Journal of Intellectual Capital

IC disclosures in IPO prospectuses: evidence from Malaysia

Azwan Abdul Rashid Muhd Kamil Ibrahim Radiah Othman Kok Fong See

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Azwan Abdul Rashid Muhd Kamil Ibrahim Radiah Othman Kok Fong See, (2012),"IC disclosures in IPO
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IC disclosures in IPO
prospectuses: evidence from
Malaysia
Azwan Abdul Rashid

IC disclosures in
IPO prospectuses

57

Department of Accounting, College of Business Management and Accounting,

Universiti Tenaga Nasional, Malaysia
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Muhd Kamil Ibrahim

College of Business, Taibah University, Al-Madina Al Munawarah,
Kingdom of Saudi Arabia

Radiah Othman
School of Accountancy, Massey University,
Palmerston North Manawatu/Wanganui, Palmerston North, New Zealand, and

Kok Fong See

School of Economics, University of Queensland, Brisbane, Australia
Abstract
Purpose This study aims to investigate the factors influencing the disclosure of intellectual capital
(IC) information in the Malaysian initial public offering (IPO) prospectus using multiple regression
analysis.
Design/methodology/approach The sample consists of 130 companies in the technology and
industrial products sectors of Bursa Malaysia that went through an IPO between 2004 and 2008.
Initially, the extent of the IC disclosure index is quantified using content analysis methodology. The
multiple regression analysis is then used to examine the associations of nine potential explanatory
variables with IC disclosure level.
Findings In general, the results provide evidence that board size, board independence, age, leverage,
underwriter and listing board significantly influence the extent of IC disclosure in an IPO prospectus.
Nonetheless, the effect of each explanatory variable may vary in each estimated parameter of the
multiple regression models. Three variables, board diversity, size and auditor, were not significant.
Originality/value Although many studies have examined the content of and reasons for IC
disclosures, this study provides empirical evidence in this specific area, i.e. to explore the determinants
of IC disclosure, particularly from the perspective of IPO prospectuses, in emerging countries such as
Malaysia.
Keywords Intellectual capital, Initial public offering, Content analysis, Multiple regression analysis,
Malaysia
Paper type Research paper

1. Introduction
The shift toward a knowledge-based economy calls for recognition of new resources
that have not previously appeared in firms financial statements. In addition to
physical and financial capital, intellectual capital (IC) resources, such as knowledge
workers, corporate culture and business strategies, are equally important for
companies to remain competitive and sustain their growth. It is the unique blend

Journal of Intellectual Capital

Vol. 13 No. 1, 2012
pp. 57-80
q Emerald Group Publishing Limited
1469-1930
DOI 10.1108/14691931211196213

JIC
13,1

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58

between IC and tangible resources that drives the value of companies (Ashton, 2005),
which, in turn, helps them to secure a sustainable competitive advantage. Factors such
as technological advancements, globalisation and increasing competition have resulted
in increasing demand for narrative reporting (voluntary disclosure) and decreasing
significance of financial reporting (Lev and Zarowin, 1999). Furthermore, the
Accounting Standards Board (2007) has expressed growing dissatisfaction with
traditional financial reporting and called for improved IC disclosure. As such,
disclosures of IC information can complement conventional financial disclosures, thus
enhancing a companys level of transparency.
IC is recognised as an important topic for further research in the fields of financial
and external reporting (Parker, 2007). Although many studies have examined the
content of IC disclosures and the reasons for these disclosures, most data from prior
studies are restricted to developed nations (Abeysekera, 2007; Goh and Lim, 2004).
Empirical evidence from emerging countries like Malaysia remains scarce because
research on IC disclosure is rather new (Abdullah and Sofian, 2009), particularly
research focusing on initial public offering (IPO) prospectuses. This study aims to
narrow this gap in the IC disclosure literature by focusing on data from Malaysia. This
study seeks to explore the factors influencing the disclosure of IC information in the
companies prospectuses. The rest of the paper is organised in the following manner.
Section 2 provides brief background information on the Malaysian economy. Section 3
discusses the literature related to IC disclosure and its potential determinants. Section 4
describes our sample selection, data, measurement of the IC disclosure index and
multiple regression analysis. Our empirical results are discussed in section 5, and their
implications and limitations are offered in sections 6 and 7, respectively. Finally, our
concluding comments are presented in section 8.
2. An overview of the Malaysian economy
Malaysia has recorded remarkable economic development since gaining its independence
in 1957. Based on the report titled The Growth Report: Strategies for Sustained Growth
and Inclusive Development by the Commission on Growth and Development (2008), from
1967 until 1997, Malaysia was one of 13 countries in the world to have gross domestic
product (GDP) growth of 7 per cent or more per year. Nevertheless, the Asian financial
crisis in 1997-1998 considerably weakened this economic growth, with a record low of
27.50 per cent in 1998 (Bank Negara Malaysia, 2002). The crisis also devalued the
Ringgit from RM2.50 to RM4.88 against the US$ and increased interest rates to
approximately 12 per cent per year. Likewise, the stock exchange composite index
plunged from 1,271 points to 262 points, corresponding to a decline in share value of about
US$225 billion. The financial meltdown has significantly increased the uncertainty in the
capital market and adversely affected investor confidence.
Several measures have been initiated to facilitate the recovery process. For example,
the Malaysian Code on Corporate Governance (MCCG) (Securities Commission, 2007)
was introduced in 2000 (latest revision 2007) to mitigate the crisis. In line with the
agenda on reforms, the Capital Market Masterplan (CMP) was issued in 2001 by the
Securities Commission with the purpose of strengthening the standards of investor
protection by enhancing disclosure and governance standards. The Malaysian
government also promoted the idea of leapfrogging to a knowledge economy in April
2001 through the Third Outline Perspective Plan 2001-2010 (OPP3).

