A longitudinal examination of voluntary IC disclosure in Chinese
firms
Yi An1,*, Harun Harun2 and Umesh Sharma1
1
Department of Accounting, University of Waikato Management School; 2Faculty of Business,
Government and Law, University of Canberra
*
Corresponding Author:
Yi An
Department of Accounting
University of Waikato Management School
Private Bag 3105
Hamilton, New Zealand
Phone: 64-7-8384466-6579
Email ya13@waikato.ac.nz
1
A longitudinal examination of voluntary IC disclosure in Chinese firms
Abstract
This research examined the trend of voluntary intellectual capital (IC) disclosure in China
over a three-year period (2006, 2008 and 2009), using content analysis of corporate annual
reports of 100 top listed A-share Chinese companies. The results indicate that there was a
generally upward trend for the disclosure of IC items, categories and the overall IC over the
investigated period. Internal capital was the most highly reported IC category whereas
external capital was the least reported for year 2008 and 2009. For disclosure items,
“management processes” was the best performer during the time while “licensing agreements”
for 2006 and “research collaborations” for 2008 and 2009 were the poorest. It is believed that
this research should have a number of contributions to the existing literature as to IC
disclosure.
Introduction
The shift of our society from the industrial age to the information age has changed the means
for value creation. In the present knowledge economy, intellectual capital (IC) has been
increasingly recognized as the key value driver for corporate growth, productivity gains and
profitability (Tayles, Pike and Sofian, 2007; Li, Pike and Haniffa, 2008; Singh and Kansal,
2011). Owing to the value of IC, increasing companies have attached significant importance
to develop their IC resources. However, because most IC resources (e.g. management
processes, brands, and employee competences) are intangible in nature, they are very difficult
to be recognized in balance sheets under the current accounting framework. Therefore,
companies tend to report these resources voluntarily in their annual reports (or on websites).
China, as the largest developing country in the world, has experienced rapid economic
growth over the past several decades. During the time, IC has played a crucial role for the
development of the Chinese economy. A large number of Chinese companies invested
intensively in research and development, which has made many of them become knowledgeintensive companies with a strong IC base. Meanwhile, the Chinese capital markets
developed dramatically with increasing companies listed on both Shanghai and Shenzhen
2
stock exchanges. The listed companies compete intensively for funding opportunities in the
markets.
In 2001, China gained the entry to WTO (the World Trade Organization), a global
international organization which is devoted to break trade barriers between nations through
negotiated agreements. This entry has intensified competitions encountered by Chinese
companies from not only domestic, but also international competitors, in particular in recent
years since China got more involved in the WTO. Given the significance of IC for value
creation, many Chinese companies have used voluntary IC disclosure as a means to highlight
their excellence to the capital markets and consequently achieve a competitive edge in fundraising (Yi and Davey, 2010).
In this research, we investigated the status of voluntary IC disclosure by Chinese companies
from a longitudinal perspective (over a three-year period). Following most previous studies in
the area, content analysis of corporate annual reports was adopted as the primary research
method. The results indicate that there was a generally upward trend for the disclosure of IC
items, categories and the overall IC over the investigated period. Internal capital was the most
highly reported IC category whereas external capital was the poorest reported for year 2008
and 2009. For disclosure items, “management processes” was the best performer during the
time while “licensing agreements” for 2006 and “research collaborations” for 2008 and 2009
were the worst.
Our research has the following contributions to the existing literature with respect to IC
disclosure. To begin, it contributes to very limited research using a longitudinal approach
since most previous studies survey the level of IC reporting, only covering a single year
period (Campbell and Rahman, 2010; Wagiciengo and Belal, 2012). Furthermore, this
research contributes to limited research in the developing country context since prior research
often focuses on developed countries with a small number of studies concerned with
developing countries (e.g. Goh and Lim, 2004; Ensslin and De Carvalho, 2007; Singh and
Kansal, 2011). Thirdly, this research makes contributions to minimal literature in the Chinese
context. As the largest emerging economy in the world, there are only two studies in the area:
Xiao (2008) and Yi and Davey (2010).
Fourthly, this research employed a number of theoretical traditions to interpret the research
findings. As indicated by Abeysekera (2006), prior research often failed to provide theoretical
interpretations for their research findings. Fifthly, this research examined both the extent and
3
quality of IC disclosure whereas most previous studies only assessed the extent (or frequency)
of IC disclosures. Finally, our research used a relatively bigger sample size in comparison
with prior research. For example, Guthrie and Petty (2000) selected 20 largest listed
companies as sample while Brennan (2001) only chose 11 Irish firms as sample. It is believed
that bigger sample size could generate more general conclusions.
The structure of this paper is organized as follows. First, a number of theoretical traditions for
voluntary IC disclosure are introduced. A literature review regarding IC disclosure is
followed with an emphasis on longitudinal studies. Third, research methods and results are
described. The final section discusses the research results and draws some conclusions.
