The impact of intellectual capital disclosure on cost of equity capital: a case of French firms/El impacto de la divulgación de capital intelectual sobre el coste del capital social: el caso de las empresas francesas.
| Autor | Boujelbene, Mohamed Ali |
| Cargo | Art |
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Introduction
Investigating the economic consequences of information disclosure is a matter of considerable interest in the accounting and finance research.
The main motivation for such research is their implications for policy making, especially, to the standard-setting process (Christensen et al., 2007).
In fact, understanding the economic consequences of information disclosure can provide a basis for evaluating the costs and benefits of disclosure (Leuz & Verrecchia, 2000; Verrecchia, 2001), which are an important consideration in the standard-setting process (Botosan, 2006).
In the context of the consequences of disclosure, the question of whether firms benefit from increased disclosure via a lower cost of capital remains a controversial issue.
In fact, although, a large number of studies have attempted to find answer to this question, however, they have generated mixed results. Results ranged from highly negative impact to an insignificant impact till having a significantly positive one (see Botosan, 1997; 2006)
To reconcile these conflicting results, several researchers adopted different types of disclosure, For example, the aggregate disclosures (Botosan, 1997; Botosan & Plumlee, 2002; Espinosa and Trombetta, 2007; Francis et al., 2005; Hail, 2002), social disclosures (Richardson & Welker, 2001), quarterly and other public relations disclosures (Botosan & Plumlee, 2002), timely strategic disclosures (Gietzmann & Ireland, 2005) and Intellectual capital disclosure (Mangena et al. 2010; Orens et al., 2009).
Through a literature review, Botosan (2006), reviews the relevant academic research that can provide insights into the issue of relationship between disclosure and cost of capital. She shows that the findings are generally mixed, and even more importantly, suggests that the impact of disclosure on cost of capital varies depending of the type of information.
For example, whilst some studies reveal a negative relationship with aggregate disclosures (Botosan, 1997; Francis et al., 2005; Hail, 2002) and timely strategic disclosures (Gietzmann & Ireland, 2005), others present a positive relationship with social disclosures (Richardson & Welker, 2001) and timely (quarterly report) disclosures (Botosan & Plumlee, 2002). Yet others show no relationship between the cost of capital and investor relations activities (Botosan & Plumlee, 2002) and no evidence of a lower cost of capital for switching from local to IFRS/US GAAP (Daske, 2006).
Botosan (2006), calls for additional research to enhance our understanding of the impact of different types of disclosure on cost of equity capital.
In this study, we investigate the role of information in affecting a firm's cost of capital. Our particular focus is on the specific roles played by the Intellectual capital disclosure.
The choice of the intellectual capital disclosure is motivated by first the importance of information related to the most relevant component in the value-creating processes, second for the growing demand of this kind of information and finally for the role played of the intellectual capital disclosure to compensate for the value relevance loss of traditional financial reporting
Intellectual capital disclosure comprises three categories: human capital, structural capital and relational capital. Human capital captures the knowledge, professional skills, experience and innovativeness of employees within an organization. Structural capital consists of the structures and processes employees develop and deploy in order to be productive, effective and innovative, whilst relational capital captures the knowledge of market channels, customer and supplier relationships, and governmental or industry networks. The key questions addressed by this study are:
* Is there a negative association between the cost of equity capital and level of intellectual capital disclosure in annual reports?
* Is there a negative association between the cost of equity capital and the level of disclosure in the three individual intellectual capital categories (human, structural and relational capital)?
The remainder of the present paper is structured as follows. Section 2 reviews prior literature and includes our hypotheses. Section 3 discusses the research design and Section 4 presents the results of the empirical analyses. Section 5 summarizes the paper and provides some questions for further research.
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Literature review and hypothesis development
The impact of disclosure on cost of equity capital has been investigated in recent years by several theoretical and empirical studies. From the theoretical point of view it has been argued that disclosure reduces information asymmetry, and consequently reduces firms' cost of equity capital. However, empirical results are mixed and depend crucially on the measures of disclosure and cost of equity capital (Espinosa & Trombetta, 2007).
