The current chapter reviews the undermentioned literature: stakeholder-agency theory, rational capital definition, rational capital revelation in prospectuses, constituents of IC and relationship between IC with house features and board construction.
2.1 Underliing Theories
1 Stakeholder-Agency Theory
In bureau theory, principals hire agents to execute some service on their behalf. Therefore, the premise of a typical bureau theory model is that there is a struggle between the involvement of the stockholders, who are the proprietors, and the direction, who run the corporation, on behalf of the stockholders ( Zahra and Pearce, 1989 ) . In order to supervise the directors more efficaciously, stockholders appoint board of managers who act as a nexus between stockholders and directors.
Therefore, the board bears the duty to supervise the direction.As such, the bureau theory assumes that the corporate board is an indispensable internal administration mechanism. However, the board ‘s capacity to supervise is jeopardised if internal members ( executives of the corporation or others affiliated with direction ) do up the bulk of the board.
Thus, bureau theory argues that bureau relationship has become the chief focal point in analyzing and analyzing corporate administration. Zahra and Pearce ( 1989 ) explain that the boards are said to execute the critical map of monitoring and honoring top executives to guarantee stockholders ‘ wealth is maximised.Hill and Jones ( 1992 ) argued that other contracts should be considered within an bureau model, which includes those between directors and the different primary involvement groups of the house or stakeholder. Stakeholders refer to the groups of components who possess a legitimate claim on the house. They consist of shareholders, creditors, directors, employees, clients, providers, local communities and the general populace. Hill and Jones ( 1992 ) besides explained that the directors are the lone group of stakeholders who enter into a contractual relationship with all other stakeholders and have direct control over the decision-making device of the house.
Therefore, the alone function of directors suggests that they can be considered to play the function as the agents of other stakeholders ; hence the term stakeholder-agency theory. Other stakeholder groups besides place claims on the house that is, if satisfied, cut down the sum of resources that direction can direct towards the chase of growing through variegation ( Hill and Jones, 1992 ) . For case, run intoing employees ‘ claims for higher rewards and clients ‘ demands for greater quality/lower monetary values both involve the usage of resources that might otherwise be invested by directors to maximize the growing rate of the house.
Hence, with higher rewards, better cognition and contributing working conditions, the employees ‘ productiveness may better and therefore supply direction with more resources i.e. voluntary revelations.
2.1.2. Information Asymmetry Theory
In information dissymmetry, the houses try to unwrap extra information in order to increase and pull stockholders or investors. By unwraping more information, the investors and capital loaners will be confident with the current house ‘s public presentation in managing physical assets.
Under the information dissymmetry, the house ensures it has better and more voluntary revelation compared to its rival. It is frequently argued that houses might happen it advantageous to supply extra pieces of information ( i.e. , voluntary revelation ) to investors and analysts through the fiscal coverage ( Petersen & A ; Plenborg, 200 ) .
Information dissymmetry between houses and ( possible ) investors, due to a low degree of revelation, increases cost of capital by presenting ‘adverse choice ‘ between purchasers and Sellerss of the house ‘s portions. In order to avoid that, the house will unwrap more information, therefore cut downing information dissymmetry and, therefore, pull drawn-out involvements ( liquidness ) in the houses ‘ portions, which lead to lower cost of capital ( Diamond & A ; Verrecchia, 1991 ) .Existing literature suggests that a house ‘s asymmetric information environment has a great impact on administration mechanisms. Cai et Al. ( 2009 ) explained that big and older houses may confront less information dissymmetry because the houses tend to be more mature, have established and tried revelation policies and patterns, and have more attending from the market and regulators. Schrand and Verrecchia ( 2004 ) found that greater revelation frequence in the pre-IPO period is associated with lower under pricing. Botosan ( 1997 ) argues that houses that are non closely followed by fiscal analysts see lower cost of capital with additions in revelation.
Harmonizing to Leuz and Verrecchia ( 2000 ) , houses that switched from German to an international accounting government ( IAS or US GAAP ) commit themselves to increased degrees of revelation. They besides found that houses that switched to an international accounting government in general, see lower cost of capital and higher trading volume. In Malaysia, Foo and Mat Zain ( 2010 ) found that houses with bumiputra dominated boards and boards with an independent president are significantly and negatively associated with information dissymmetry. The ground is due to the alone Malaysian environment where administrations tend to be close in nature.