Theoretical traditions
A number of theories, including resource-based theory (e.g. Sonnier, 2008), agency theory
(e.g. Bozzolan, Favotto and Ricceri, 2003), stakeholder and legitimacy theory (e.g. Guthrie,
Petty and Ricceri, 2006), signalling theory (e.g. Singh and Van der Zahn, 2008), political
economy of accounting theory (e.g. Abeysekera and Guthrie, 2005), decision usefulness
theory (e.g. Whiting and Miller, 2008), institutional theory (e.g. Petty and Cuganesan, 2005),
and media agenda setting theory (e.g. Sujan and Abeysekera, 2007), have been used to
interpret IC disclosure practices in prior research. It is acknowledged that all these theories
have some tenets in relation to voluntary IC disclosure. However, the first four theories
(namely resource-based, agency, stakeholder and legitimacy theory) have been more
frequently employed in previous studies amongst others. As a matter of fact, the authors
believe that these four theories are more relevant to IC disclosure practices by organizations.
The relationship between each of the theories and voluntary IC disclosure is described as
follows.
Within the resource-based theory, resources are often defined as those tangible and intangible
assets owned or controlled by organizations, which are able to assist organizations achieve a
competitive edge over the competitors (Barney, Ketchen Jr and Wright, 2011; Abeysekera,
2006). According to Wernerfelt (1984, p. 172), examples of resources include “brand names,
in-house knowledge of technology, employment of skilled personnel, trade contacts,
machinery, efficient procedures, capital, etc.” In terms of the definition of “resources”, most
IC attributes, such as research and development, networking systems, corporate reputation,
licensing agreements, are critical resources for organizations. These resources, intangible in
nature, scarce and not substitutable, are expected to bring and sustain a competitive
4
advantage for firms. Because of the strategic importance of these knowledge resources, many
companies would like to report them in annual reports (or on websites) on a voluntary basis
so as to signal their superior quality, and consequently gain support from investors in the
stock markets.
Agency theory posits that information asymmetry is one key factor to generate agency
problems between the principal and the agent. For example, the management of a company
(the agent) may choose accounting policies that maximize the reported net profit in order to
obtain higher bonuses, whereas the shareholders (the principal) may be not able to fully
recognize the intention of the agent due to limited knowledge as to accounting (Subramaniam,
2006). Accounting information disclosure, in particular those voluntary disclosures (e.g. CSR
and IC), are therefore important means for companies to reduce information asymmetry
between shareholders and the management, and as a consequence to eliminate the related
agency problems and costs. More specifically, voluntary IC disclosure could decrease
opportunistic behaviour (e.g. insider trading) and lower cost of capital for organizations (Li et
al., 2008; Singh and Van der Zahn, 2008).
Pursuant to stakeholder theory, organizations should “attempt to meet multiple goals of a
wide range of stakeholders rather than merely those of shareholders” (An, Davey and
Eggleton, 2011, p. 574). It consists of two branches: an ethical (or moral) branch and a
positive (or managerial) branch. The ethical branch suggests that an organization should treat
all its stakeholders equally, and should manage its activities on the basis of all stakeholders’
benefits while the positive branch purports that organizations should manage the relationship
with various stakeholder groups in terms of significance or power of the stakeholder group.
Under the positive branch, the demands of those significant or powerful stakeholders (e.g.
those control over critical resources required by the organization) would be given priority.
Since most forms of IC are advantage-achieving resources for companies, the information
regarding IC is highly demanded by a variety of stakeholder groups for decision-making
(Sonnier, 2008; Yi and Davey, 2010). Hence, companies should discharge their
accountability through voluntary IC disclosure in order to reduce information asymmetry and
improve the relationship between various stakeholders and the management of the company,
which is the basis for them to survive and develop in a sustainable manner in society
Legitimacy theory suggests that there is a social contract between the organization and the
community (or society) where it operates. Within the contract, an organization should not
5
only comply with societal expectations and norms in operation, but also seek to ensure that its
operations are perceived to be consistent with the societal expectations and norms by various
stakeholders in society (Deegan and Samkin, 2009). Only in these circumstances, the
organization would be considered to be legitimate. According to Lindblom (1994),
information disclosure is an effective means for organizations to achieve legitimacy. Owing
to the significance of IC and the increasing demand of IC information by various stakeholders,
voluntary IC disclosure would be very helpful for companies, especially those with bigger
proportion of intangible assets, to legitimize their status in the current information age, and
further to gain access to capital and support from the financial markets (Petty and Cuganesan,
2005), or to deflect the attention of the community (or media) from the prevailing negative
influence of their operations (An et al., 2011; Deegan, 2006).
It is noted that all these theories are interrelated and jointly provide a number of motivations
for companies to disclose their IC voluntarily. In this paper, we use these four theories
combining the Chinese environment to interpret the research findings.
Literature review
Definition of IC
There is no general agreement with regard to the definition of IC. IC researchers have
developed various definitions. For instance, Stewart (1997) defined IC as intellectual material
(e.g. knowledge, information, intellectual property and experience) that can be used to create
wealth for organizations while Sharma, Hui and Tan (2007) defined it as knowledge, skills,
technologies applied to create a competitive advantage for organizations. Drawing on a
number of definitions from prior literature, Yi and Davey (2010) proposed a relatively
complete definition in that IC is regarded as intangible assets or knowledge resources that can
create value for firms, as well as achieve and maintain a competitive advantage for them.
