SHS Web of Conferences 34 , 07001 (2017) DOI: 10.

1051/ shsconf/20173407001

FourA 2016

Intellectual capital disclosure determinants and its effects on the

market capitalization: evidence from Indonesian listed
companies

Angga Arifiawan Sudibyo1, *, and B. Basuki2

Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia

Abstract. Currently, intellectual capital (IC) is the main source of company’s competitive advantage. The role
of IC has become one of the main factors of company’s value creation process. Since companies rely more on
their intangibles (including IC), management must provide an appropriate annual report in which discloses
information regarding IC in order to give better information to the related parties. The aim of this study is to
examine variables that expected to have a significant influence to the level of intellectual capital disclosure
(ICD) practices in Indonesian listed companies’ annual reports. A content analysis method is used to examine
the ICD level, based on the framework developed by [1]. The IC information was collected from 135
Indonesian LQ45 listed companies, which derived from their annual reports from the year 2012 to 2014.
Sample companies are classified into two groups of industries: high- and low profile industries in order to
analyze differences in IC reporting practices between the two groups. The empirical results proved that
company size, industry type and market capitalization are significantly associated with the ICD, while the
influence of company profitability on the level of ICD is not significant. Furthermore, it is revealed that there is
no significant difference in the intellectual capital disclosure practices between companies in high- and low-
profile industries.

Keywords: Intellectual capital disclosure; Content analysis; Annual report; Industry type; LQ45; Indonesia
Stock Exchange; Independent t-test; Market Capitalization, ROA

1 Background
Recently, new economies are shifting towards a knowledge-based economy or knowledge economy (KE) in which
companies’ competitiveness and sustainability are increasingly dependent of knowledge based resource. The dramatic shift
from material sources to knowledge, from hardware to software is actually experiencing by companies across the world.
Their key economic resources are no longer natural resource or physical capital, but the knowledge itself [2]. The transition
from manufacturing-based economies towards knowledge-based economy makes a continuous enhancement of IC
importance in company’s value creation process.
[3] found that the relevance of traditional financial accounting model is unable to represents the key factors of
company’s long term value (i.e., intangible assets). Companies with traditional financial accounting valuation method are
based on balance sheet, income statement or statement of cash flow. Stakeholders have been dissatisfied with this traditional
financial reporting made by companies and its capability to present users with sufficient information about company’s
ability to create wealth. [4] as one of the pioneers in intellectual capital studies are argued that reporting intellectual capital
of companies’ intangible assets is a substantial way of connecting the information gap that may exist between owners and
managers.
There are numerous prior study related to IC and even they have taken similar variables, but the empirical results were
varying and several studies have contradictory results. This condition is likely happened because until now there is still no

*Corresponding author: anggasudibyo@live.com

© The Authors, published by EDP Sciences. This is an open access article distributed under the terms of the Creative
Commons Attribution License 4.0 (http://creativecommons.org/licenses/by/4.0/).
SHS Web of Conferences 34 , 07001 (2017) DOI: 10.1051/ shsconf/20173407001

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regulation or standards of reporting of IC information on the annual reports. In case of Indonesia, the regulation regarding to
components of Intellectual Capital is stated in [5]. However, the scope is very limited only for intellectual property that can
be included in traditional financial statement. The list of IC items that should be reported in the company’s annual report
until now is still not regulated yet.
This study concentrates on empirical study on the firms’ characteristics (company size, industry and profitability) that
becomes the determinants of ICD. It is aimed to also find empirical evidence on the influences of Intellectual Capital of
company that represented in their annual report to its market capitalization during the year 2012 until 2014. Companies
listed in LQ45 index selected as the sample in this study. LQ45 companies are known for their high market capitalization
and transaction value, and also have a good prospect of growth. Thus, those companies are expected to be more active in
disclosing their IC. These companies come from various industries so then it is expected to be able in representing two types
of industries (high- and low-profile) that become one of the variables in this study. This study also hopes to be able in
comparing the level of intellectual capital disclosure between companies in high-profile and low-profile industries.

