an input-driven to a knowledge-driven economy that focuses more on utilizing human knowledge and skills, rather than on productions of labor-intensive goods (Goh, 2005).
Intellectual capital disclosure has been receiving an increasing amount of attention among the companies around the world such as Australian companies, Italian companies and many more. However, in Malaysia not many companies reported on identifiable intangible assets. (Tan, 2000) found that only 0.2 percent of the total assets of the companies listed on the KLSE revealed intangible assets other than goodwill. He also noted that the number of companies reporting identifiable intangible assets was insignificant.
Since, nowadays there is a global trend and demand for more useful and comprehensive non-financial information about the operating activities of firms (Anderson and Epstein, 1996) hence, Malaysian companies should voluntarily disclosed about intellectual capital in their annual reports.
The disclosure of intellectual capital in Malaysia companies may be derived by these factors such as level of board independence, firm age, level of leverage and size of firm. Thus, this study is conducted to investigate the factors which are influencing the voluntary intellectual capital disclosure among Malaysian companies.
In general, this study seeks for the factors which are influencing and resulting to the voluntary intellectual capital disclosure among Malaysian companies. Besides that, this study also wants to know the current level of intellectual capital disclosure among Malaysian companies.
Main research questions are:
What is the current level of intellectual capital disclosure of Malaysian companies?
How much Malaysian companies disclosed information regarding the intellectual capital in their annual report?
Specifically, the following research questions would be addressed in this study:
What are the factors that determine voluntary intellectual capital disclosure among Malaysian companies?
How do these factors; level of board independence, firm age, level of leverage and size of firm influence voluntary intellectual capital disclosure among Malaysian companies?
1.4 Research Objectives
The general objective of this study is to gain useful insights on the development of intellectual capital disclosure among Malaysian listed companies. Specifically, this study tries to achieve the following three objectives:
To identify the current level of voluntary intellectual capital disclosure among Malaysian listed companies.
To identify the factors that influencing the intellectual capital disclosure among Malaysian listed companies.
To examine if there is any relationship between company size, level of board independence, level of leverage and firm age with the level of intellectual capital disclosure among Malaysian listed companies.
Significance of the Study
Contribution to knowledge: This study in general will reveal the situation of the current level of the intellectual capital disclosure among Malaysian listed companies. Furthermore, it can explain and gain understanding on the determinants or the factors which influencing the level of intellectual capital disclosure among the companies in Malaysia.
Contribution to policy maker/standard setters: This study will give a useful feedback to authorities or regulatory bodies. The useful feedback will assist them to develop the practical standard regarding the intellectual capital which can be applied by the whole companies in Malaysia especially. Furthermore, this study may also encourage the policy maker or standard setters to make it mandatory for Malaysian companies to disclose intellectual capital information in their annual reports.
Scope and Limitations of the Study
This study has been conducted with several limitations such as:
The study is conducted only among public listed companies in Malaysia. Hence, the result may not be generalized to other types of companies like small medium companies in Malaysia.
The sample size is one of the limitations of this study. There are only 50 companies are selected as the sample. Thus small sample will not comprehensively or accurately illustrate the real situation occur in Malaysia.
Another limitation is refers to content analysis. Analyzing the annual reports based on the specified list of intellectual capital(IC) which means related terms may not provide the whole picture as well as the IC disclosure practices.
This study only focus on Malaysia context, thus the result will not be generalized to other country.
This study only limit to 78-item disclosure index developed by Bukh et al. (2005).
The above- mentioned limitations have narrowed down the scope of the research and hopefully, the result of the research could be useful.
This chapter discusses and summarizes the literatures on all variables under study. The first part of this chapter discusses on literature on intellectual capital disclosure. The literatures are arranged according to dependent variable and independent variables. The dependent variable is the intellectual capital disclosure is discussed first. The rest of the chapter summarizes all the independent variables. There are four independent variables involve in the study. They are level of board independence, firm age, level of leverage and firm size.
Intellectual capital disclosure
According to (Marr et al., 2003), there are a few reasons for the companies to disclose intellectual capital information in their annual reports. They are; help organizations formulate their strategies, to assess strategy executions, to assist in diversification and expansion decisions, use as basis for compensations and to communicate measures to external stakeholders.