As to what constitutes IC, there are also varied views ranging from two to five elements, for
instance, two elements (human capital and intellectual assets, see Sullivan, 1999), three
elements (internal structure, external structure and human competence, see Sveiby, 1997),
four elements (structure and human capital, thinking and non-thinking assets, see Roos, Roos,
Dragonetti and Edvinsson, 1997), and five elements (human capital, technological capital,
organizational capital, business capital, and social capital, see CIC, 2003).
6
Amongst the frameworks, the three-element model comprising internal structure, external
structure and human competence developed by Sveiby (1997) is more influential since it has
been employed by many researchers in their research (e.g. Guthrie and Petty, 2000; Brennan,
2001; Goh and Lim, 2004; Ensslin and De Carvalho, 2007; Yi and Davey, 2010; Whiting and
Woodcock, 2011). Moreover, the framework is considered to be very useful for the research
as to IC disclosure in a national context in the light of the previous studies.
For the purpose of this research, the three-element model was applied as a basis for the
construction of an IC coding framework, which was employed as an instrument to examine
the extent and quality of IC disclosure by Chinese firms on a longitudinal basis (refer to the
“research method” section for more details). In the following, the three elements are
described.
Firstly, internal structure, also called internal capital, refers to the knowledge embedded in
the organizational structure, processes, procedures, routines, systems and culture, which is
created by employees or brought in, but which stays in the organization when employees go
home after work (Pablos, 2002; Wong and Gardner, 2005). As for the second component,
external structure (the so-called external capital) refers to the knowledge embedded in the
relationships external to the organization, such as suppliers, customers, business partners, etc
(Bontis, 1998; Pablos, 2002). It includes such items as brand and reputation, customer
satisfaction, distribution channels, business or research collaborations, licensing agreements,
and so forth. The last component, namely employee competence (or human capital), refers to
the individual’s knowledge such as qualification, skills, values and experience within an
organization, which goes home with employees after work (Guthrie, Petty and Wells, 1999;
Pablos, 2002).
Prior literature
Research as to IC disclosure is growing in recent years. Most previous studies often
investigate the status of IC disclosure in a particular country or industrial sector over a oneyear period (e.g. Guthrie and Petty, 2000; Bozzolan et al., 2003; Wong and Gardner, 2005;
Ensslin and De Carvalho, 2007; Davey, Schneider and Davey, 2009; Singh and Kansal, 2011).
However, there are also a few researchers who used a longitudinal approach to examine the
trend of IC disclosure practices by organizations (e.g. Williams, 2001; Abeysekera and
7
Guthrie, 2005; Vandemaele, Vergauwen and Smits, 2005; Abeysekera, 2008; Campbell and
Rahman, 2010; Wagiciengo and Belal, 2012). The relevant literature is reviewed as follows.
Williams (2001) is an earlier study in the area in that it provides a longitudinal examination
of IC disclosure practices by 31 FTSE 100 listed companies from 1996 to 2000. Corporate
annual reports were the data source.
The study reveals that there was a significant
improvement for the quantity of IC disclosures by UK firms during the investigated period
albeit the disclosure practice was varied considerably between firms.
Abeysekera and Guthrie (2005) surveyed the trend of IC reporting by the top 30 Sri Lanka
listed companies on the Colombo Stock Exchange between the period 1998/1999 and
1999/2000, using content analysis of corporate annual reports. The findings indicate that
there was an increase for the frequency of IC reporting by the surveyed companies, and the
most reported IC category was external capital. The political economy of accounting theory
was used to interpret the findings. This research is a pioneering study that provides evidence
regarding voluntary IC disclosure in a developing country context.
Vandemaele et al. (2005) investigated the disclosure practice of IC in three European
countries (Netherland, Sweden and UK) over a period of three years (1998, 2000 and 2002),
using content analysis of 180 annual reports. The results show that the Swedish companies,
on average, performed the best in comparison with the Dutch and UK firms, and there was a
general upturn trend for the average amount of IC disclosures over the surveyed period
except for Sweden in which a downturn trend occurred between 2000 and 2002.
Similar to Vandemaele et al. (2005), Abeysekera (2008) is also a comparative and
longitudinal study that compared the disclosure practice of IC between a developing (Sri
Lanka) and a moderately developed country (Singapore) from 2000 to 2002. In line with
prior research, content analysis of corporate annual reports was the primary research method.
The findings indicate that there were mixed results for the trend of IC disclosure in both
countries, and human capital was the most reported IC category in Singapore while external
capital in Sri Lanka.
Campbell and Rahman (2010) is a special study in that the disclosure practice of a solo
British company (Marks & Spencer) was examined over a period of 31 years (1978-2008),
using the content analysis approach. This study reveals that there was a general upward trend
for the reporting of IC information, in particular for the reporting of relational (or external)
capital. It also finds that narrative reporting had increased while factual reporting has
8
decreased during the study period. The transition of our society from the “industrial age”
relying on physical assets to the “information age” depending on knowledge resources (or IC)
had been seen as a key driver for the change of IC reporting practices over the 31 years.