2.2 Definition of Intellectual Capital
The footings rational capital, intangibles, and cognition assets are popular subjects of research and are often used interchangeably. Many research workers, nevertheless, notice that there is no consensus on the precise definition of these footings ( Beattie & A ; Thomson, 2007 and Marr et al. , 2004 ) .
This thought is backed by Lev ( 2001 ) and Abdul Rashid et Al. ( 2009 ) who claim that the footings are widely used – intangibles in the accounting literature, knowledge assets by economic experts, and rational capital in direction and legal literature. However, these footings refer basically to the same thing: a non physical claim to future benefits.Williams ( 2000 ) defined IC as the enhanced value of a house attributable to assets. It is by and large of an intangible nature, ensuing from the company ‘s organizational map, processes and information engineering webs, the competence and efficiency of its employees and relationship with its clients. Intellectual capital assets are developed from ( a ) the creative activity of new cognition and invention ; ( B ) application of present cognition to current issues and concerns that enhance employees and clients ; ( degree Celsius ) packaging, processing and transmittal of cognition ; and ( vitamin D ) the acquisition of present cognition created through research and acquisition. In accounting footings, rational assets ( IA ) are “ debits ” , single assets such as patents or rational belongings. On the other manus, rational capital ( IC ) is a ‘credit ‘ balance or entire organizational wealth ( equity ) invested in all rational assets.
Webster Dictionary defines ‘capital ‘ as anything which can be used to increase one ‘s power of influence. The Oxford English Dictionary defines ‘capital ‘ as ‘that which confers wealth, net income, advantage or power ‘ and Dictionary.com defines ‘capital ‘ as the entries of balance sheet demoing all belongingss, both touchable and intangible which includes hard currency, stock, stock lists, belongings rights and good will.
The International Accounting Standard Committee ( IAS 38, 1998 ) defines rational capital or intangible plus as, “ an identifiable non pecuniary plus without physical substance held for usage in the production or supply of goods or services, for rental to others or for administrative intents. An plus is a resource, ( a ) controlled by an endeavor as a consequence of past events, and ( B ) from which future economic benefits are expected to flux to the endeavor ” . Klein ( 1998 ) suggests that rational capital is knowledge, experience, expertness, and associated with soft assets, instead than their difficult physical and fiscal capital.
In most instances, intangible assets are defined as ( capital ) assets that do non hold physical substance but are likely to supply future benefits ( Canibano et al. , 2000 ) . This survey hence uses the footings intangibles, rational capital, and knowledge assets synonymously.
2.3 Components/Types of Intellectual Capital
Several research workers have provided categorization strategies to depict the major constituents of IC. Contemporary categorization strategies divide rational capital into three classs: 1 ) external ( customer-related ) capital, 2 ) internal ( structural ) capital and 3 ) employee competence/human capital ( e.g.
Sveiby, 1997 ; Roos et al. , 1997, Stewart, 1997 ; Edvinson & A ; Mallone, 1997 ; Petty & A ; Guthrie, 2000 ; Goh & A ; Lim, 2004 ) . They are shown in Figure 2.1.
Figure 2.1 Components of Intellectual CapitalIntellectual CapitalInternal ( structural ) capitalExternal ( client related ) capitalEmployee Competence ( Human Capital )
2.3.1 Employee Competence ( Human Capital )
In all three constituents shown in Figure 2.1, employee competency is normally distinguished as the most of import driver of IC value creative activity. This is because the important scheme in developing a house ‘s IC base revolves around the effectual agreement of its structural capital and human resources ( A Danish Trade and Industry Development Council Taskforce, 1996 ) .
Cuganesan et Al. ( 2006 ) mentioned that employee competency ( human capital ) specifically refers to the accomplishment, preparation and instruction, and experience every bit good as value features of an administration ‘s work force. In the procedure of making value from IC, the function of human capital is overriding. Skilled and engaged employees are required to impel invention and both create and later gain the benefits of favorable clients, providers and broader external dealingss. It is for these grounds that the direction of human capital has been quoted as critical for concerns if they are to vie efficaciously ( Sveiby, 1997 ) . Bontis et Al. ( 2000 ) referred to employee competency as the individual-level cognition that is possessed by every employee. Pulic ( 1998 ) stated that in the knowledge-based economic system the responsible party for the achieved market consequences are decidedly the employees ; they are the coherence factor of the nucleus construction of a company through which merchandises and services are created.