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Although IC is increasingly becoming the key driver of the knowledge economy,

Malaysian companies undervalue their IC or intangible assets (Brand Finance, 2008).
The low proportion of intangible contributions implies that Malaysian companies
continue to rely on tangible assets as their primary resources. Moreover, the recovery
of the Malaysian economy was much slower than that of other countries affected by the
Asian financial crisis (Abdul Rahman and Salim, 2010), thus delaying Malaysias goal
of becoming a developed nation by 2020. This delay has led to an increased need for
companies to measure and report IC resources as part of the effort to push Malaysia
forward in the global economy, which is rapidly shifting towards knowledge-based
activities.
3. Literature review
Several empirical studies using the content analysis method in the field of IC disclosure
are reported in Table I. Analyses of IC disclosure have employed several types of
communication media, such as annual reports (Abeysekera, 2007; Bozzolan et al., 2003;
Cerbioni and Parbonetti, 2007; Guthrie et al., 2004), prospectuses (Bukh et al., 2005;
Cordazzo, 2007; Rimmel et al., 2009; Singh and Van der Zahn, 2007), analyst reports
(Garcia-Meca, 2005), management reports and chairmans letters (Oliveira et al., 2006).
Researchers such as Gerpott et al. (2008) and Striukova et al. (2008) have analysed
multiple communication media. It is also evident from Table I that prior studies have
focused mostly on companies in developed countries, such as Canada (Bontis, 2003),
Ireland (Brennan, 2001), Australia (Guthrie and Petty, 2000) and the UK (Striukova
et al., 2008; Williams, 2001).
Although many studies have used annual reports to investigate IC disclosure
practices (Guthrie et al., 2004; Vergauwen et al., 2007), the focus on prospectuses is
indeed limited (Singh and Van der Zahn, 2007), particularly in developing and
emerging countries such as Malaysia. The study of IC disclosure in IPO prospectuses is
unique for two reasons: most IPO companies are less acknowledged by investors
because they are relatively small and young, and IPO companies have limited publicly
available information on their financial results (Cordazzo, 2007) because they are only
required to publicise financial information for the three financial years prior to the IPO
(Securities Commission, 2005). As such, to promote the shares they are offering to
investors, the companies use prospectuses to provide relevant information for making
an investment decision. Thus, it is anticipated that a higher level of IC disclosure will
be observed in prospectuses than in annual reports (Bukh et al., 2005).
The disclosure of IC information in a prospectus may give some insights into
information asymmetry problems that lead to suboptimal allocation of resources within
the company. A disclosure of more IC information provides a potentially important means
to supplement the small amount of available information, thus reducing the problem of
information asymmetry. Indeed, the issue is important given that IPOs in Malaysia are
quite underpriced compare to IPOs in other developing countries (Prasad et al., 2006).
Also, this study has special relevance to Malaysia, where the economy is shifting from
input-driven to knowledge-driven. From 2001 to 2010, the IPO market grew strongly, with
a total of 414 companies listed on the Bursa Malaysia and RM52.79 billion in funds raised
(Bursa Malaysia, 2010). Based on the above arguments, coupled with significant growth
in the equity market, it is important to recognise and understand the increasing need for
IC disclosure by a company seeking access to capital markets via IPO.

IC disclosures in
IPO prospectuses

59

30 1999-2000
86 1999-2002

Sweden, UK & Denmark

Sri Lanka & Australia

Italy

Vergauwen et al.
(2007)
Abeysekera (2007)
Cordazzo (2007)

Singapore

60 2002

Australia & Hong Kong

Portugal

Guthrie et al. (2006)

Oliveira et al. (2006)

334 1997-2004

150 2002
56 2003

68 1990-2001

Denmark

Bukh et al. (2005)

257 2000-2001

257 & 217 2000-2001

Spain

Singh and Van der

Zahn (2007)

Annual report
Annual report
Annual report
Annual report

Annual report
Annual report

Annual report

Medium of disclosure

NA

NA

NA
Sizea, Industry *, Listing status *,
Physical capital performance
& Leverage *
NA
Industry & Sizeb
NA
NA

NA

Determinants of IC disclosure

Prospectus

Annual report
Prospectus

NA
Sizea *, Age, Managerial ownership *,
Technology level & Listing
Auditor, Underwriter *, Solicitor *,
Leverage, Executive Compensation,
Gross proceeds from IPO * & Age
(continued)

Presentation to analyst and Analyst NA

report
Presentation to analyst
Sizec *, Listing status, Industry,
Leverage *, Profitability *, Market to
book ratio & Objective of the meeting *
Prospectus
Industry differences *, Sized, Age
& Managerial ownership *
Annual report
Sizee *& Industry
Management Report Chairmans
Sizef, Industry *, Type of auditor *,
Ownership concentration * & Listing
Letter
status *
Annual report
NA

60 1998, 2000 and Annual report

2002
89 2000-2001
Annual report

10,000

30 2001
20 2001
30 1999-2000

Garcia-Meca and
Martinez (2005)

Netherlands, France
& Germany
Spain

Netherlands, Sweden & UK

Canada
Italy
Malaysia
Sri Lanka

11 1999
31 1996-2000

Ireland
UK

Bontis (2003)
Bozzolan et al. (2003)
Goh and Lim (2004)
Abeysekera and
Guthrie (2005)
Vandemaele et al.
(2005)
Vergauwen and van
Alem (2005)
Garcia-Meca (2005)

20 1998

Australia

Year

Guthrie and Petty

(2000)
Brennan (2001)
Williams (2001)

Table I.
Summary of IC disclosure
studies using content
analysis method

Country

60

Authors

Sample

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22 2002-2004
120 2003

Spain

Singapore

Europe & USA

UK

Indonesia

Japan

Garcia-Meca and
Martinez (2007)

Singh and Van der

Zahn (2008)

Gerpott et al. (2008)

Striukova et al. (2008)

Sihotang and Winata

(2008)
Rimmel et al. (2009)

Prospectus

Web page, Annual report, Annual

review, Interim report, Analyst
presentation, Preliminary report
and CSR report
Annual report

Annual report and Website

Prospectus

Analyst report

Annual report

Medium of disclosure

Industry differences, Pre-IPO

managerial ownership, Sized & Age *

NA

Sizea *, Ownership structure,

Profitability *, Leverage, Growth
opportunities, Listing status, Legal
enforcement, Board composition *,
Board structure *, Board leadership *
& Board size *
International listing, Profitability *,
Analyst recommendation *, Risk,
Sizeg *, Market to book ratio *, Type of
report * & Brokerage house
Ownership retention *, Proprietary
costs *, Corporate governance
structure, Auditor, Underwriter *,
Solicitor *, Leverage *, Executive
compensation, Gross proceeds from
IPO * & Age *
Sizeh, Leverage, Home region *, Legal
system of home country
NA

Determinants of IC disclosure

Notes: NA: Not applicable. aTotal assets; bMarket capitalisation, sales & total assets; cCompanys market value; dNo of employees; eMarket capitalization; fTotal
assets * *, turnover, number of employees, market value; gMarket value, total assets, turnover, capitalization; hTurnover & number of employees. *Significant
variable

15

29 2003/2004

444 1997-2006

260 2000-2003

54 2002-2004

UK, France, Switzerland,

Sweden, Denmark, Ireland,
Austria, Netherland, Belgium
& Germany

Year

Cerbioni and
Parbonetti (2007)

Sample

Country

Authors

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IC disclosures in
IPO prospectuses

61

Table I.