According to (PricewaterhouseCoopers, 1999), disclosure of intellectual capital will raise some benefits for the organizations. Among of the benefits are; it will enhances transparency in term of more disclose on intangible information rather than tangible information. Besides that, it will result in lower cost of capital and thus higher share price. Another benefits is by disclosing intellectual capital information, it will helps inspire a sense of faith among the workforce and other major stakeholders and lastly will supports long term vision of the organization.
The disclosure of intellectual capital will be analyzed using two theories. They are stakeholder theory and legitimacy theory. Under stakeholder theory, an organization's management is expected to take on activities expected by their stakeholders and to report on those activities to the stakeholders (Guthrie et al., 2004). This theory also suggests that all stakeholders have a right to be provided with information about how organizational activities impacts on them, even if they choose not to use the information, and even if they cannot directly play a constructive role in the survival of the organization (Deegan, 2000). According to (Donaldson and Preston, 1995) stakeholder theory argues that every legitimate person or group participating in the activities of a firm do so to obtain benefits for all stakeholders and companies as well. The stakeholder view maintains that firms have stakeholders rather than just shareholders to account for. The groups that have a "stake" in the firm include shareholders, employees, customers, suppliers, lenders, the government and society. Thus, under this theory, organizations should disclose intellectual capital information for the benefits of their stakeholders.
Another theory that supports the intellectual capital disclosure is legitimacy theory. This theory closely linked to stakeholder theory. Under this theory, it hypothesizes that organizations will ensure that they operate within the limits and standards of the societies they are in (Guthrie et al., 2004). By adopting a legitimacy theory, a company would voluntarily report on activities if management perceived that the particular activities were expected by the communities in which it operates (Deegan, 2000).Hence, this theory encourage the organization to voluntarily disclose intellectual capital information for the benefits of society.
Previous study has been conducted in investigating the key drivers or determinants of voluntary intellectual capital disclosure in biotechnology companies in Australia.
The study conducted by (Gregory White, Alina Lee and Greg Tower, 2007) found that the key drivers such as board independence, level of leverage and firm size had significant relationship with the level of voluntary intellectual capital disclosure among biotechnology companies in Australia.
Another study conducted by (Alexander Bruggen, 2009) examines the determinants which are influencing Australian firms in making decision to disclose intellectual capital in their annual reports. The result found that, industry type plays a key role as a determinant for the disclosure of intellectual property in annual reports. In addition, firm size is another determinant for intellectual disclosure of Australian firms. In contrast with earlier studies and theoretical predictions of voluntary disclosure, however, this study does not find any relationship between the level of information asymmetry with intellectual capital disclosure among the Australian firms.
Level of board independence
The monitoring ability of the board will depend on its individual members' ability to represent the shareholders by assessing firm activities and controlling the behavior of firm managers. The percentage of independent directors on the board and the size of the board have both been positively associated with measured levels of disclosure in past studies (Cravens and Wallace, 2001; Jaggi and Leung, 2004).
Bukh et al. (2005) identify that company age has often been used in previous studies as a proxy for risk. From this perspective it might be expected that younger companies with "less history" will be more reliant upon non-financial disclosures.
In other words, prospective information about earnings will be more useful than limited historical data for investors to value the firm (Amir and Lev, 1996). In Bukh's study above, they did not find that age was an explanatory factor for firm intellectual capital disclosures.
Level of leverage
Traditional agency theory also predicts that highly leveraged firms that have significant obligations under existing debt covenants incur monitoring costs to reach equilibrium between self-interested managers as agents for external debt-holders (Dhaliwal et al., 1982). The paper of Watts and Zimmerman (1986) further explains that the more external financing that is employed by an organization the more management will attempt to use different policies for their own benefit. While Singh and Van der Zahn (n.d.) find there is a significant positive correlation between oil and gas firm leverage and intellectual capital disclosure they also review two other papers with contrary results. A positive correlation between firm leverage and voluntary segment disclosures was found by Bradbury (1992). No relationship was found between the same two variables measured in New Zealand firms (Chow and Wong-Boren, 1987).