Wagiciengo and Belal (2012) is another research in a developing country context in that the
researchers studied the extent and nature of IC disclosure by top 20 South African companies
over a period of 5 years (2002-2006), using the content analysis method. The findings
indicate that there was an upward trend for the disclosure of IC information by South African
companies with certain firms disclosing significantly more than others. Inconsistent with the
previous studies, human capital (rather than external capital) was the most reported IC
category.
Based upon the above literature review, there have been three studies (Abeysekera and
Guthrie, 2005; Abeysekera, 2008; Wagiciengo and Belal, 2012) concerned with IC reporting
from a longitudinal perspective in the developing country context. As for china, the largest
developing country and one of the most dynamic economies in the world, no such research is
found in addition to two studies from a single year perspective: Xiao (2008) and Yi and
Davey (2010). Xiao examined the extent of IC disclosure by 50 top listed companies on the
Shanghai Stock Exchange using the 2007 annual reports while Yi and Davey surveyed both
the extent and quality of IC reporting by 49 dual-listed A and H share companies employing
the 2006 annual reports. Both studies observe that the current level of IC reporting in China
was quite low and Chinese companies did not attach significant importance to disclosing their
IC.
Because of the absence of a longitudinal study into IC reporting in the Chinese context, this
research attempts to address this gap through investigating the trend of IC reporting practices
by Chinese firm over a period of three years (2006, 2008 and 2009). Given that all the
previous studies suggest a general upward trend for IC reporting (in different countries) over
time, it is expected that this trend should be applicable to the Chinese environment as well.
Research method
Sample selection and data source
In this research, one-hundred top listed A-share Chinese companies were selected as sample.
The following reasons are accountable for the sample selection. Firstly, the sample
companies are the largest companies in China, and they are most likely to disclose more IC
9
information than those SMEs owing to the resource advantage and high visibility to the
public. Secondly, most sample companies are leaders and the best performers in their specific
industries, which represent the elite of the Chinese economy. Finally, since all the companies
are publicly listed companies, their annual reports (the data source) are easily obtained.
Two years’ annual reports (2008 and 2009) of sample companies were the primary data
source. In addition, a previous and similar study (Yi and Davey, 2010), using the 2006 annual
reports, was also included, which enables the longitudinal analysis over a three-year period
(2006, 2008 and 2009). At present, the annual report of a company has became a complicated
document, comprising both mandatory and voluntary information, in the forms of numbers,
narratives, photographs and graphs (Stanton and Stanton, 2002). Firms often employ it as a
primary vehicle to indicate what is important for them, and a communication medium to
discharge accountability to various stakeholders (Guthrie and Petty, 2000; Yi and Davey,
2010). For the purpose of this research, it is appropriate to use corporate annual reports as
data source.
Content analysis
Consistent with prior research, content analysis of corporate annual reports was the primary
research method for this research. Krippendorff (2004) defines content analysis as a research
technique to make replicable and valid inferences from texts within certain contexts.
According to Guthrie, Petty, Yongvanich and Ricceri (2004), content analysis, as a method
for data collection, often codifies both qualitative and quantitative information into predefined categories on the basis of selected criteria so as to derive patterns in the presentation
and disclosure of information. The method has gained popularity in disclosure studies over
the past several decades, in particular in the areas of CSR and IC (e.g. Guthrie and Parker,
1990; Unerman, 2000; Steenkamp and Northcott, 2007; Beck, Campbell and Shrives, 2010;
Singh and Kansal, 2011). Drawing on the previous studies, the method was applied to
examine the trend of IC disclosure by Chinese firms. In the following section, an IC coding
framework is developed as an instrument for content analysis.
IC coding framework
The IC coding framework is composed of two elements: IC items and quality criteria. Prior
research regarding IC disclosure (e.g. Guthrie and Petty, 2000; Striukova et al., 2008; Yi and
Davey, 2010) has provided a number of items under the three widely-accepted IC categories
10
(internal, external and human capital). Based on prior literature and consultation with a
number of Chinese IC experts, we identified a total of 20 IC items for this research as shown
in table 1, which was deemed to be applicable to the Chinese environment.
Table 1 IC items
Internal Capital
External Capital
Human Capital
1. Research & Development
2. Intellectual property
3. Management
philosophy/corporate culture
4. Management processes
5. Information/networking systems
6. Financial/investors relations
1. Brands/reputation
2. Suppliers
3. Customers
4. Customer satisfaction/loyalty
5. Marketing
6. Distribution channels
7. Business collaborations
8. Research collaborations
9. Licensing
agreements/franchising
agreements/favorable contracts
1. Employees
2. Qualifications
3. Education/training
4. Work-related
knowledge/competences
5. Entrepreneurial spirit
To assess the quality of IC disclosures, a five-point scale (0-4) was developed on the basis of
prior literature (Firer and Williams, 2005; Shareef and Davey, 2005). Table 2 demonstrates
the detailed criteria for the quality scale.
Table 2 Quality criteria for IC disclosures
Quantitative/monetary with
narrative (4)
Narrative (3)
Obscure (2)
Immaterial (1)
Non-disclosure (0)
The disclosure item is clearly defined in monetary or
numeric terms and narrative statements are made.
