Intellectual capital, corporate governance and firm value : pre- and post- Malaysian Financial Reporting Standards adoption

Abstract

Intellectual Capital is gaining prominence in a knowledge-based economy. This is because in this type of economy, firms’ value creation depends more on intangible assets, including intellectual capital, rather than tangible assets. Therefore, the current research emphasizes on intellectual capital disclosure and intellectual capital performance practices, taking into consideration Malaysian Financial Reporting Standards (MFRS) adoption and Malaysian Code of Corporate Governance (MCCG) amendment in 2012. The current study has four objectives: First, it systematically studies firm characteristics as determinants of intellectual capital disclosure using the meta-analysis technique. Secondly, it investigates the trends and determinants of intellectual capital disclosure, including the regulatory changes of Malaysian listed companies. Thirdly, it examines the association between intellectual capital disclosure and intellectual capital performance with firm market capitalisation in the Malaysian context. Finally, it tests the moderating effect of corporate governance on the association between intellectual capital disclosure and intellectual capital performance with firm market capitalisation in the Malaysian listed companies. The study gathered secondary data (published papers, DataStream and annual reports data for the years 2011, 2012 and 2013). Meta-analysis technique was used to review intellectual capital disclosure determinants literature. The study developed a disclosure index to measure the extent of intellectual capital disclosure in the annual reports and another index to measure corporate governance. Then, Value Added Intellectual Coefficient was calculated to measure intellectual capital performance. The main statistical techniques, conducted in this study, are: descriptive statistics, univariate analysis (i.e. one way ANOVA) and multivariate analysis (i.e. panel data regression). Findings from the meta-analysis technique indicated that firm size, profitability and industry type are determinants of intellectual capital disclosure. Subsequently, results from the descriptive statistics revealed moderately high intellectual capital disclosure extent, although there was no significant improvement over the years 2011 to 2013. Moreover, Malaysian listed firms disclosed more human capital information compared to other categories of intellectual capital. The study’s regression results provide evidence that Malaysian Financial Reporting Standards and corporate governance are determinants of intellectual capital disclosure. However, neither intellectual capital disclosure nor intellectual capital performance were significantly associated with firm market capitalisation. This is because only Capital Employed Efficiency, a component of intellectual capital performance, was significantly associated with firm market capitalisation. Nevertheless, the study found that the association between intellectual capital performance with firm market capitalisation became significant only when it is moderated by corporate governance. This study is considered useful because the meta-analysis technique has summarized the literature and highlighted the determinants of intellectual capital disclosure for future reference of researchers. Then, the regression results have provided empirical evidence that the regulatory requirements of Malaysian Financial Reporting Standards and Malaysian Code of Corporate Governance, both have had a positive effect on intellectual capital disclosure. These findings indicate that regulators’ efforts have been worthwhile. Then, from the findings, a recommendation may be made to companies to invest more on structural capital as Capital Employed Efficiency influences firm value, however human capital is disclosed most in the annual reports of Malaysian companies. Finally, the findings provide empirical support for agency theory and the importance of corporate governance in enhancing intellectual capital performance’s effect on firm value. As Malaysia strives to become a developed nation and promotes a knowledge based economy more efforts should be directed toward increasing intellectual capital since the study’s findings revealed that intellectual capital performance does influence firm value, consequently the capital market, through a direct interaction with corporate governance.