Does intellectual capital disclosure reduce an IPO's cost of capital?

Abstract

PurposeThe pivotal aim is to examine the association between underpricing and intellectual capital (IC) disclosures amongst Singapore initial public offerings (IPOs). A secondary aim is to elaborate on the research by Bukh into IC disclosures by Danish IPOs.Design/methodology/approachUsing a theoretical framework based on the notions of ex ante uncertainty and information asymmetry, the study examines empirically 334 Singapore IPO prospectuses between 1997 and 2004.FindingsContrary to theoretical predictions and much of the prior financial disclosure/underpricing research, we find a positive association between underpricing and the extent of IC disclosure. Additional sub‐sample analysis shows that the positive association holds across the market's broader industry base, but is strongest amongst IPOs that are heavily reliant on IC resources.Research limitations/implicationsThe research studies Singapore IPOs only, within a specific timeframe (1997‐2004), and concentrates on a single disclosure mechanism (though the one considered most significant to an IPO).Practical implicationsEmpirical analysis suggests issuers may not use IC disclosures effectively to reduce their cost of capital. Rather, they use IC disclosures as a strategic tool to complement underpricing. Further, findings suggest policymakers may need to introduce minimal uniform IC disclosure requirements to prevent a speculative IPO market from developing as the significance of IC increases.Originality/valueStudy is the first to provide empirical evidence of the association between IC disclosures and underpricing. Further, it is one of the very first to examine the consequences of IC disclosures and thereby provide a new path for future IC disclosure research.

Determinants of Non-Disclosure of Intellectual Capital Information in Malaysian IPO Prospectuses

“…The data used in this study are obtained manually from the prospectus of each IPO downloaded from the website of Bursa Malaysia. Consistent with previous IC disclosure studies (see, for example, Bukh et al, 2005;Cordazzo, 2007;Singh & Van der Zahn, 2007), this study employs content analysis to measure the extent of IC disclosure in IPO prospectuses. A widely used technique for investigating IC disclosure, content analysis enables researchers to record qualitative and quantitative information in predefined categories to understand the disclosure pattern in published media (Beattie & Thomson, 2007;Guthrie et al, 2004).…”

“…This fact is especially important in the Malaysian IPO setting, where empirical studies on IPO underpricing are significantly higher in the past (Prasad et al, 2006;Uddin, 2008). Furthermore, the underpricing phenomenon is recognised as the major cost of capital for an IPO (Singh & Van der Zahn, 2007). This situation implies the presence of asymmetric information and an increased need for greater disclosure to reduce underpricing.…”

“…Furthermore, the lack of an established framework for reporting IC information leads to considerable variation in prior studies pertaining to the disclosure categories and number of items disclosed (Gerpott et al, 2008;Guthrie & Petty, 2000). Although guidelines on IC practices have been issued in several countries (see, for example, German Ministry of Labour, 2004; Australian IC Guidelines, 2005; Putting IC into Practice Guidelines by Nordic countries, 2006), thus far, there is no commonly accepted index or indicators to provide companies with a basis for the measurement and reporting of their IC information (Singh & Van der Zahn, 2007).…”

“…This is especially true for an emerging country like Malaysia, where the field of IC disclosure is relatively new (Abdullah &Sofian, 2009;Kin, 2002). Whereas many studies (see, for example, Guthrie et al, 2004;Vergauwen et al, 2007) have investigated IC disclosure practices in companies' annual reports, only a few studies have attempted to do so by analysing prospectuses, as in Denmark (Bukh et al, 2005), Italy (Cordazzo, 2007), Singapore (Singh & Van der Zahn, 2007) and Malaysia (Warn &Somasundaram, 2010). Overall, studies in an IPO setting suggest that IC disclosure is relatively limited in companies' prospectuses.…”

Pengungkapan Intellectual Capital, Reputasi Underwriter dan IPO Underpricing

“…Singh dan Van der Zahn (2007;2008) dalam penelitiannya menggunakan indeks pengungkapan intellectual capital yang dikembangkan dari indeks penelitian sebelumnya oleh Bukh et al (2005). Indeks pengungkapan tersebut dari 84 item yang membagi intellectual capital menjadi 6 komponen, yaitu: karyawan ada 28 item, pelanggan ada 16 item, teknologi informasi ada 6 item, proses ada 9 item, riset dan pengembangan (R&D) ada 9 item, serta pernyataan strategis ada 16 item.…”