Evaluating disclosure theory using the views of UK finance directors in the intellectual capital context

Abstract

In contrast to most prior research in this area, which focuses on actual disclosures, this study uses a large-scale direct method to investigate the factors that a key preparer group believes influence intellectual capital (IC) disclosure decisions. IC disclosures are typically characterised by uncertainty of interpretation and high levels of commercial sensitivity. A questionnaire elicits 93 UK-listed company finance directors' views regarding the influences on these decisions. Results are used to evaluate the relative explanatory power of several theoretical and practical reasons for disclosure. Strongest support is found for competitive disadvantage and capital market considerations. Issues related to legitimacy theory, stakeholder theory and other economic disclosure costs also feature. Factor analysis reduces the set of 28 incentives and disincentives to 10 uncorrelated dimensions, indicating that a broad and complex set of overlapping factors affect the disclosure decision. The importance of disclosure incentives and disincentives is found to vary both within and between disclosure topics, which may explain the variation in findings in prior research.

Keywords:

• disclosure theory
• intellectual capital
• questionnaire survey
• voluntary disclosure

Acknowledgements

We  thank The Scottish Accountancy Trust for Education and Research for funding the research upon which this paper is based. Particular thanks go to the 93 finance directors who completed the questionnaire. We also thank the two anonymous reviewers and the editor for their helpful comments.

Notes

Studies tend to investigate either human capital or all three IC categories in combination.

An example would be disclosures about drug trials and new products from a biotech company – where knowledge of similar projects by competitors would condition the external user's interpretation of the valuation impact of the disclosure. (We are grateful to an anonymous reviewer for making this point to us).

Under International Standards on Auditing, voluntary disclosure in the annual report is merely ‘reviewed’ by the auditors for consistency with the financial statements, and so may not be fully credible; disclosures made outside the annual report offer no assurance at even this level.

Industrial and commercial companies excluding investment trusts and real estate companies located in the Channel Islands.

The initial draft was piloted using contacts provided by The Institute of Chartered Accountants of Scotland (ICAS).