Brooking ( 1996 ) wrote that human-centered assets are the critical constituents of employee competency which comprise expertness, originative and job resolution capableness, leading, entrepreneurial and managerial accomplishments embodied by employees. Employee competency consists of know-how, instruction, vocational making, work related cognition, work-related competence and entrepreneurial spirit.
2.3.2 External Structure ( Relational Capital )
External construction refers to the firm’sA relationshipsA andA communicationA channels that connect it with itsA rivals, A clients, A providers, loaners, A investors, and otherA stakeholdersA outsideA its physical boundaries.
In the context of rational capital, external construction is the organizational value obtained from dependable, quality-driven supplies and from loyal, satisfied clients ( Lynn, 2000 ) . Bontis et Al. ( 2000 ) defined external construction as client capital, the exclusive characteristic of the cognition embedded in the selling channels and client relationship that an administration develops through the class of transporting out concern.
Brooking ( 1996 ) stated that market assets are the possible an administration has due to the market-related intangibles. External construction is made up of trade name acknowledgment, client, client trueness, companies ‘ name, distribution channel, concern coaction, licencing understanding, favorable contract and franchising understandings.
2.3.3 Internal Structure/Organisational Capital
Internal construction is the supportive substructure that enables employees to execute aptly ; it is owned by an administration and remains with an administration even when people leave. Brooking ( 1996 ) pointed out that internal construction can be divided into two constituents, viz.
rational belongings and substructure assets. Harmonizing to Bontis et Al. ( 2000 ) , internal constructions encompasses all non-human depots of cognition in administrations which include databases, organizational charts, procedure manuals, schemes, and modus operandis ; it includes anything whose value to the company is higher than its material value. Internal construction consists of rational belongings such as patent, right of first publication and hallmark. It besides covers infrastructure assets such as direction doctrine, corporate civilization, direction procedure, information system, networking system and fiscal dealingss ( Goh & A ; Lim, 2004 ; Abdul Rashid et al. , 2009 ) .
4 Intellectual capital revelation in prospectuses
The Malaysian Securities Commission ( 2005 ) explained that it is compulsory for the prospectus to include all such information that investors and their professional advisors would moderately necessitate and anticipate to happen in the prospectus. This information enables all the interested parties to do an informed appraisal of the assets, liabilities, fiscal place, net incomes and losingss, chances, and rights attached to the securities ; it besides gives them an chance to measure the virtues of puting in the securities and to measure the extent of hazard involved in making so. Some illustrations of the information include a company ‘s pre-listing public presentations ( gaining per portion ) , forecast net incomes, possible and hazard of the several markets. The survey done by Abdul Rashid et Al. ( 2009 ) shows that more rational capital information is disclosed in prospectuses than one-year studies. This is because prospectuses offer extra information on the companies ‘ long term scheme, company hazard and future profitableness ; they are by and large more frontward looking than one-year studies. Annual studies focal point on historical public presentation while prospectuses provide information which pertains to companies ‘ future chances ( Abdul Rashid et al.
, 2009 ) .Previous literature provides illustrations where research workers ( e.g. Bukh et al. , 2005 ; Cordazzo, 2007 ; Singh and Van der Zahn, 2007 ) have looked at some initial public offering ( IPO ) prospectuses which were employed by direction to depict the portions the companies are offering to possible investors. It is pertinent to observe that prospectuses and one-year studies are tailored to specific demands of different users.
Unlike one-year studies that focus on historical public presentation, prospectuses provide information that focal point on companies ‘ future chances. Cordazzo ( 2007 ) asserts that prospectuses offer extra information on companies ‘ long term scheme, concern hazard and future profitableness ; it is by and large more future oriented than one-year studies. These differences are likely to be reflected in the revelation patterns of the two paperss.
2.5 Intellectual capital revelation and house features
The extent of rational capital revelation in Malaysia IPO prospectuses can be explained by three house specific variables – Company age, company size and industry differences.