2 Literature review and hypotheses development

Under the stakeholder theory, a company should consider that stakeholders have a powerful competency to influence
management in managing the resources owned by the company. The greater power of stakeholders, the greater company’s
effort in creating value will be. By appropriately managing the resources, the company will be able to create more value and
enhance the financial performance. A company’s strategic information including IC information should be communicated to
the stakeholders in order to meet their needs. Therefore, as the company disclose their IC information, it is expected to raise
the confidence of stakeholders regarding to the company and reduce the risk and uncertainty faced by investors.
A company’s resources consist of all assets, both tangible and intangible, capabilities, organizational processes, human
and nonhuman identified and controlled by the company, and that permit it to consider and apply value-enhancing strategies
[6]. Based on Resource-based View (RBV) Theory, a company will have a competitive advantage when it is able in
implementing a value creating strategy, not by simultaneously being implemented by any current or potential competitors.
[7] explained about difference strategies (defender and prospector) can be implemented by company to reach its competitive
advantage. Knowledge based resource is mainly derived from the RBV ideas. Knowledge resource within a company will
allow company to compete either by being a defender or prospector. Intellectual capital, according to RBV point of view, is
considered as an important source of competitive advantage because IC items are mostly able to fulfil the attributes of good
resource. Thus, it is expected to make a competitive advantage for the company.
Moreover, the basic ideas of signalling theory stated in [8] signalling is a reaction to information asymmetry, it was
also used in many accounting studies to explain voluntary disclosure practices of accounting information [9]. [8] proposed
that between two parties could get asymmetric information problem if one party send a signal that would reveal some
relevant information to the other party. Thus, that informed party will interpret that given signal and adjust the purchasing
behaviour. Information of IC in the annual report can be interpreted as a signal. Companies should signal their IC to their
stakeholder or to the capital market as “good news” in order to increase the share price or attract new investors.

2.1 Intellectual Capital Disclosure

Intellectual Capital is often divided into different components: human capital (HC), relational capital (RC), and structural
capital (SC). HC includes knowledge, skills, and experience owned by the employees of the company. Structural capital
(SC) refers to knowledge that attached to the structure and organization process, including corporate culture, share of
knowledge, technology, and availability of information systems. Relational or Customer capital is a good relation
(association network) owned by company to its stakeholders. The relation here refers to the supplier relations, customer
loyalty, goodwill and a good relation with government and society in general. Petty and [10] argues that external capital
defined as company’s ability to identify the need of the market, so that a good relation may be build between company and
external parties. It is argued that between these two IC components is dependent-independent each other. [10] stated that
the creation of patent highly depends on the HC, but after it is completed, it considered as company’s SC. Information on
intellectual capital is important to stakeholders in their decision-making. The greater disclosure provide by a company might
reduces the uncertainty be faced by investors and thus it will reduce company’s cost of capital. Even though disclosing
intellectual capital still voluntarily done by the company, but the number of companies that realized the importance of
reporting non-financial information is increasing over years.

2.2 Company Size

Company sixe is reflected by the value of total assets stated in company’s balance sheet. The greater amount of total assets,
the larger the size of a company, and vice versa. The size of company may affect the company’s operating capabilities that
will affect the share returns of companies. Studies by [11], [12] and [13] found that size is a significant determinant for

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intellectual capital disclosure. [12] notes that large companies are basically have more value-driven activities and also larger
companies being more visible and obtain more attention by the stakeholders, such as public and government.
H1: Company size has influences on the intellectual capital disclosure

2.3 Industry Type

Information disclosed by companies in particular industry which they consider as relevant, is might not always considered
as relevant information for companies in another industry [14]. This study propose that type of industry is a key factor for
intellectual capital disclosure recall that intellectual capital among companies in some industries are more important than
companies in other industries. The sample is into two groups of industries which are high-profile and low-profile industry.
High-profile industries as companies with high consumer visibility, political risk and strong competition among its
competitors and whose economics activities more likely to modify their environment, more often discloses the environment
impacts rather than other industries, while low-profile industries are the otherwise of high-profile industries. According to
[15] companies classified into high-profile industries are mining, chemical, wood, automotive, aviation, agriculture, tobacco
and cigarettes, food products and beverages, media and communications, energy (electricity), engineering, health and
transport and tourism. Meanwhile, companies in low-profile industries include real estate industry, finance and banking,
healthcare, consumer goods, retail and household products. The general expectation is that companies in high-profile
industries will disclose more IC information than companies in low-profile industries. High profile companies are more
likely to be reliant on intellectual capital and therefore high profile companies are likely to disclose more intellectual capital
information under the annual reports.
H2.1 Industry types has influences on the intellectual capital disclosure
H2.2 There is a significant difference of the level of intellectual capital disclosure between high-profile and low-profile
industries

2.4 Profitability
Companies with higher profitability are expected to disclose more information to the public in comparison to the companies
with lower profitability. According to [6] resource-based view (RBV) theory, companies are able to generate value and will
indicate a profitable growth if they follow those growth opportunities that will fit to their resources base. Higher profit
companies are mainly attributed to their competitive advantage. Companies that have competitive advantages assumed that
they have more financial resources so then they are able to disclose more.
H3 Company’s profitability has influences on the intellectual capital disclosure