Large companies are often scrutinized by particular stakeholder groups, and therefore positive disclosure practices such as intellectual capital disclosure might be predicted if a firm is attempting to minimize political costs. The study conducted by (Gregory White, Alina Lee and Greg Tower, 2007) uses market capitalization as a proxy for political visibility. (Singh and Van der Zahn,n.d.) found that, work on Australian oil and gas industry companies has shown that size is a significant factor impacting voluntary intellectual capital disclosure.
However, for Danish IPO prospectuses size was not a determinant for intellectual capital disclosure (Bukh et al.,2005). Bukh and others identify an earlier study by Robb et al. (2001) that found prospective and historical non-financial disclosures in the annual reports were affected by size and international operations. Besides that, Bozzolan et al. (2003) investigate the annual reports of 30 nonfinancial companies listed in the Italian Stock Exchange in 2001. Adopting Guthrie and Petty's (2000) framework with some modifications, they conclude that company size and industry influence the amount of intellectual capital disclosure in Italian companies.
RESEARCH DESIGN AND METHODOLOGY
The first section of this chapter discusses the conceptual framework followed by hypotheses development, variables measurement and instrumentation data collection and data analysis.
Conceptual framework and hypotheses development
In a "knowledge-based" economy, the source of companies' economic value no longer depends on the production of material goods but on the creation and manipulation of intellectual capital (Guthrie et al., 2004). There are several reasons for firms to disclose information on intellectual capital. The reasons or factors affecting firm disclosure were identified through agency theory. Traditional accounting disclosure papers focus almost exclusively on formulating research hypotheses within an agency theory conceptual framework, with its overarching themes of ownership, control, agency, opportunism and cost. This is an entirely appropriate theoretical framework within which to develop the current set of hypotheses. Agency theory is probably the central theory to all of accounting theories. This theory explains that separation of ownership and control in companies creates a moral hazard where managers act as agents for shareholder owners, act for their own economic self-interest (Jensen and Meckling, 1976). Positive accounting theory (PAT) is the branch of accounting theory that attempts to explain the manager agent's behavior and accounting policy choice decisions, considering the economic consequences of particular decisions, with regard to incentive and reward schemes put in place to motivate and reward them (Deegan, 2005; Watts and Zimmerman, 1986; Zeff, 1978). In the changing global reporting environment today, managers should understand and address the important economic consequences of not making voluntary disclosures about the firm's intellectual capital base.
3.2 Hypotheses development
3.2.1 Level of board independence
(Cravens and Wallace, 2001; Jaggi and Leung, 2004) found that the percentage of independent directors on the board and the size of the board have both been positively associated with levels of voluntary disclosure. The study conducted by (Gregory White, Alina Lee and Greg Tower, 2007) found that level of board independence had significant relationship with the level of voluntary intellectual capital disclosure among biotechnology companies in Australia.
H1: There is a significant positive relationship between level of board independence and level of voluntary intellectual capital disclosure.
In Bukh's et.al (2005) found that, there is no significant relationship between firm age and firm intellectual capital disclosures. The study conducted by (Gregory White, Alina Lee and Greg Tower, 2007) found that there is no significant relationship between firm age with the level of voluntary intellectual capital disclosure among biotechnology companies in Australia.
H2: There is no significant relationship between firm age and level of voluntary intellectual capital disclosure.
Level of leverage
Singh and Van der Zahn (n.d.) found that, there is a significant positive correlation between oil and gas firm leverage and intellectual capital disclosure. A positive correlation between firm leverage and voluntary segment disclosures also was found by Bradbury (1992).
However, no relationship was found between the same two variables measured in New Zealand firms by (Chow and Wong-Boren, 1987).The study conducted by (Gregory White, Alina Lee and Greg Tower, 2007) found that level of leverage had significant relationship with the level of voluntary intellectual capital disclosure among biotechnology companies in Australia.
H3: There is a significant positive relationship between level of leverage and level of voluntary intellectual capital disclosure.