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62

3.1 The determinants of IC disclosure

An important stream of IC disclosure studies in the IPO setting investigates the
determinants of disclosure. Bukh et al. (2005) became the pioneer in this little-explored
area by analysing the content of 68 Danish IPOs using a 78-item disclosure index. The
study investigated how IC disclosure changed from 1999-2001 and whether industry
differences, pre-IPO managerial ownership, size and age can explain differences in IC
disclosure in Danish IPO prospectuses. IC disclosure increased substantially during
the study period. IC-intensive companies and managerial ownership provided
incentives to disclose IC information as a means to minimise information asymmetry
from issuers to investors. Subsequently, the disclosure index of 78 items developed by
Bukh et al. (2005) has been either adapted or adopted by similar studies conducted in
Italy (Cordazzo, 2007), Singapore (Singh and Van der Zahn, 2008) and Japan (Rimmel
et al., 2009). Based on prior studies examining IC disclosure, this section discusses
potential independent variables and their effects on IC disclosure.
Board size. Even though there is no agreed-upon number of members that should
constitute the board, the MCCG recommends that every board should examine its size,
with a view to determining the impact of the number upon its effectiveness. A number
of empirical studies suggest that board size has consequences for both the process of
interaction and management and the ability to control management (Jensen, 1993;
Yermack, 1996). Although a larger board has the advantage over a smaller board on
matters pertaining to information access and know-how (Pierce and Zahra, 1992), the
former is arguably less effective because its members are more difficult to coordinate
( Jensen, 1993; Lipton and Lorsh, 1992; Eisenberg et al., 1998). Consistent with previous
studies, Vafeas (2000) contends that market players such as investors and analysts
may notice that the earnings of companies with larger boards are less informative than
those of companies with smaller boards due to ineffective board monitoring. Although
it seems logical that an increase in the number of directors could enhance a boards
monitoring capacities, the price of making delayed decisions could negate this benefit
(Lipton and Lorsh, 1992), thus decreasing information disclosure (Cerbioni and
Parbonetti, 2007). This notion is supported by Yermacks (1996) study, which found
that a company with a larger board may find it more difficult to control top
management in an effective manner.
Board independence. Another important governance factor is the percentage of
independent non-executive directors (INEDs) on the board. In Malaysia, the MCCG and
the Listing Requirements entail that one-third of the board should make up INEDs.
Furthermore, the control of the highest management level is of significant importance;
thus, the presence of a higher proportion of independent directors may help to ensure
separation between control and management of decisions (Fama and Jensen, 1983).
Therefore, an independent director is viewed as a mediator whose basic aim is to
safeguard the interests of shareholders in managerial decision-making (Fama, 1980).
Empirical studies on this topic show mixed results. For instance, although Eng and
Mak (2003) and Cerbioni and Parbonetti (2007) claimed that outside directors often
motivate companies to reveal more useful information to external investors, the
percentage of independent directors does not influence the compulsory disclosure
quality of stock options (Forker, 1992). In contrast, Chen and Jaggi (2000) revealed that
the percentage of INEDs and voluntary disclosure are significantly and directly
related. This is confirmed by Cheng and Courtenay (2006).

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Board diversity. In this study, board diversity refers to ethnic diversity in board
composition, including Malay, Chinese, Indian and other members. Ethnic diversity
provides several positive effects for a company. Katzenbach et al. (1995) argue that
board diversity provides better opportunities for flexibility and creativity that allow a
company to adapt much more quickly to an ever-changing business environment. If the
board members are fairly similar, there remains a possibility that the decision that is
made will be autonomous, expected and not flexible enough for all parties (Westphal
and Zajac, 1998). On the other hand, a heterogeneous board has an increased ability to
take action against the challenges that arise in an unpredictable and ever-changing
business environment (Gilbert and Ivancevich, 2000). The way in which ethnic
diversity is defined depends on the circumstances of each country. For example,
although Chinese individuals account for only 37 per cent of the population in
Malaysia, they have experienced better economic outcomes and participated in more
modern sector activities than Malays, who constitute 52 per cent of all residents
(Athukorala and Menon, 1996). Hence, it is presumed that the majority of the directors
are of Chinese ethnicity. Based on the above arguments, board diversity is measured as
the proportion of Malay directors on the board.
Size. Size is a widely used explanatory variable in most empirical studies on
accounting disclosure. Many researchers (e.g. Oliveira et al., 2006; Cordazzo, 2007;
Cerbioni and Parbonetti, 2007) have employed total assets as a proxy for company size.
Alternatively, number of employees, turnover and market value of the company have also
has been utilised to represent company size. Generally, large companies are often
scrutinised by the public and are quite familiar with integrated information systems
(Garca-Meca et al., 2005), thus allowing them to provide more comprehensive information
at relatively lower costs (Bukh et al., 2005; Oliveira et al., 2006). As suggested in previous
studies, there is a significant direct relationship between company size and the extent of
IC disclosures (Bozzolan et al., 2003; Cerbioni and Parbonetti, 2007; Cordazzo, 2007;
Garca-Meca et al., 2005, Garca-Meca and Martnez, 2007; Guthrie et al., 2006; Oliveira
et al., 2006). Smaller companies, however, may also disclose more information on IC in an
attempt to ease their capital costs (Singh and Van der Zahn, 2007).
Age. Early empirical studies often used company age as a proxy for risk. It is
expected that investors view older companies as less risky. For instance, Kim and
Ritter (1999) explain that younger companies tend to rely upon non-financial
information in their valuation more than older firms do. Bukh et al. (2005) and Cordazzo
(2007), however, found that age was not an explanatory factor for IC disclosure. In
more recent studies (e.g. Singh and Van der Zahn, 2008; Rimmel et al., 2009), age is
found to be a significant factor influencing IC disclosure.
Leverage. Companies with higher leverage might increase their interest in observing
the capital market. Thus, it is expected that companies readily reveal plenty of IC
information as a means to decrease the cost of capital ( Jensen and Meckling, 1976). In
contrast, signalling theory suggests that a company with relatively low leverage also
has a motive to disclose more information on IC as a signal of its favourable financial
structure. The empirical results on the outcome of leverage on IC disclosure are
inconclusive. For instance, whereas Garca-Meca and Martnez (2005) and Williams
(2001) find a significant positive relationship, other researchers (e.g. Cerbioni and
Parbonetti, 2007; Oliveira et al., 2006; Singh and Van der Zahn, 2007) show no obvious
linkage.