2.5 Market Capitalization

Market capitalization can be defined as the total worth of companies’ securities in the capital market [16]. IC is a part of
companies’ capital and resources, in which contributes to the wealth creation process. Information regarding IC in annual
reports helps to make capital markets more efficient by reducing the information asymmetry problems between management
of company and its investors. Additionally, IC disclosure helps the capital market to provide a more accurate market
capitalization of firms [17]. When stakeholders have better understanding about the company, they will belief in company’s
future capabilities in creating more profit, so then it might raise the company stock price (market capitalization increase).
H4 Company’s Market Capitalization is influenced by the disclosure of Intellectual Capital

2.6 The differences of ICD between High Profile and Low Profile Industry
This study divided the sample companies into two groups of industries which are high-profile and low-profile industry.
Thus, from the study it is expected to be able in explaining any differences of the level of ICD between those two types of
industries. The general expectation is that companies in high-profile industries will disclose more IC information than
companies in low-profile industries. High profile companies are more likely to be reliant on intellectual capital and
therefore high profile companies are likely to disclose more intellectual capital information under the annual reports.
However, a study by [11] has been found that companies belonging to high-profile and low-profile industries disclose the
same level of ICD under the annual reports.

H5 There is a significant difference of the level of intellectual capital disclosure between high-profile and low-profile
industries

3 Research methods
3.1 Sample Selection

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Data collected are obtained by using documentation technique which comprising the company’s annual reports. A sample of
Indonesian LQ45 companies was selected for content analysis of the annual reports from the three-year periods from 2012
until 2014. The reason behind the selection of LQ45 is due to it is the 45 most liquid and most heavily traded stocks in the
Indonesia Stock Exchange (IDX). Additionally, it represents various industries in the stock market.

3.2 Content analysis of annual report

This study uses content analysis to collect empirical data about ICDs [18]. Content analysis has been argued as the most
reasonable methodology for data collection. The ICD index used in this study replicates the index constructed to measure
both the extent and quality of IC disclosures (Li et al., 2008). This index contains of 61 items that covered the three IC
subcomponents of structural, relational, and human capital. 22 items are HC elements, 18 are SC, and the remaining 21
represent RC elements (see Table 3.1). IC related items appears on the annual report will be scored 1, if there is no
disclosure will be scored 0. Thus, the sum of all obtained scores represents company’s ICD score. The level of disclosure
for each company’s annual report is then calculated by dividing the sum or total score of disclosure with the total number of
items scored.
Σ

  = 100% …………………………….. [Eq X]


There are three independent variables: company size, industry type, profitability, and intellectual capital disclosure,
while the dependent variables are intellectual capital disclosure and market capitalization.

Table 3.1: IC Framework

Classification of intellectual capital, Li et al (2008)

Human Capital Relational Capital

Number of Employee Customers
Employee age Market presence
Employee Diversity Customer relationships
Employee Equality Customer acquisition
Employee Relationship Customer retention
Employee Education CTE
Skills/ know-how Customer involvement
Employee Competences Company image
Employee Knowledge Company awards
Employee Attitudes Public relation
Employee Commitments Diffusion & networking ͒
Employee Motivation Brands
Employee Productivity Distribution channels
Employee Training Relationship with suppliers
Vocational Qualifications Business Collaboration
Employee Developments Business agreements
Employee Flexibility Favourite contract
Entrepreneurial Spirit Research collaboration
Employee Capabilities Marketing
Employee Teamwork Relationship with stakeholders
Employee Community Involvement Market leadership
Other Employee Features
Structural Capital
Intellectual Property Technology
Process Financial dealings
Management Philosophy Customer support function
Corporate Culture Quality management & improvement
Organization Flexibility Knowledge-based infrastructure
Structure Accreditations (certificate)
Learning Overall infrastructure/ capability
Research & Development Networking
Innovation Distribution Network

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Results and discussions

The results of multiple linear regression analysis show that variable SIZE and TYPE has significant influence
towards the level of ICD, while company’s profitability, denoted by ROA has no significant influences towards the level of
ICD. The second model examines the level of IC owned by company presented by ICD on annual reports towards
company’s Market Capitalization (MCAP) proved that the relationship between these two variables is significant. Table
below provides the result of independent sample t-test in regard to compare the level of ICD between Indonesian companies
in high- and low-profile industries.

Simple Regression Results (Model 2)

MCAP
Independent Variables
t-statistic Sig.

ICD 5.082 0.001

Multiple Regression Results (Model 1)

ICD
Independent Variables
t-statistic Sig.