2.5.1 Company Age
Company age has frequently been seen as a placeholder for hazard, in the sense that the more constituted companies are by and large less hazardous. From this position, the extent of a company ‘s revelation is expected to be related to how long it has been in concern. For illustration, a survey done by Jaggi ( 1997 ) on Hong Kong listed houses consists of 161 samples ; it was concluded that there were some positive associations between rational capital revelation and company age, i.e.
the figure of old ages the company has been in concern. A survey by Rimmel et Al. ( 2009 ) on120 Japan IPO houses besides found a positive relationship between house age and rational capital revelation.
The mature companies, i.e. companies which have been in being for relatively a longer period of clip, are likely to unwrap more information ( Jaggi, 1997 ) . This is because the older houses of course have more resources such as figure of employees compared to the younger houses to guarantee better revelation in rational capital information.
2.5.2 Firm Size
Firm sizes are besides likely to act upon revelation. The survey of Robb et Al.
( 2001 ) consists of 192 US, Canada and Australia samples. It was found that big houses tend to unwrap more information on rational capital than smaller houses. This shows that company size is related to the sum of voluntary revelation. Another illustration, Anton ( 1954 ) concluded that tierce of big American and Canadian companies on a regular basis present consequences to shareholders while the corresponding figure for little companies is one out of 20. Among the accounts are that big companies are more likely to hold a larger ownership base, and that the costs of supplying information are more prohibitory for little companies.
The latter job tends to turn with increased revelation. A survey done by Cordazzo ( 2007 ) dwelling of 86 IPOs from Nuovo Mercato and Borsa Italiana listings in the period of 1999-2002 besides found that a house ‘s age has positive association with its degree of rational capital revelation.However, another factor to be considered is that larger companies, when compared to smaller 1s, seem less hazardous to investors and have better entree to resources.
Therefore, little companies have greater inducements to cut down uncertainness by supplying more revelation. This statement presumes that a little company – all other things being equal – should unwrap more information and inside informations on rivals than is the instance for a big company. These deductions have been supported in surveies by, for illustration, Ahmed and Courtis ( 1999 ) . However, non all surveies conclude that the size of the company is a important factor in explicating voluntary publication of information. For case, Wallace ( 1988 ) and Stanga ( 1976 ) concluded that size is non a important factor in explicating differences in companies ‘ coverage between Nigeria and the USA.
Bukh et Al. ( 2005 ) besides stated that company size does non impact the rational capital revelation in Danish IPO prospectus dwelling of 68 houses. The ground is the cost of revelation theory does non hold important importance in the present epoch of more advanced accounting systems and instant coverage. Hence, house size is non an of import influence over a house ‘s degree of rational capital revelation.
2.5.3 Industry differences
Industry differences, has antecedently been used to explicate differences in revelation in one-year studies by Bukh et Al ( 2005 ) , Cordazzo ( 2007 ) and Rimmel et Al.
( 2009 ) because there are differences in industry revelation norms. Bukh et Al. ( 2005 ) explained that as rational capital is regarded as being particularly of import in hi-tech industries, it is anticipated that IT and biotechnology companies will unwrap more information than traditional fabrication and commercial companies. Furthermore, since the market-to-book values of IT and biotechnology companies are by and large higher, the revelation of rational capital is comparatively of import.
These consequences are similar to the findings of Cooke ( 1989 ) which stated that industry differences have important effects on rational capital revelation ; companies which are categorised as ‘trading ‘ , disclosed less rational capital information than other industry types.
2.6 Intellectual Capital Disclosure and CG mechanism
The relationship between rational capital revelations in Malaysia IPO prospectuses with CG mechanism can be explained by four variables – Cultural diverseness on board, president dichotomy function, board size and audit commission size.
2.6.1 Cultural Diversity on Board of Directors
Based on the current literature available, a assortment of grounds can be highlighted to back up how cultural diverseness can increase a board ‘s influence on a house ‘s public presentation with regard to IC. Refering IC revelation, Williams ( 2000 ) argued that the board diverseness in footings of cultural background are features of diverseness that may hold placed South Africa publically listed companies in a better place to oppose the state ‘s concern environment during the 1990s.
