Structural economic changes in many countries, together with unprecedented developments in the business environment, have significantly affected the value creation processes of firms and the way business is conducted. The traditional financial reporting model is inadequate as a consequence of these developments, and intellectual capital (IC) information has gained importance for investment decision making. Empirical capital markets research demonstrates the value-relevance and predictive ability of certain types of IC information.
The use of IC information by capital market participants is a topic that has begun to gain attention from contemporary researchers, but for which scant empirical evidence exists. Much of the research in this area relies on the literature about the use of non-financial information (NFI), which is inadequate in its examination of certain types of IC information. Therefore, the main aim of this thesis is to examine the use and communication of IC information by sell-side analysts. Sell-side analysts are of particular interest because they are capital market intermediaries and sophisticated processors of corporate information. The reports they produce provide an opportunity to examine their use and communication of IC information.
The specific objectives of this thesis are to examine: the extent and types of IC information used by sell-side analysts in initiating coverage reports produced by them; how IC information is used and communicated in these reports; and factors that may influence the use of IC information by sell-side analysts. In order to address these research objectives a content analysis of IC references in 64 initiating coverage reports written on an equivalent number of S&P/ASX 200/300 companies is performed. The content analysis identifies and measures IC references by topic, evidence (discursive, monetary, numerical, or visual), news-tenor (positive, neutral or negative) and time orientation (forward-looking, past-oriented or non-time-specific).
The findings indicate that Australian sell-side analysts appreciate the importance of IC in firm valuation, and thus are not ambivalent about the use of IC information in general. However, the findings suggest that their communication of IC information is inconsistent and unsystematic, and inadequate in relation to certain types of IC. This highlights the need for undertaking work at a policy level to educate and train sell-side analysts to deal with IC information, and the development of better models and guidelines for analysing and communicating IC information.
On how IC information is used, this thesis finds that sell-side analysts have varying uses of IC information. It was found that IC is predominantly communicated discursively, positively, and in a past-oriented manner; and in doing so IC is used as a tool to further the sell-side analysts’ agenda for the company analysed. Further, the results highlight that the type of investment recommendation in analyst reports impacts on the evidence, news tenor, and time-orientation of IC communicated. These findings alert future researchers to the wider role played by IC beyond its use in forecasts and valuations.
Also, the findings indicate inter-sectoral differences in the use of IC information in analyst reports, highlighting the need to improve IC reporting practices of firms by including additional information on industry-specific IC value drivers. Further, it was found that sell-side analysts emphasise IC information in analyst reports for companies from high IC-intensive sectors compared to those from low IC-intensive sectors. Similarly, it was found that analyst reports on risky companies contain significantly more IC information than analyst reports on less risky companies. Contrary to expectations, the extent of IC information is not found to vary with firm size and firm profitability. Also, the results support that the extent of certain types of IC information differs between types of analysts’ investment recommendations.
More generally, the findings of this thesis suggest that the corporate reporting process could be improved by including additional types of IC information and providing this information more effectively in a manner that enables users to visualise the interrelationships between resources (both tangible and intangible) and outcomes. This study calls for standards or guidelines for intellectual capital reporting (ICR) in Australia and the expansion of the role of auditing and assurance services to enhance reliability of firm provided IC information in a bid to improve the use of IC information in company analysis by sell-side analysts.