SIZE 3.639 0.001

TYPE 1.868 0.064
ROA 0.263 0.793
Independent Sample t-test 0.217 1.541

4 Research Discussions
4.1 The influence of Company Size towards Intellectual Capital Disclosure
The result indicates that SIZE has a significant positive influence towards ICD. The result is consistent with some previous
studies conducted by [11], [19], [12] and [13], which shows the company size has significant positive effects on the
intellectual capital disclosure. But this result is in contrast to study conducted by [20]. The result of this study proves that
the larger a company, the higher level of reporting conducted (including IC items). In other words, the larger LQ45
companies disclose more intellectual capital information than the smaller companies. Furthermore, larger companies are
generally becoming a subject to special attention from financial analysts, so that in order to maintain their credibility, they
have to be transparent to the public.

4.2 The influence of Industry Type toward Intellectual Capital Disclosure

The result also showed that the industry type having a significant impact on intellectual capital disclosure at the level of
significance 10%. In regard with the signaling theory, company that hopes to send a positive signal to its stakeholders will
tend to disclose more information. This study also supports a study by Bozzolan et al. (2003) which argues that companies
within a same industry have the same motive in the reporting activities, so when a company show a lower level disclosure
compared to others within the same industry, it is a signal that company hiding some information.

4.3 The differences of ICD between companies in High-Profile and Low-Profile Industries
This study used independent-samples t-test to see the difference of level of intellectual capital disclosure between
companies in high-profile and low-profile industries. Table above shows that the value is greater than the level of
significance (0.217 > 0.10). Even tough according to the results of the prior hypothesis (H2) proved that high-profile
companies exhibit greater disclosure than low-profile companies, however the result of independent t-test indicated that
there is no statistically significant difference between high-profile and low-profile industries. This result is similar to the
study by [21]. In this case, the insignificant differences of ICD between this two types of industries is probably occurs

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because each company whether in high-profile or low-profile industries are tend to provide a complete information to the
stakeholders. Therefore, companies across the industries are equally eager to disclose information as complete as possible,
including information related to IC items as the company’s business strategy.

4.4 The influence Profitability towards Intellectual Capital Disclosure

The result of t-test shows that level of significance of ROA is above the significance value 0.1; it means that profitability
has no significant influence to ICD. The result is consistent with the study by [13] and [19] which also failed to support the
influence of profitability towards ICD.
The signaling theory by [8] explained that high profitability companies use their financial information to send signals
to the market. Furthermore, high profitability companies may have advantage to signal their stakeholder that they are a good
company by giving more information about the IC items in its annual reports. However, this study indicates that
profitability does not significantly influence the level of ICD. It related with the signaling theory, companies with high
profitability tend to not disclose more information related to intellectual capital because they already send a positive signal
to the market regarding the financial information. Thus, any additional voluntary disclosure made by company will no
longer necessary.

4.5 The influence of Intellectual Capital toward Market Capitalization

The result of the t-test showed that there is a high significant relationship between these two variables. The findings are
similar to study by [22] and [23]. The more IC items owned by company, the higher market capitalization would be. Under
the stakeholder theory, when a company has higher level of IC, the managers will let the public (stakeholders) know about
how is the management performance. The stakeholders would value more regarding to the information disclosure, and thus
it might decrease the misevaluation of the company’s share price. Moreover, eventually company’s share price would
increase. As a result of the higher share prices, company’s market capitalization would be also affected.

5 Conclusion, limitation and suggestion

The results proved that company size, industry type and market capitalization are significantly associated with the ICD,
while the influence of company profitability on the level of ICD is not significant. Furthermore, it is revealed that there is no
significant difference with regard to the intellectual capital disclosure practices between companies in high- and low-profile
industries.
There are several limitations of the study that influenced the interpretation of the results from the study. Firstly, only
three independent variables are used in the study (model 1) in order to examine the level of ICD. R2 result shows that those
variables are only able to explain the model at 8.1 %, and 91.8% are explained by other variables which have better
capabilities in explaining the ICD. The second limitation is the use of ROA. The study reveals that the ROA is not
significantly influence into the level of ICD.
Based on those limitations, this study proposed some suggestion to mitigate the limitations. First, future studies could
also analyses controlling factors to provide additional insights into the relationships between the IC’s determinants and ICD.
Even tough the role of control variables is not a primary concern in the results, but by adding some control variables hopes
that the value of coefficient of determinants will increased. Second, further research could use another measurement of
profitability such as ROE or NRM. Ideally, the different measurements of company profitability might offer a different
statistical result.

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