Do aggressive pro forma earnings-reporting firms have difficulty disclosing intellectual capital? Australian evidence

Abstract

Purpose The purpose of this paper is to investigate whether aggressive pro forma earnings-reporting firms are difficult in relation to signalling sufficient intellectual capital (IC), and how the market reacts to aggressive pro forma earnings reporting. Design/methodology/approach Content analysis of 610 annual reports of Australian firms listed on the Australian Securities Exchange 200 is used to obtain IC information. Fixed-effects logistic and ordinary least squares (OLS) regressions are used to examine the hypotheses. Findings The study finds that aggressive pro forma earnings reporting is negatively and significantly associated with sufficient IC disclosure. Moreover, this paper finds that investors react favourably to aggressive pro forma earnings reporting, and believe that pro forma earnings have greater incremental value-relevance information than statutory earnings. Research limitations/implications The coding framework used in this study comprises 33 IC items. Other studies have used coding frameworks comprising fewer or more varied IC items. Therefore, when comparing the results of this and other studies, the interpretation of the findings must recognise the differences in approach. Practical implications Sufficient IC disclosure may help investors to distinguish high-reporting-quality firms and low-reporting-quality firms. The paper demonstrates that aggressive pro forma earnings-reporting firms, which are low-reporting-quality firms, are less likely to disclose sufficient IC. Originality/value This paper is the first to examine the relationship between aggressive pro forma reporting and IC disclosure. Moreover, this paper built a theoretical framework based on signalling theory to develop research hypotheses, which extend the research on IC underpinned by signalling theory.

Intellectual Capital Disclosures and Corporate Governance in Gaining the Firms’ Non-Discretionary Profits and Market Value in ASEAN-5

“…With the addition of ICD, information disclosure in financial reporting will become comprehensive and potentially reduce bias on firm value (Hatane et al, 2019). Therefore, ICD is vital to lower information asymmetry (Yang, 2018). Information asymmetry is a condition where one party has more and better information than the other.…”

“…Information asymmetry in a company more often happens in agent-principal relationships, which may cause Earnings Management (EM) practice (Bendickson et al, 2016). EM is defined as management's actions in managing earnings in order to gain the desired profit, and so can mislead stakeholders on firm performance through the reported accounting numbers (Yang, 2018). Besides ICD, Corporate Governance (CG) is also another element that may limit EM occurrences.…”

“…Then, RCD is a firm's disclosure on its relationship with stakeholders, representing all resources related to the external relations of the company or company's business relationships (Simion & Tobă, 2018). Empirical studies show that a company that does not disclose IC causes information asymmetry and a lack of transparency, thereby losing the relevance of its financial reporting (Yang, 2018). Financial reporting relevance depends on the capacity of accounting information in explaining the firm value, which can be derived from the firm's share price (value relevance) (Vafaei et al, 2011).…”

“…On average, HCD is the highest, with RCD and SCD after that. Tables 4 to 6 contain ICD items that are compiled from several research papers by Nimtrakoon (2015), Zéghal (2015), Cabrita et al (2017) and Yang (2018). The disclosure column in these tables indicates how often a firm discloses IC.…”

“…Investment in Intellectual Capital (IC) is currently seen as the leading value creator for firms and economy sectors (Zéghal, 2015) and may positively influence investment decisions and firm value (Yang, 2018). IC is the knowledge, information, and practical experience which can be used to generate wealth for firms and thus become the foundation for competitiveness and is acknowledged as an essential asset to business performance (Cabrita et al, 2017).…”