The disclosure item is discussed showing clearly its
influence on the company or its policies.
The item is reported in limited references or value
comments while discussing other topics and themes.
The company states that the disclosure item is
immaterial to the financial well-being and results of the
company.
The disclosure item does not appear in the annual report.
For instance, China Merchants Bank Co., Ltd. achieved the highest quality score of 4
(quantitative/monetary with narrative) for the reporting of its “distribution channels” (an
external capital item):
The Company provides products and services via multiple distribution channels. As
at 31 December 2009, in 65 cities across Mainland China, the Company had 52
branches, 685 sub-branches (including outlets)…a branch in Hong Kong; a branch
and a representative office in New York, the United States; a representative office in
London (China Merchants Bank Co., Ltd., 2009, p. 45).
11
As another example, China Merchants Bank obtained a score of 3 (narrative) for the
disclosure of “customer satisfaction”:
In addition, the company’s products and services have been widely recognized by our
clients who maintain a high level of satisfactions with our services (China Merchants
Bank Co., Ltd., 2009, p. 44).
If an item was disclosed more than once in the annual report of a company, a quality score
would be given on the basis of the aggregate of disclosures. This research used the
framework as an instrument to code annual reports of the sample companies. The results are
presented in the following section.
Results
In this research, we conducted longitudinal analysis of IC disclosure in terms of items,
categories and the over IC over the three years period. Firstly, the trend for the disclosure of
IC items is analyzed.
IC items
Table 3 demonstrates the disclosure performance (score) of each IC item over the three years.
We can find that there was a generally upward trend for the disclosure of IC items. Especially
from 2006 to 2008, the increase was often considerable. Between 2008 and 2009, the increase
was relatively steady. In 2006, six items (38%) achieved a disclosure score above 0.50
whereas almost all the items obtained a score over 0.50 in 2008 and 2009. Amongst the items,
“management processes” was the most highly reported item for all the three years. Yet the
poorest reported item was varied, “research collaborations” for both 2008 and 2009 while
“licensing agreements” for 2006. Table 4 shows the greatest and the poorest three reported
items for each of the three years.
As to the change of disclosure performance for individual items, two items, comprising
“management philosophy/corporate culture” and “marketing”, achieved the greatest
improvement with an increase of 0.56 in disclosure score between 2006 and 2009. In addition,
disclosures of “licensing agreements” and “financial/investors relations” were also
remarkably improved with an increase of 0.46 and 0.43 respectively. However, there were
two items, “brands/reputation” and “business collaborations”, following a downward trend
between 2008 and 2009, with a decrease of 0.06 and 0.05 respectively.
12
Table 3 Disclosure score of IC items
Items
Research & development
Intellectual property
Management philosophy / corporate
culture
Management processes
Information / networking systems
Financial/investors relations
Brands/reputation
Suppliers
Customers
Customer satisfaction / loyalty
Marketing
Distribution channels
Business collaborations
Research collaborations
Licensing agreements / franchising
agreements / favourable contracts
Employees
Qualifications
Education/training
Work-related knowledge/competences
Entrepreneurial spirit
2006
N/A
0.29
0.35
2008
0.83
0.38
0.78
2009
0.87
0.50
0.91
0.89
0.23
0.43
0.78
N/A
0.69
0.22
0.23
0.39
0.81
N/A
0.08
0.97
0.51
0.82
0.64
0.75
0.86
0.36
0.70
0.60
0.80
0.19
0.42
0.98
0.60
0.86
0.70
0.79
0.96
0.48
0.79
0.65
0.85
0.24
0.54
0.82
N/A
0.27
0.21
0.55
0.90
0.85
0.56
0.60
0.66
0.94
0.88
0.63
0.58
0.78
Note: The disclosure score is a normalized score from 0 to 1, combining both the extent and quality of
disclosures for each IC item. For the calculation of the score, please refer to Appendix for an example. N/A
indicates that the item was not available in Yi and Davey (2010) for the 2006 dataset.
Table 4 The greatest and poorest three reported items
Year
The greatest three
The poorest three
2006
2008
2009
“management processes”
“management processes”
“management processes”
“employees”
“employees”
“customers”
“business collaborations”
“customers”
“employees”
“licensing agreements”
“research collaborations”
“research collaborations”
“work-related knowledge”
“customers satisfaction/loyalty”
“customers satisfaction/loyalty”
“customer satisfaction”
“Intellectual property”
“Intellectual property”
IC categories and the overall IC
Figure 1 shows the disclosure performance of IC categories and the overall IC over the threeyear period. As with IC items, there was an upturn trend for the disclosure of each IC
category and the overall IC. We conducted One-way ANOVA for the overall IC disclosure.
The results indicates that the increase across the three years was significant (F = 7.214, p
13
= .002). A Turkey post-hoc test reveals that the increase between 2006 and 2008, and 2006
and 2009, was significant (p = .020 and p = .001 respectively). However, there was no
significant increase between 2008 and 2009 (p = .602).