From a theoretical perspective, the association between disclosure and a firm's cost of capital is supported by two related streams of theoretical literature (see Botosan, 1997).
The main postulate of these streams of the literature is that firms which provide more information about their activities reduce information asymmetry in the capital markets.
The first stream suggests that better disclosure increases stock market liquidity, thereby reducing the cost of equity capital either through reduced transaction costs or increased demand for a firm's securities. This line is represented by Amihud and Mendelson (1986) and Diamond and Verrecchia (1991).
The second stream of research suggests that better disclosure may reduce cost of capital by reducing non-diversifiable risk estimate. This thrust is represented by Barry and Brown (1985), Handa and Linn (1993), Coles et al. (1995).
From an empirical perspective, a sizeable body of studies has investigated empirically the association between cost of equity capital disclosure and different disclosure types (aggregate disclosure, social, timely, intellectual capital disclosure...).
Botosan (1997) was the first to empirically explore the relationship between the cost of capital and aggregate disclosure.
Using annual report of 122 American firms operating in the machinery manufacturing industry within one year (1990), she documents a negative association between the cost of equity capital and voluntary disclosure level for firms with a low analyst following but finds no association between these variables for firms with a high analyst following.
Hail (2002) used a similar procedure and found in the examination of a sample of 73 Swiss firms a negative and highly significant association between voluntary disclosure and cost of capital.
In international setting, Francis et al. (2005) examine the same relation using a sample of firms from 34 countries. They also find that firms in industries with greater external financing needs have higher voluntary disclosure levels, and that an expanded disclosure policy for these firms leads to a lower cost of capital.
Richardson and Welker (2001) investigate the relation between two types of disclosure (social and financial disclosures) and the cost of capital for a sample of Canadian firms within three years 1990-1992). They find that the financial disclosure is negatively related to the cost of equity capital for firms with low analyst following. However, contrary to their expectations, they document a significant positive relation between social disclosures and the cost of equity.
In an extension of Botosan (1997), Botosan and Plumlee (2002) examine the association between the cost of equity capital and levels of annual report disclosures, timely disclosures (quarterly and other published reports), and investor relations activities. They find that the cost of equity capital decreases with increased annual financial disclosures level but increases with greater level of timely disclosures. They find also no association between the cost of equity capital and the level of investor relations activities.
Concerning the positive impact of timely disclosure which is contrary to theory, they suggest that is due to the increased stock price volatility because this type of disclosure attracts transient investors who trade aggressively on short-term earnings.
Gietzmann and Ireland (2005) criticize Botosan and Plumlee's (2002) study arguing that the positive relationship documented for timely disclosures may have arisen due to problems with the measurement of disclosure. In a UK context, they construct an innovative measure of timely disclosure that attempts to capture quality rather than quantity of strategic disclosures. They find that timely disclosures are negatively related to the cost of capital for firms with aggressive accounting policies than for those with conservative accounting policies.
Espinosa and Trombetta (2007) also document a negative relationship between disclosure and cost of capital for firms with aggressive accounting policy. Using a sample of Spanish firms quoted on the Spanish continuous market from 1999 to 2002, they confirm that the relationship between disclosure and cost of capital is affected by the choice of accounting policy. They find a negative relationship between disclosure and cost of capital for firms with aggressive accounting policy.
In the new knowledge economy, where intellectual capital plays a key role in the value-creating processes (Guthrie et al, 2012; OCDE, 2008; Zeghal & Maaloul, 2011), some studies focus on the voluntary information regarding this hide capital.
Singh and Van der Zahn (2007) examine empirically the association between underpricing and intellectual capital disclosures using a sample 334 Singapore IPO prospectuses between 1997 and 2004. Contrary to theoretical predictions, they find a positive association between underpricing and the extent of intellectual capital disclosure. However, this study uses under-pricing in IPOs rather than the cost of capital directly...
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