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IPO prospectuses

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64

Underwriter. Firth and Liau-Tan (1998) assert that leading underwriters are very
concerned about their reputation. They are strongly associated with firms to be listed
and provide signals to investors about the quality of shares being issued (Chen and
Mohan, 2002) by voluntarily disclosing more information. This enables investors to
make a better valuation of firms, causing the underpricing to be reduced. In an IPO,
underpricing is recognised as the major cost of capital to an issuer (Singh and Van der
Zahn, 2007). As such, leading underwriters seek to reduce underpricing as compared to
non-leading underwriters ( Jog and McConomy, 2003). Loughran and Ritter (2004),
conversely, argue that successful underwriters are expected to exploit their name to
elevate the level of underpricing, which, in turn, may be beneficial to them. Singh and
Van der Zahn (2007), 2008), however, find no association between leverage and IC
disclosure.
Auditors. Auditors play an important role in strengthening the credibility of
disclosures and narrowing the information gap between investors and issuers. For that
reason, auditing is viewed as one means of reducing agency costs ( Jensen and
Meckling, 1976). Larger audit firms tend to provide high-quality audits (Abbott and
Parker, 2000) to preserve their reputation and to avoid litigation (Owusu-Ansah, 2005).
Previous studies find that a company audited by a large audit firm is likely to be
engaged in more audit activity (Collier and Gregory, 1999) and have a greater extent of
IC disclosure (Oliveira et al., 2006). In contrast, auditors might be more conservative in
dealing with IC-related items (Vergauwen and Van Alem, 2005) due to their subjective
nature and the absence of a regulatory framework, thereby reducing IC disclosure.
Oliveira et al. (2006) and Singh and Van der Zahn (2007, 2008) revealed that the type of
auditor is not an important factor influencing IC disclosure.
Listing board. The industry type is expected to have an effect on levels of IC
disclosure, especially for companies involved in high-technology activities. In general,
the amount invested in IC resources by these technology-oriented companies appears
to be significant, thus ensuring continued growth and competitiveness (Bozzolan et al.,
2003). As a result, high-technology companies tend to have a higher degree of IC
disclosure than low-technology companies do. Whereas Bukh et al. (2005) and Oliveira
et al. (2006) find a significant association between industry type and level of IC
disclosure, other researchers (e.g. Garca-Meca and Martnez, 2005; Cordazzo, 2007;
Rimmel et al., 2009) find no association. The positive influence of the level of
technology on IC disclosure makes it likely that companies listed on the MESDAQ
market (the high-growth technology segment of the Bursa Malaysia, now known as the
ACE market) also have higher levels of IC disclosure.
4. Data and methods
This section discusses the sample selection process and data collection procedure using
content analysis methodology. The following sections present the measurement of the
variables and the analytical procedure used in this study.
4.1 Sample selection
The sample of this study consists of companies in the technology sector (68 companies)
and industrial products sector (62 companies) that went through an IPO on Bursa
Malaysia between 2004 and 2008. While these two sectors have the most companies to
go public among all sectors in the period under review, IC disclosure is likely to be

more vital in technology industries than it is in traditional manufacturing and

commercial companies (Bukh et al., 2005). This study provides valuable insights on IC
disclosure in Malaysian IPO prospectuses in both technology and non-technology
sectors of Bursa Malaysia. The data for all independent and dependent variables in this
study are extracted manually from the prospectus of each company, downloaded from
the Bursa Malaysia database.

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65
4.2 Content analysis
Content analysis of the companies prospectuses is used as the main research method
in this study. This study develops its own disclosure index because there is no
generally acknowledged IC disclosure index or public IC disclosure indicator currently
available (Singh and Van der Zahn, 2007). The method permits researchers to classify
qualitative and quantitative information into predefined categories with the purpose of
understanding the disclosure practices with regard to a particular theme (Guthrie et al.,
2004). The choice of IC categories and items is based on prior indices developed by
Bukh et al. (2005), Cordazzo (2007) and Singh and Van der Zahn (2007) to measure IC
disclosure in prospectuses.
Consistent with prior studies of IC disclosure in an IPO setting (e.g. Bukh et al., 2005;
Cordazzo, 2007; Singh and Van der Zahn, 2007), this study classifies IC in six different
categories: human resources, IT, R&D, process, strategy and customers. Disclosure
items are discussed with investment analysts to ensure that they are tailored to the
Malaysian context. Additionally, the Prospectus Guidelines for Public Offerings and
Financial Reporting Standard 138 Intangible Assets (Malaysian Accounting Standards
Board, 2005) are reviewed to confirm that only voluntary information is included.
Finally, six IC disclosure categories with 84 items are proposed for this study (see
Appendix A for more details on the disclosure items).
Another important aspect of content analysis is the choice of recording unit. Several
researchers (e.g. Beattie and Thomson, 2007; Unerman, 2000; Milne and Adler, 1999)
have described the benefits and drawbacks of using words, sentences, paragraphs,
portions of pages and clauses/phrases as the specific recording unit to capture the
meaning of content being analysed. Likewise, as highlighted by Campbell and Abdul
Rahman (2010), disclosure indices have become the preferred approach of some
researchers (e.g. Bukh et al., 2005; Cordazzo, 2007; Singh and Van der Zahn, 2007) when
examining IC disclosure in IPO prospectuses. While each recording unit has its own
advantages and disadvantages, Campbell and Abdul Rahman (2010) further argue that
disclosure indices can provide researchers with extensive analysis on the level of
disclosure. As such, the study employs disclosure index as the recording unit for
analysing the IC-related information in IPO prospectuses.
The process of capturing IC information from the prospectuses is as follows:
(1) the entire prospectus is read at the beginning to acquire a basic understanding
of the IC information being disclosed; and
(2) each IC disclosure is identified based on a predetermined list, as per the
disclosure index, and recorded in the coding sheet.
This study adopts a dichotomous scoring system (1 if the item appeared in the
prospectus and zero otherwise) to facilitate the recording process[1]. The results from
the coding process in any content analysis study need to demonstrate rigorous