Human capital was the most highly reported category for 2006 while internal capital was the
greatest for both 2008 and 2009. As for the poorest reported category, which was internal
capital for 2006, and external capital for 2008 and 2009. These finding are greatly
inconsistent with previous studies in that external capital was often the most frequently
reported item whereas internal capital was the least reported item (e.g. Abeysekera and
Guthrie, 2005; Guthrie et al., 2006; Oliveras, Gowthorpe, Kasperskaya and Perramon, 2008;
Whiting and Miller, 2008; Striukova et al., 2008; Campbell and Rahman, 2010).
Figure 1 Disclosure scores of IC categories and the overall IC
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2006
2008
2009
Internal capital
0.44
0.72
0.79
External capital
0.45
0.59
0.67
Human capital
0.46
0.71
0.76
Overall IC
0.45
0.66
0.73
Note: The disclosure score for each IC category (and the overall IC) represents a mean disclosure score for
relevant items. For example, the disclosure score for internal capital is the average disclosure score of internal
capital items.
Discussion and conclusions
In this research, we conduct a longitudinal comparison with respect to IC disclosures by
Chinese firms over a three-year period. The findings show that there was a generally upward
trend for the disclosure of IC items, categories and the overall IC. In particular between 2006
and 2008, the improvement was often remarkable. This may be owing to a one-year interval
(2007). Between 2008 and 2009, the improvement became steady. This result indicates that
the reporting of IC by Chinese firms had reached a new (and high) level by 2008.
14
In general, the upturn trend over the three years was not unexpected. Firstly, since China
gained entry to WTO in 2001, it has been more involved in the process of globalization in
recent years. Chinese companies are facing with intensive competition from both domestic
and international competitors. Under these circumstances, increasing firms has realized the
importance of IC as a critical resource for them to achieve and sustain a competitive
advantage in the fierce global competition.
Furthermore, as suggested by those positive theoretical traditions (agency, stakeholder and
legitimacy theory), many Chinese companies believe that the disclosure of IC-related
information in corporate annual reports would be a very helpful means to reduce information
asymmetry, discharge accountability and highlight legitimacy to various stakeholders, and
consequently improve the relationship with them, which is a basis for organizations to
survive and succeed in society (Yi et al., 2011).
Specifically, voluntary IC disclosure could bring organizations a number of benefits, such as
reducing insider trading, lowering capital costs, decreasing volatility of stocks, enhancing
corporate image, attracting potential investors, customers, and talents, and retaining the
existing ones (Leadbeater, 2000; Vergauwen and Alem, 2005; Rogers, 2007). Thus, it is not
surprising that Chinese companies would like to improve their IC disclosure over time.
Internal capital was the most highly disclosed IC category for both 2008 and 2009. This result
is quite surprising since most previous studies indicate that external capital is the greatest
reported item. A possible explanation is that managers of Chinese companies consider
internal capital attributes (e.g. R&D, management processes and financial relations) to be
more critical resources for value creation and advantage achieving, and therefore favour the
reporting of this type of information.
In addition, the measure of IC disclosure in this research is different from prior research. This
could be another explanation. The current study assesses both the extent and quality of IC
disclosure using a normalized disclosure score from 0 to 1 while most previous studies only
gauge the extent (or frequency) of IC disclosure using either word or line account. Since the
frequency of IC reporting are not equivalent to the quality of IC reporting (Yi and Davey,
2010), it is normal that this study obtained varied results from the previous studies.
The
most
improved
disclosure
items
during
the
time
were
“management
philosophy/corporate culture” and “marketing” since these two items performed poorly in
15
2006. It is also noted that the disclosure level of some IC items are still low although it has
been improved over the survey period. These items include “research collaborations”,
“customer satisfaction/loyalty” and “intellectual property”. Chinese companies should attach
importance to these items in the future practices.
Limitations
It is acknowledged that this research has some limitations. First, it focused on only large
Chinese companies, ignoring those small and medium sized companies (SMEs). This may
lead to incomplete picture regarding IC disclosure in the Chinese context. Second, corporate
annual reports were the only data source for this research. Other media for information
disclosure, such as websites, IPOs, were disregarded. Finally, subjectivity was involved in the
development of the coding framework and the coding process although it was deemed to be
acceptable in prior research.
Future research
Given the limitations, future research can extend to SMEs or use multiple data sources (e.g.
websites and IPOs). Moreover, future research can employ multiple coders to improve the
reliability of the coding process. Thirdly, a longer longitudinal study, for instance, using 5 or
10 years annual reports, can be conducted to improve the validity of a longitudinal
comparison. Fourthly, future research can compare the Chinese findings with those of other
developing countries over the same period, such as India or Brazil, to examine what the
similarities and differences are between the countries. Finally, other research approaches,
such as interview and questionnaire survey, can be applied to investigate the perceptions or
motivations of managers for their IC disclosure practices.
Appendix: An example for the calculation of disclosure score
IC item
Research and Development
0
8
Frequency (n = 100)
1
2
3
0
7
22
4
63
Disclosure
Score (0-1)
0.83
In which:
N = 100: the sample size; “frequency”: the number of companies obtaining a particular
quality score (0-4); “disclosure score” is a normalized score (0-1), combining both the extent
(frequency) and quality of disclosures for each IC item; taking “research and development”
as an example (for year 2008): 0.83 = (8*0 + 0*1 + 7*2 + 22*3 + 63*4) / 100*4.
