This study is the first to empirically examine the applicability of the Value Chain Scoreboard™ proposed by Lev (2001) as an alternative disclosure framework for intangible assets (IA). The context of the research is the top 200 emerging market companies, which are the focus of increasing international attention. We empirically examine the extent of IA disclosures and find that emerging market companies do actively engage in voluntary disclosure practices to disseminate mainly quantitative IA information to their global stakeholders. Corporate-specific factors such as the adoption of IFRS/U.S. GAAP, industry type, and price-to-book ratio are key influences significantly associated with the level of IA voluntary disclosure. In addition, country-specific factors, including risks associated with economic policies and legal systems, are found to be significantly associated with the level of IA disclosure.
While there is an increasing awareness of investment opportunities in emerging economies,1 these markets generally are not considered to possess and/or maintain high-quality and transparent financial reporting frameworks. Emerging market companies, therefore, engage in voluntary disclosure practices in order to compete for funds on equal terms with other corporations originating from developed economies in international markets (Wang and Claiborne, 2008, Purushothaman et al., 2000 and Meek et al., 1995). Voluntary disclosures are additional disclosures, primarily outside the financial statements, that are not explicitly required by GAAP or any accounting standards (Wang and Claiborne, 2008 and Boesso, 2002). Disclosure studies assume that managers have superior information to outside investors on their firms' expected future performance; therefore, voluntary disclosures are associated with lower agency costs, reductions in the cost of capital, and improvements in the market price of securities (Leuz and Verrecchia, 2000 and Botosan, 1997).
The focus of our study is on one particular type of disclosure that has become popular in recent years; the disclosure of information about intangible assets (IA). An intangible asset is a claim to future benefits that does not have a physical (e.g., building or equipment) or financial (e.g., stock or bond) embodiment (Lev, 2001).2 For example, patents, brand names, and unique organizational infrastructures that generate cost savings for companies can be defined as IA. The relatively recent growth of the service sector and of information technology-related businesses, along with the dramatic increase in the number and size of international mergers and acquisitions, has made accounting for IA very significant (Lev, 2001 and Saudagaran, 2001).
Currently, there are few comprehensive guidelines for corporations in either International Financial Reporting Standards (IFRS) or in U.S. GAAP on how to report IA, other than for purchased goodwill and some development costs, in company financial statements.3 That is, while the importance and the necessity of such assets in creating and maintaining corporate value have been widely accepted, traditional financial reporting frameworks unfortunately do not capture many of these value drivers (Jenkins and Upton, 2001, Upton, 2001 and Lev and Zarowin, 1999) due to the “non-physical” nature of IA and the subsequent uncertainties associated with their “future benefits.” It may be naïve to assert that total transparency regarding IA would automatically enhance the quality of corporate information being distributed to external stakeholders; however, given the increasing importance of IA in driving corporate value, it can be argued that corporations should nonetheless voluntarily communicate relevant and useful information on IA to their stakeholders. While the concept of IA management and reporting practices in developed economies has been examined in the previous literature, the status of IA voluntary disclosure practices, and corporate and country specific factors behind such practices, in the emerging economies has not. In this study, we examine the voluntary disclosure practices of the top 200 emerging market companies in respect of information about IA. Specifically, we develop a disclosure index based on the Value Chain Scoreboard™ (Lev, 2001) to investigate both its applicability, which has not been assessed empirically, and the extent of IA voluntary disclosure practices. We also evaluate some of the likely factors that may influence the level of IA disclosure.
The remainder of the paper is structured as follows. Section 2 reviews the existing literature on IA and reporting practices in emerging markets. In Section 3, we develop an IA disclosure index based on the Value Chain Scoreboard™. Our research methodology and findings appear in 4, 5 and 6. Conclusions and suggestions for future research are presented in Section 7.
Our research makes a number of important contributions. Significantly, this is the first study to empirically examine the applicability of the Value Chain Scoreboard™ proposed by Lev (2001) as an alternative IA disclosure framework. While much of the prior research is based on the use of Sveiby's (1997) Intangible Asset Monitor (IAM) as the basic IA reporting model,24 no empirical study to date has examined the applicability of the Value Chain Scoreboard™ as an alternative reporting model. Unlike the IAM, the Scoreboard considers the entire spectrum of a company's value chain activities. Further, it was actually designed with external reporting as its main objective and, therefore, has the most potential to be a relevant external reporting model that can be included as an element of corporate annual reports. Another important contribution of our study is the focus on top emerging market companies and an assessment of their voluntary disclosure practices. Due to the shift in the way investors and other stakeholders consider emerging economies and their companies, most of the international attention is now on a select group of high-flying and top-performing emerging market companies (Smith et al., 2003).
Our empirical findings on the extent of disclosure by emerging market companies indicates that they do actively engage in voluntary disclosure practices to disseminate mainly quantitative IA information to their global stakeholders. Corporate-specific factors, such as the adoption of IFRS/U.S. GAAP, industry type, and price-to-book ratio, are key influences significantly associated with the level of IA voluntary disclosure. In addition, country-specific factors, including risks associated with economic policies and the legal systems, are also found to be significantly associated with the level of IA disclosure.
These findings are, of course, subject to some limitations. The final sample size was reduced to 144 companies due to the difficulties associated with the general lack of available data and the collection of such data about companies originating from emerging markets where English is not the language of choice for annual reports, despite the incentives and pressures of international investor interest. For the purpose of this study, it was necessary to focus on the voluntary disclosures in annual reports prepared in English. Further, data regarding the independent variables (i.e., corporate profile information) were collected only from sources written in English.
Future research could consider a larger number of emerging market companies and their disclosure practices. Other studies may aim to examine whether additional national differences, including culture, influence the extent of IA. A second avenue of future research could involve examining whether stakeholders place some value relevance on the voluntary disclosures of information about IA in making their investment decisions. Finally, given the exceedingly complex nature of voluntary disclosure, other mediums of disclosure could be investigated, including, for example, corporate websites, special reports, and press releases.