JIC
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66

reliability to ensure that the results can be replicated and that any inferences drawn
from the results are valid (Milne and Adler, 1999; Krippendorff, 2004). For that reason,
two researchers used data from five IPO companies (not included in the sample) to pilot
test the disclosure index and scoring system. The results were then compared to assess
the coders error rates. Any differences identified in the coding process were reviewed
through several subsequent iterations to eliminate ambiguous, irrelevant and
overlapping items. The extent of the IC disclosure index is quantified using the
following formula.
!
m
X
di =M 100%:
IC Disclosure Score ICDS

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i1

where di can be taken as a dummy variable equal to one if the respective intellectual
capital items are disclosed on an IPO prospectus and zero otherwise; and M represents
the total number of items in the IC framework.
4.3 Regression model
In the IC disclosures literature, the associations among the IC disclosure level and its
potential indicators are commonly estimated using multiple regression analysis. The
following OLS regression model is used to evaluate the association between IC
disclosure and potential explanatory variables:
ICDSi b1 b2 BSIZEi b3 BINDi b4 BDIVi b5 SIZEi

b6 AGEi b7 LEVi b8 UNDi b9 AUDi b10 LISTBi 1i

where:
ICDS

Represents the ratio of the number of IC items disclosed by IPOs to the

total number of IC items.

BSIZE Represents the total number of directors.

BIND

Represents the percentage of independent non-executive directors on the

board.

BDIV

Represents the proportion of Malay ethnic directors on the board.

SIZE

Represents the total sales as a proxy for company size.

AGE

Represents the duration between the founding date and the IPO date.

LEV

Represents the book value of total debt divided by the book value of
total assets.

UND

Is a dummy variable equal to one if the IPO engaged one of the top two
underwriter firms (based on frequency) in the year of its listing and zero
otherwise.

AUD

Is a dummy variable equal to one if the IPO engaged a Big Four audit
firm and zero otherwise.

LISTB Is a dummy variable equal to one if the IPO listed in the Mesdaq Market
and zero otherwise.
1

Represents the residual.

5. Empirical analysis
This section presents the results of the study. First, the trend of disclosing IC
information in Malaysian IPO prospectuses during the period from 2004 to 2008 is
described. This is followed by descriptive statistics. Finally, the results of the multiple
regression analysis are presented.
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IC disclosures in
IPO prospectuses

67

5.1 IC disclosure trend

Table II summarises the annual breakdown of each IC disclosure category disclosed in
the prospectuses. To provide further analysis of IC disclosure patterns over the period
of 2004-2008, the study also developed six different indices to represent specific
categories of IC disclosure. As indicated by the average disclosure in 2004 and 2008,
there is a small increase in the IC information disclosed in the human resource, process
and strategy categories. IC disclosures relating to information technology, R&D and
customers experienced a slight decrease during the same period. The average total IC
disclosure score (ICDS) follows the same trend and shows a minor decrease over time.
In regard to the disclosure pattern (refer to Table II), the study discovers that R&D
is the most cited category at 64.10 per cent, or 5.95 out of nine items. This reflects the
importance of R&D as a means for companies to innovate and develop new products or
services. The second and third most commonly cited attributes are process and
strategy, with averages of 37.69 per cent (3.02 of eight items) and 34.66 per cent (5.53 of
16 items), respectively. These categories provide valuable insights into the companys
ability to use intellectual resources that contribute to its competitive advantage.
Disclosures on customers are ranked in fourth position, with an average of 31.54 per

Category

2008
(n 43)

2007
(n 47)

2006
(n 26)

2005
(n 5)

2004
(n 9)

Overall
(n 130)

Total (ICDS)

%
No.

35.32
29.56

39.76
33.40

33.61
29.15

34.45
28.87

35.80
30.07

34.99
29.55

Human resource

%
No.

33.33
9.33

32.86
9.20

29.95
8.38

30.09
8.45

31.64
8.86

30.91
8.66

Information technology

%
No.

14.81
0.89

10.00
0.60

16.03
0.96

18.44
1.11

18.60
1.12

17.44
1.05

Research & development

%
No.

49.38
4.44

71.11
6.40

58.55
6.19

66.90
6.02

66.67
6.00

64.10
5.95

Process

%
No.

47.22
3.78

47.50
3.80

33.65
2.69

35.90
2.87

38.95
3.12

37.69
3.02

Strategy

%
No.

34.72
5.56

42.50
6.80

34.86
5.58

35.24
5.60

32.99
5.28

34.66
5.53

Customer

%
No.

33.33
5.56

38.82
6.60

31.45
5.35

28.66
4.83

33.52
5.70

31.54
5.34

Table II.
Annual breakdown of
raw disclosure by IC
disclosure category

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13,1

cent (5.34 of 17 items). Although much attention has been given to human capital in IC,
human resources disclosures were limited at 30.91 per cent, or 8.66 items (out of 28
items). Finally, disclosures on IT information are ranked last, with an average of 17.44
per cent (1.05 of six items). The most and least disclosed items by disclosure category
are shown in Table III.

68

5.2 Descriptive statistics

The descriptive statistics for the explanatory variables are presented in Table IV. The
disclosure score varies between 20.2 per cent (17 items) and 47.6 per cent (40 items)
between 2004 and 2008. Out of the total number of items in the disclosure score
framework (84 items), the IPO companies disclose, on average, more than 34.9 per cent

Table III.
Overall disclosure pattern
in prospectuses by IC
disclosure category

Table IV.
Descriptive statistics

Category

Most disclosed

Second most disclosed Least disclosed

Human resource

Statements of policy
on competency
development

Statements of
dependence on key
personnel

Information technology

Description of
information
technology facilities

Description of existing Information

technology expenses
information
technology systems

Comments on
employee absentee rate

Research and development Statements of policy,

strategy and/or
objectives of R&D
activities

Number of patents and R&D invested into

licenses
basic research

Process

Internal sharing of
knowledge and
information

Measure of internal
processing failures

Discussion of fringe
benefits and company
social programs

Strategy

Future plans and

strategies

Statements of
corporate quality
performance

Corporate culture
statements

Customer

Competitors

Marketing

Ratio of customers to
employees

Variables

Mean

SD

Minimum

Median

Maximum

130
130
130
130
130
130
130

0.349
6.550
0.367
0.246
49.482
3.127
0.416

0.056
1.595
0.074
0.230
83.967
4.228
0.225

0.202
4
0.250
0.000
1.091
0.403
0.017

0.357
6
0.333
0.200
20.681
1.696
0.410

0.476
12
0.667
1.000
661.436
33.899
1.521

130
130
130

80
76
47

ICDS
BSIZE
BIND
BDIV
SIZE
AGE
LEV
Dichotomous variables
UND
AUD
LISTB

0
(61.5%)
(58.5%)
(36.2%)