(Singh and Van der Zahn,n.d.) found that, Australian oil and gas industry companies has shown that size is a significant factor impacting voluntary intellectual capital disclosure. However, for Danish IPO prospectuses size was not a determinant for intellectual capital disclosure (Bukh et al.,2005). Bukh and others identify an earlier study by Robb et al. (2001) that found prospective and historical non-financial disclosures in the annual reports were affected by size and international operations. Besides that, Bozzolan et al. (2003) investigate the annual reports of 30 nonfinancial companies listed in the Italian Stock Exchange in 2001. Adopting Guthrie and Petty's (2000) framework with some modifications, they conclude that company size and industry influence the amount of intellectual capital disclosure in Italian companies. The study conducted by (Gregory White, Alina Lee and Greg Tower, 2007) found that firm size had significant relationship with the level of voluntary intellectual capital disclosure among biotechnology companies in Australia.
H4: There is a significant positive relationship between firm size and level of voluntary intellectual capital disclosure.
Level of Intellectual Capital Disclosure
Level of board independence
Level of leverage
Figure 3.1 Determinants of level intellectual capital disclosure
Variable measurement and instrumentation
Measurement for Intellectual Capital Disclosure (Dependent variable)
In order to measure intellectual capital disclosure (dependent variable), I decided to use a 78-item disclosure index developed by Bukh et al. (2005). The disclosure index is a method of scoring particular information disclosures using either 1 for "yes" or 0 for "no" for each item. This categorical record is then converted into a percentage index of disclosure for each company by dividing the sum of disclosures by the denominator of total items measured. In the publication by Bukh et al. (2005) intellectual capital disclosures are divided into six categories. They are employee, customer, information technology, processes, research and development and strategic statement which are scored from 27, 14, 5, 8, 9 and 15 individual items, respectively (total of 78 individual items).
Measurement for Independence, Age, Leverage and Size (Independent variables)
The factors which are going to be study in affecting intellectual capital disclosure among public listed firms in Malaysia country are level of board independence, firm age, level of firm leverage and firm size.
Independence - The independence of the board of directors of the public listed Malaysian companies was measured by the number of independent directors on the board in the 2009 financial year as a percentage of the total number of directors of the company. This data was available from the mandatory annual report disclosure required by the Malaysian standard or Malaysian regulations bodies such as MIA and FRS standard.
Age - The age of the companies were measured in months from the date of incorporation to the end of the 2009 financial year. Most of the Malaysian companies choose the date for yearly ended was 30 June 2009 or 31 December 2009.
Leverage - The level of external financing of the companies was measured by the ratio of total liabilities over total assets at the end of the 2009 financial year.
Size - There is no definitive measure of political visibility, but size has been used as a proxy for political visibility in a number of empirical studies, and measures of size which have been applied include total assets or total sales. Hence, I decided to measure the size of the company based on total asset of the company.
In this study, the population frame will include all the public listed companies in Kuala Lumpur Stock Exchange (KLSE). According to KLSE, there were 841 companies listed in the main board of KLSE as at 7 November 2009. Therefore, the population frame of this study will be based on all the listed 108 companies.
A 50 sample was selected from all the listed companies in main board in the Kuala Lumpur Stock Exchange. The sample was selected using simple random sampling from all the difference sectors including industrial sectors, service sectors, agricultural sectors and construction sectors. This technique assures that each of the companies in the population has an equal chance of being selected.
In this study, data will be collected through secondary data, where the data will be taken from the existing sources such as annual reports from the companies. While seeking for secondary data, it will save time and costs of acquiring information. These sources of secondary data provide a lot of information for research and problem solving (Sekaran, 2003). Using the internet Netscape Navigator to carry out the study, a survey of the companies' websites or home pages was conducted in order to know the companies total assets and their profitability. Also, the researcher has letters sent out to those companies where the websites could not be found directly through the internet. The letters were designed to find out whether the companies have websites on the internet and their websites addresses.
In order to carry out this study, I plan to use content analysis for the purpose to scrutinize the intellectual capital reporting practices of the public listed firms in Malaysia. Then, in order to test the relationship between dependent variable and independent variables, I will use correlation and the multiple-regression analysis.