16
References
Abeysekera, I. (2006). The project of intellectual capital disclosure: Researching the research.
Journal of Intellectual Capital, 7(1), 61-77.
Abeysekera, I. (2008). Intellectual capital disclosure trends: Singapore and Sri Lanka.
Journal of Intellectual capital, 9(4), 723-737.
Abeysekera, I., & Guthrie, J. (2005). An empirical Investigation of annual reporting trends of
intellectual capital in Sri Lanka. Critical Perspectives on Accounting, 16(3), 151-163.
An, Y., Davey, H., & Eggleton, I. R. C. (2011). Towards a comprehensive theoretical
framework for voluntary IC disclosure. Journal of Intellectual Capital, 12(4), 571585.
Barney, J. B., Ketchen Jr, D. J., & Wright, M. (2011). The future of resource-based theory:
Revitalization or decline? Journal of Management, 37(5), 1299-1315.
Beck, A. C., Campbell, D., & Shrives, P. J. (2010). Content analysis in environmental
reporting research: Enrichment and rehearsal of the method in a British-German
context. British Accounting Review, 42(3), 207-222.
Bozzolan, S., Favotto, F., & Ricceri, F. (2003). Italian Annual intellectual capital disclosure:
an empirical analysis. Journal of Intellectual Capital, 4(4), 543-558.
Brennan, N. (2001). Reporting intellectual capital in annual reports: Evidence from Ireland.
Accounting, Auditing & Accountability Journal, 14(4), 423-436.
Campbell, D., & Rahman, M. R. A. (2010). A longitudinal examination of intellectual capital
reporting in Marks & Spencer annual reports, 1978-2008. The British Accounting
Review, 42(1), 56-70.
CIC. (2003). Modelo intellectus: Medición y gestión de capital intellectual (Serie
Documentos Intellectus No. 5). Madrid: Centro de Investigación sobre la Sociedad del
Conocimiento (CIC).
Davey, J., Schneider, L., & Davey, H. (2009). Intellectual capital disclosure and the fashion
industry. Journal of Intellectual Capital, 10(3), 401-424.
17
Deegan, C. (2006). Legitimacy theory. In: Hoque, Z. (Eds.), Methodological Issues In
Accounting Research: Theories and methods (pp. 161-181). London: Spiramus Press
Ltd.
Deegan, C., & Samkin, G. (2009). New Zealand Financial Accounting. North Ryde, New
South Wales, Australia: McGraw-Hill.
Firer, S., & Williams, S. M. (2005). Firm ownership structure and intellectual capital
disclosures. South African Journal of Accounting Research, 19(1), 1-18.
Ensslin, S. R., & De Carvalho, F. N. (2007). Voluntary disclosure of intellectual capital in the
Brazilian context: An investigation informed by the international context.
International Journal of Accounting, Auditing and Performance Evaluation, 4(4/5),
478-500.
Goh, P., & Lim, K. (2004). Disclosing intellectual capital in company annual reports:
Evidence from Malaysia. Journal of Intellectual Capital, 5(3), 500-510.
Guthrie, J., & Parker, L. D. (1990). Corporate social disclosure practice: A comparative
international analysis. Advances in Public Interest Accounting, 3, 159-176.
Guthrie, J., Petty, R., & Wells, R. (1999). There is no accounting for intellectual capital in
Australia: a review of annual reporting practices and the internal measurement of
intangibles. Paper Presented in OECD Symposium on Measuring and Reporting of
Intellectual Capital, Amsterdam, Netherland.
Guthrie, J. & Petty, R. (2000). Intellectual capital: Australian annual reporting practices.
Journal of Intellectual Capital, 1(3), 241-254.
Guthrie, J., Petty, R., Yongvanich, K., & Ricceri, F. (2004). Using content analysis as a
research method to inquire into intellectual capital reporting. Journal of Intellectual
Capital, 5(2), 282-293.
Guthrie, J., Petty, R., & Ricceri, F. (2006). The voluntary reporting of intellectual capital:
Comparing evidence from Hong Kong and Australia. Journal of Intellectual Capital,
7(2), 254-271.
Krippendorff, K. (2004). Content analysis: An introduction to its methodology (2nd edition).
Thousand Oaks: Sage Publications.
18
Leadbeater, C. (2000). New Measure for the New Economy. The Institute of Charted
Accountants, London.
Li, J., Pike, R., & Haniffa, R. (2008). Intellectual capital disclosure and corporate governance
structure in UK firms. Accounting and Business Research, 38(2), 137-159.
Lindblom, C. K. (1994). The implications of organizational legitimacy for corporate social
performance and disclosure. Paper presented at the Critical Perspectives on
Accounting Conference, New York, US.
Oliveras, E., Gowthorpe, C., Kasperskaya, Y., & Perramon, J. (2008). Reporting intellectual
capital in Spain. Corporate Communications: An International Journal, 13(2), 168181.