50
54
83

1
(38.5%)
(41.5%)
(63.8%)

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(29 items). The low frequency of IC disclosures suggests that some factors may restrain
IPO companies from disclosing more information on IC and may vary between
different company sectors and business environments.
The average number of Directors on a Board is six, and approximately 36.7 per cent
of board members are independent. The average proportion of Malay ethnic directors
on the boards is approximately 24.6 per cent. Descriptive statistics for the three
continual variables, size, age and leverage, are also shown in Table III. With
respect to the underwriter firms, 38 per cent of the companies employed the top two
underwriter firms (based on frequency) in the year of the companies IPO.
Approximately 42 per cent of the companies in the sample are audited by Big Four
firms, whilst 64 per cent are listed in the MESDAQ market.
Table V presents the Pearson correlation matrix to examine the interrelationships
between the variables in the samples. The results confirm that, except for a few
significant correlations observed between independent variables, the correlation
coefficients is not higher than 0.8, and thus, multicollinearity is not a major problem
(Hair et al., 2010). As a further precaution, the researchers calculated variance inflation
factor (VIF) scores to establish that the regression model does not suffer from
multicollinearity. None of the VIF scores exceeds ten (the highest calculated VIF is
1.621), indicating no serious problems with multicollinearity (Hair et al., 2010).
5.3 Multiple regression results
Three different models (according to sample coverage) were run to explore the factors
influencing the disclosure of IC information in IPO prospectuses for companies to be
listed in the technology and industrial products sectors. Table VI presents the empirical
results for the multiple regressions using the IC disclosure score as the dependent
variable for the sample companies. The F-test is used to test whether the variables
contribute to the fit of the model. The test indicates that Model 1 and Model 3 (significant
at the 5 per cent level) are sufficiently robust. Although Model 2 was not significant,
further discussions on the explanatory variables are still deemed beneficial. Overall, the
results suggest that the factors with the most influence on the level of IC disclosure are
board size, board independence, company age, leverage, underwriter and listing board.
Board diversity, company size and auditor type do not affect the disclosure level.
The present study finds that the size of board is positively associated with IC
disclosure score ( p , 0.05) in Model 2 (i.e. the technology sector), implying that the
disclosure of IC information in the prospectus is enhanced by having more directors in
an IPO company. Although this finding is not consistent with Cerbioni and
Parbonettis (2007) argument that larger boards disclose less about their IC, it supports
Pierce and Zahras (1992) notion that larger boards have the advantage over smaller
boards in terms of having access to more information and expertise from a mixture of
backgrounds. At the same time, the presence of larger boards is more important for
companies seeking IPOs in the technology sector. Due to rapid changes in technology,
the possession of technological know-how is critical to companies business operations.
Hence, a company with more members on the board has more people who can
effectively contribute their know-how to assist in the decision-making process.
For board independence, the study finds that IC disclosure score is negatively
related to the proportion of INEDs on the board only in Model 3 (i.e. the industrial
products sector) ( p , 0.05). Although the presence of more independent directors is

IC disclosures in
IPO prospectuses

69

Table V.
Pearson correlation
matrix
1
2 0.440 * *
0.079
0.348 * *
0.005
0.078
0.182 *
0.060
2 0.302 * *
1
0.226 * *
2 0.118
2 0.056
0.032
2 0.146
2 0.076
0.095

BIND

1
0.221 *
0.143
20.002
20.003
0.110
20.056

BDIV

1
0.232 * *
0.251 * *
0.138
0.082
20.523 * *

SIZE

1
0.106
2 0.022
0.027
2 0.209 *

AGE

1
2 0.028
0.121
2 0.179 *

LEV

Notes: *Correlation is significant at the 0.05 level (2-tailed); * *Correlation is significant at the 0.01 level (2-tailed)

1
0.168
20.070
0.008
0.074
20.103
0.267 * *
0.113
20.014
0.201 *

BSIZE

1
20.025
20.195 *

UND

AUD

1
20.113

70

ICDS
BSIZE
BIND
BDIV
SIZE
AGE
LEV
UND
AUD
LISTB

ICDS

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LISTB

JIC
13,1

0.3365
0.0032
2 0.0387
0.0141
2 8.15E-05
2 0.0020
0.0700
0.0078
2 0.0080
2 0.0237

0.0460
0.0035
0.0754
0.0223
7.12E 2 05
0.0011
0.0219
0.0099
0.0097
0.0118
130
0.1517
2.3859 * *

7.311
0.8902
2 0.5137
0.6331
2 1.1450
2 1.7556 *
3.1946 * * *
0.7844
2 0.8258
2 2.0035 * *

0.2277
0.0105
0.0885
0.0091
29.56E-05
20.0009
0.0576
20.0129
20.0085
68
0.1550
1.3537

0.0553
0.0050
0.0950
0.0294
0.0001
0.0030
0.0254
0.0148
0.0140

4.1165
2.0928 * *
0.9312
0.3110
20.5860
20.3025
2.2611 * *
20.8752
20.6072

Model 2
IPO companies in the technology
sector
Standard
Coefficient
errors
t-statistic

Notes: *, * *, * * * Indicates significance at the 10 per cent, 5 per cent and 1 per cent level respectively

CONSTANT
BSIZE
BIND
BDIV
SIZE
AGE
LEV
UND
AUD
LISTB
n
R2
F-value

Explanatory
variables

Model 1
IPO companies in the technology sector
and industrial products sector
Standard
Coefficient
errors
t-statistic
0.4389
20.0034
20.3036
0.0218
22.18E-05
20.0029
0.1271
0.0269
20.0190

62
0.2599
2.3273 * *

0.0693
0.0050
0.1282
0.0343
7.57E 2 05
0.0013
0.0468
0.0135
0.0138

6.3339
2 0.6795
2 2.3682 * *
0.6344
2 0.2876
2 2.2832 * *
2.7148 * * *
1.9827 *
2 1.3724

Model 3
IPO companies in the industrial products
sector
Standard
Coefficient
errors
t-statistic

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IC disclosures in
IPO prospectuses

71

Table VI.
Multiple regression
analysis

JIC
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72

deemed to provide an incentive to disclose voluntary information extensively (Cerbioni

and Parbonetti, 2007; Chen and Jaggi, 2000; Cheng and Courtenay, 2006; Eng and Mak,
2003) to benefit the shareholders at large, the results of this study suggest otherwise. A
plausible explanation is that more companies are listed in the industrial products
sector than in the technology sector, and more of the former are established in
Malaysia. As such, the competition in the industrial products sector is likely to be more
intense. Considering the importance of information and knowledge as valuable assets
in the knowledge economy, there is increased need for the company to limit its
disclosure even with a larger proportion of INEDs. As highlighted by Vergauwen and
Van Alem (2005), many companies will refrain from revealing too much information to
protect its strategic importance.
In line with Rimmel et al. (2009), the present study finds that company age has a
negative and significant influence on the IC disclosure score in Model 1 (i.e. both
sectors) ( p , 0.1) and Model 3 (i.e. the industrial products sector) ( p , 0.05). The
results also are consistent with Kim and Ritters (1999) conclusion that older companies
are less reliant upon non-financial information than younger companies. Despite the
concern about future uncertainties such as threats of new entrants and rapid
technology changes, the results imply that older companies have less incentive to
disclose IC-related information than younger companies do over the long term. Older
companies may disclose less IC-related information to safeguard their strategic
information from competitors who could jeopardise their competitive advantage.
Nevertheless, the study finds no significant association between company age and IC
disclosure score in the technology sector. This finding indicates that the level of IC
disclosure in technology-oriented companies is not influenced by how many years the
company has been in business, but it may be affected by involvement in
high-technology activities that demand disclosure of more IC information.
The findings of the present study suggest that leverage is the most important
explanatory variable. Leverage and IC disclosure score are significantly and positively
related in all models. Although the results are not in line with most studies on IC
determinants, which show no association between these variables, they are consistent
with findings by Garcia-Meca and Martinez (2005) and Williams (2001). The results
indicate that companies with high levels of debt have an incentive to disclose more
IC-related information as a signal of their favourable financial standing (Ahmed and
Courtis, 1999). This is because most IPO companies are likely to incur significant
start-up costs that decrease both their assets and their earnings, in turn increasing their
debt level.
There is a positive and significant relation at the 10 per cent level between
underwriter and IC disclosure score in Model 3 (i.e. the industrial products sector). The
results are contrary to Singh and Van der Zahns (2007, 2008) studies, which find no
significant relationship. The present study confirms the arguments made by Chen and
Mohan (2002). They argue that, because the underwriting firms are closely linked to
IPO companies, it is imperative especially that the leading underwriters influence
management to disclose more information voluntarily. Consequently, the supply of
additional information could assist the investors in making a more accurate valuation
of the company (Botosan, 1997) and eventually preserve their reputation as a
prestigious underwriting firm (Firth and Liau-Tan, 1998). However, no significant
relationship exists between underwriter type and IC disclosure score in the technology

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sector. Because high-technology companies are facing greater risk due to technology
changes, they have more incentive to disclose IC information regardless of underwriter
type.
The sample companies were grouped into two segments according to their listing
board, high-growth technology (MESDAQ market) and non-high growth technology
(main board and second board), as a proxy for listing location. The findings indicate
that the IC disclosure score is significantly related to the listing board in the combined
sector (Model 1) ( p , 0.05). However, the sample in Technology sector is
over-represented by companies classified as high-growth technology (97.1 per cent).
Conversely, the sample in Industrial Products sector is underrepresented by companies
grouped as high-growth technology (27.4 per cent). This reflects that the sample differs
markedly between high-growth technology and non-high-growth technology
classifications in both sectors and the results have the potential to become
erroneous. Consequently, the variable is dropped from Model 2 and Model 3 due to
concerns about sampling bias. The present study supports the view that the level of IC
disclosure and industry type are significantly associated, as expressed by Bukh et al.
(2005), Bozzolan et al. (2003) and Oliveira et al. (2006). It is estimated that
high-technology companies disclose more IC information than low-technology
companies do because the former tend to rely heavily on IC resources. Nevertheless,
this study detects a negative association implying that well-performed IPOs are likely
to reduce a companys level of voluntary disclosure in the longer term to safeguard its
competitive advantage (Williams, 2001).
6. Implications for managers, practitioners and researchers
This paper offers significant implications in the following ways. First, the findings of
the study help to extend the previous research on IC disclosure in this specific area,
i.e. to explore the determinants of IC disclosure in an emerging country, particularly in
the IPO setting. Recognising the growing importance of IC in the knowledge economy,
the presence of IC information is an important supplement to conventional financial
disclosure for revealing the companys value creation potential. The issue is of
particular important to Malaysia as it shifts to a knowledge-based economy. Hence,
this study provides an overview of the progress of IC disclosure practices, especially in
IPO prospectuses.
Second, the regulators and policy makers may find the results informative in
dealing with factors that enhance IC disclosure. In view of the Malaysian corporate
governance reforms agenda, the present study is timely in providing much-needed
empirical support of the efforts to improve transparency and promote higher standards
of disclosure to increase investor confidence. The low level of IC disclosure indicates
that the progress of IC reporting in Malaysia is limited due to the absence of specific
guidelines for IPO companies on how to incorporate various IC disclosures into their
prospectus. Increased disclosure of IC information is anticipated to allow for more
meaningful decision making on resource allocation by potential investors.
Finally, this study also developed a disclosure index specifically customised to
Malaysian IPOs. As such, the index can be employed as a basis for companies to report
their IC information, which, in turn, will increase the probability of companies
reporting IC in the prospectuses. The index can also act as a catalyst for developing
new approaches to corporate reporting that include greater disclosure of IC.