Pablos, P. O. D. (2002). Evidence of intellectual capital measurement from Asia, Europe and
the Middle East. Journal of Intellectual Capital, 3(3), 287-302.
Petty, R., & Cuganesan, S. (2005). Voluntary disclosure of intellectual capital by Hong Kong
companies: Examining size, industry and growth effects over time. Australian
Accounting Review, 15(2), 40-50.
Rodgers, W. (2007). Problems and resolutions to future knowledge-based assets reporting.
Journal of Intellectual Capital, 8(2), 205-215.
Roos, J., Roos, G., Dragonetti, N., & Edvinsson, L. (1997). Intellectual capital: Navigating in
the new business landscape. London: MacMillian Business.
Shareef, F., & Davey, H. (2005). Accounting for intellectual capital: Evidence from listed
English football clubs. Journal of Applied Accounting Research, 7(3), 78-116.
Sharma, R. S., Hui, P. T. Y., & Tan, M. W. (2007). Value-added knowledge management for
financial performance: The case of an East Asian Conglomerate. The Journal of
Information and Knowledge Management Systems, 37(4), 484-501.
Singh, S., & Kansal, M. (2011). Voluntary disclosures of intellectual capital: An empirical
analysis. Journal of Intellectual Capital, 12(2), 301-318.
19
Singh, I., & Van der Zahn, J. (2008). Determinants of intellectual capital disclosure in
prospectuses of initial public offerings. Accounting and Business Research, 38(5),
409-431.
Sonnier, B. M. (2008). Intellectual capital disclosure: High-tech versus traditional sector
companies. Journal of Intellectual Capital, 9(4), 705-722.
Stanton, P., & Stanton, J. (2002). Corporate annual reports: Research perspectives used.
Accounting, Auditing & Accountability Journal, 15(4), 478-500.
Steenkamp, N., & Northcott, D. (2007). Content analysis in accounting research: The
practical challenges. Australian Accounting Review, 17(3), 12-25.
Stewart, T. A. (1997). Intellectual Capital: The new wealth of organizations. New York:
Doubleday Dell Publishing Group, Inc.
Striukova, L., Unerman, J., & Guthrie, J. (2008). Corporate reporting of intellectual capital:
Evidence from UK companies. The British Accounting Review, 40(4), 297-313.
Subramaniam, N. (2006). Agency theory and accounting research: An overview of some
conceptual and empirical issues. In: Hoque, Z. (eds.), Methodological Issues in
Accounting Research: theories and methods (pp. 55-81). London: Spiramus Press Ltd.
Sujan, A., & Abeysekera, I. (2007). Intellectual capital reporting practices of the top
Australian firms. Australian Accounting Review, 17(2), 71-83.
Sullivan, P. H. (1999). Extracting profits from intellectual capital: Policy and practice. In
Imparato, N. (Ed.), Capital for our time: the economic, legal and management
challenges of intellectual capital (pp. 209-232). Stanford, CA: Hoover Instutute Press.
Sveiby, K. E. (1997). Intangible assets monitor. Journal of Human Resources Costing and
Accounting, 2(1), 73-97.
Tayles, M., Pike, R, H., & Sofian, S. (2007). Intellectual capital, management accounting
practices and corporate performance. Accounting, Auditing& Accountability Journal,
20(4), 522-548.
Unerman, J. (2000). Reflections on quantification in corporate social reporting content
analysis. Accounting, Auditing & Accountability Journal, 13(5), 667-681.
20
Vandemaele, S. N., Vergauwen, P. G. M. C., & Smits, A. J. (2005). Intellectual capital
disclosure in the Netherlands, Sweden and the UK. Journal of intellectual Capital,
6(3), 417-426.
Vergauwen, P. G. M. C., & Alem, F. J. C. (2005). Annual report IC disclosure in the
Netherlands, France and Germany. Journal of Intellectual capital, 6(1), 89-104.
Wagiciengo, M. M., & Belal, A. R. (2012). Intellectual capital disclosures by South African
companies: A longitudinal investigation. Advances in Accounting, incorporating
Advances in International Accounting, 28, 111-119.
Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal,
5(2), 171-180.
Whiting, R, H., & Miller, J. C. (2008). Voluntary disclosure of intellectual capital in New
Zealand annual reports and the “hidden value”. Journal of Human Resource Costing
& Accounting, 12(1), 26-50.
Whiting, R. H., & Woodcock, J. (2011). Firm characteristics and intellectual capital
disclosure by Australian companies. Journal of Human Resource Costing &
Accounting, 15(2), 102-126.
Williams, S. M. (2001). Is intellectual capital performance and disclosure practices related?
Journal of Intellectual Capital, 2(3), 192-203.
Wong, M., & Gardner, C. (2005). Intellectual capital disclosure: New Zealand Evidence.
Paper presented at the AFFANZ 2005 conference, Melbourne, Australia.
Xiao, H. F. (2008). Corporate reporting of intellectual capital: Evidence from China. The
Business Review (Cambridge), 11(1), 124-129.
Yi, A., & Davey, H. (2010). Intellectual capital disclosure in Chinese (mainland) companies.
Journal of Intellectual Capital, 11(3), 326-347.
21