IC disclosures in
IPO prospectuses

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74

7. Limitations and future research

Although the study contributes to an understanding of IC disclosure in the Malaysian
IPO setting, it is limited in three ways. First, this study only examines IPO
prospectuses in one country. Future research should seek to enlarge the current sample
to further investigate the precise nature of IC disclosure and enhance the comparability
between nations or sectors. Second, the method of analysing the content of
prospectuses merely detects the presence or absence of a particular IC item from a
predetermined checklist. A more robust method should be utilised to measure both the
quantity and the quality of IC disclosures. Finally, although multiple regression
analysis is the most common regression model used in analysing the determinants of
IC disclosure, it is interesting to observe the results from using different methods, such
as censoring or truncated regression models or Bayesian estimation.
8. Conclusions
This study provides valuable insights on the factors affecting the disclosure of IC
information using multiple regression analysis. The population of interest comprises
130 companies in the technology and industrial products sectors that applied for initial
listing on Bursa Malaysia over the period from 2004 to 2008. The study investigated
the effects of nine potential determinants of IC disclosure level. In general, the results
provide evidence that board size, board independence, company age, leverage,
underwriter and listing board significantly influence the extent of IC disclosure in an
IPO prospectus. Nonetheless, the effect of each explanatory variable may vary in every
model estimated, perhaps due to different sectors and environments. On the other
hand, the study finds no significant association with board diversity, size or auditor
type. The study also presents the trend on disclosure of IC information in Malaysian
IPO prospectuses. It reveals the following:
.
the extent of IC disclosure seems to be relatively low (34.99 per cent, or 28 items
out of 84); and
.
R&D information is disclosed most frequently, followed by process, strategy,
customer, human resource, and IT information.
Despite the low level of IC disclosure, the presence of IC information in the prospectus
is a signal that urgent needs exist, first, to create a mutually agreed-upon framework
for IC and, second, to understand what IC exactly is.
Note
1. It is important to note that if a disclosure item was stated repeatedly in a prospectus, it was
captured once on the scoring sheet.
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1. Description of investments in
information technology
2. Reason(s) for investments in
information technology
3. Description of existing
information technology
systems
4. Software assets held or
developed by the firm
5. Description of information
technology facilities (e.g.
buildings)
6. Information technology
expenses

1. Employee breakdown by age

2. Employee breakdown by gender
3. Employee breakdown by
nationality
4. Employee breakdown by
department
5. Employee breakdown by job
function
6. Employee breakdown by level of
education
7. Employee breakdown by
seniority
8. Rate of employee turnover
9. Comments on changes in the
number of employees
10. Comment on employee health
and safety
11. Employee absenteeism rate
12. Comments on employee absentee
rate
13. Discussion of employee
interviews
14. Statements of policy on
competency development
15. Description of competency
development programs and
activities
16. Education and training expenses
17. Education and training expenses
by number of employees
18. Employee expenses by number of
employees
19. Recruitment policies of the firm
20. Separate indication firm has a
HRM department, division or
function
21. Job rotation opportunities
22. Career opportunities
23. Remuneration and incentive
systems
24. Pensions
25. Insurance policies
26. Statements of dependence on key
personnel
27. Revenues to employee
28. Value added to employee
1. Statements of policy, strategy
and/or objectives of R&D
activities
2. R&D expenses
3. Ratio of R&D expenses to sales
4. R&D invested into basic
research
5. R&D invested into product
design and development
6. Details of future prospects
regarding R&D
7. Details of existing company
patents
8. Number of patents and licenses
etc.
9. Information on pending patents

Research & development

Source: Adapted from Bukh et al. (2005); Cordazzo (2007); Singh and Van der Zahn (2007)

Information technology

Human resource
1. Information and
communication within the
company
2. Efforts related to the
working environment
3. Internal sharing of
knowledge and information
4. External sharing of
knowledge and information
5. Measure of internal
processing failures
6. Measure of external
processing failures
7. Discussion of fringe benefits
and company social
programs
8. Outline of environmental
approvals and statements/
policies

Process
1. Description of new
production technology
2. Statements of corporate
quality performance
3. Information about strategic
alliances of the firm
4. Objectives and reason for
strategic alliances
5. Comments on the effects of
the strategic alliances
6. Description of the network
of suppliers and
distributors
7. Statements of image and
brand
8. Corporate culture
statements
9. Statements about best
practices
10. Organisational structure of
the firm
11. Utilisation of energy, raw
materials and other input
goods
12. Investment in the
environment
13. Description of community
involvement
14. Information on corporate
social responsibility and
objective
15. Description of employee
contracts/contractual issues
16. Future plans and strategies

Strategy

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1. Number of customers
2. Sales breakdown by customer
3. Annual sales per segment or
product
4. Customers geographical
breakdown
5. Average purchase size by
customer
6. on key customers
7. Description of customer
involvement in firms
operations
8. Description of customer
relations
9. Education/training of
customers
10. Ratio of customers to
employees
11. Value added per customer or
segment
12. Absolute market share (%) of
the firm within its industry
13. Relative market share (not
expressed as percentage) of
the firm
14. Market share (%) breakdown
by country/segment/product
15. Repurchases by customers
16. Competitors
17. Marketing

Customer

Appendix: Framework for the collection of intellectual capital information

IC disclosures in
IPO prospectuses

79

Table AI.
Intellectual capital
information disclosure
items (di)

JIC
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80

About the authors

Azwan Abdul Rashid is a Senior Lecturer at the Department of Accounting, Universiti Tenaga
Nasional, Malaysia. He is currently pursuing his PhD at Universiti Teknologi MARA, Malaysia
in the field of intellectual capital disclosure. A member of the Malaysian Institute of Accountants,
and his research interests include intellectual capital, corporate governance and financial
reporting. Azwan Abdul Rashid is the corresponding author and can be contacted at:
azwan@uniten.edu.my
Muhd Kamil Ibrahim served as a Professor with the Faculty of Accountancy, Universiti
Teknologi MARA, Malaysia before joining Taibah University, Kingdom of Saudi Arabia. His
research articles appear in academic journals such as Journal of Intellectual Capital, Journal of
Financial Reporting and Accounting, Corporate Governance, The International Journal of
Business in Society, International Journal of Business and Economics and Asian Accounting
Review.
Radiah Othman was an Accounting Lecturer with the Faculty of Accountancy, Universiti
Teknologi MARA, Malaysia since 1997. She has published more than 20 articles in academic and
professional journals such as Corporate Governance, Corporate Social Responsibility and
Environmental Management, International Journal of Disclosure and Governance, and Journal of
Financial Regulation and Compliance. She currently serves as a Senior Lecturer with the School
of Accountancy, Massey University, New Zealand.
Kok Fong See is based at the School of Economics, University of Queensland, Brisbane,
Australia.

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