A diversified board of managers enables a house to make confederations and alliances with a broader scope of human resources. Therefore, a greater assortment of cognition, accomplishments and capablenesss can be accumulated and exploited, thereby increasing a house ‘s IC revelation.Williams ( 2000 ) conducted a survey from a sample of 84 publically listed companies in South Africa. The purpose was to look into the relationship between board construction features and rational capital public presentation which is measured based on the VAICTM.
Empirical findings from the survey support the proposition that there is a important positive nexus between greater diverseness across a board of managers in footings of race and administration ‘s rational capital revelation.A survey by Coffey and Wang ( 1998 ) on 98 Fortune 500 companies touched on the topics of the present dynamic nature of the universe ‘s concern environment and outgrowth of greater power to a wider set of stakeholder groups. It was observed that increased diverseness on boards of managers would better determination devising. Overall, empirical findings support the general renters of resource dependance theory that view human resources as the most critical house degree resource required in set uping competitory advantage.
In Malaysia, surveies which explore the connexion between board diverseness and rational capital revelation is scarce. The survey by Haniffa and Cooke ( 2000 ) covers 167 non-unit trust and non-financial companies. The survey shows there is a important relationship between the ratios of bumiputra managers on the board and voluntary revelation. The consequence of their survey seems to be in tandem the belief that Islamic values encourage transparence in concern. Malayans, who are by and large Muslims, are expected to be less close in footings of revelation as compared to Chinese.
2.6.2 Chairman Duality
Harmonizing to the Malayan Code of Corporate Governance ( MCCG, 2000 ) , there is a demand for balance of power and authorization between the CEO and Chairman so that no individual person has uncontrolled power of decision-making.
Even though there is no limitation for Malayan PLCs to divide or unite the CEO-Chairman place in the house, the MCCG emphasises that there should be a clearly acceptable division of duties between both places. As stated in the MCCG ( 2000 ) , if the functions of the board ‘s president and the CEO are combined, the board should hold astrong independent component in order to avoid the board from being dominated by a individual individual. The Chairman has to be independent so as to supervise the effectivity of the board over the direction and back up the separation of the function of the CEO and Chairman ( MCCG, 2000 ) .Similarly, Dimma ( 2002 ) explains that a widely held company will execute magnificently for its stockholders if the functions of president and CEO are separated. The two grounds are: 1 ) separation allows the president to concentrate on the board and its members and on sound corporate administration.
2 ) The corporation will execute best if power is distributed between the board and the direction. Williams ( 2000 ) besides supports the separation of functions of president and CEO because it will enable the board of managers to implement their determinations related to rational capital revelation in a more effectual mode. Lack of dichotomy will besides let the board to develop a greater affinity with a more diverse set of stakeholders, such as employees and clients who will increase the house ‘s overall IC revelation ( Williams, 2000 ) .A survey done by Liang and Li ( 1999 ) on 228 China private houses and Abdul Rahman and Mohd Haniffa ( 2002 ) , found that dichotomy functions of president and CEO did non look to execute every bit good as their opposite numbers with separate board leading based on accounting public presentation measuring, Return on Total Equity ( ROE ) and Return on Entire Asset ( ROA ) .However, duality function may heighten board effectivity when stewardship theory is applied to back up their instances. It can be argued that directors will move in the best involvements of the stockholders as their compensation is dependent on the house ‘s public presentation.
3 Audit Committee Size
Audit commission was foremost introduced in the United States as an internal control mechanism to cut down corporate deceitful patterns. In Malaysia, the Audit commission formation is compulsory for all Bursa Malaysia listed companies with consequence from 1 August 1994, in conformity to Bursa Malaysia Listing Requirements. The revised MCCG ( 2007 ) proposed that the constitution of Audit Committees should consist at least three non-executive directors.In add-on, all of the members should be independent and led by an independent non-executive manager. The principle of holding the non-executive managers in the Audit Committee is that these individuals have vested involvements in guaranting that the fiscal personal businesss of the company are handled suitably ( Revised MCCG, 2007 ) . It besides notes that holding such individuals in the Audit Committee guarantee that the involvements of direction are ever aligned with those of the proprietors.
In a survey done in South Africa by Williams ( 2000 ) , they found no association between the size of Audit Committee and house ‘s rational capital revelation. In Malaysia, a survey done by Abdullah ( 2001 ) showed that the Malaysian companies which complied with the KLSE demand of Audit Committee have at least three members. Similarly, in another survey done by Muhammad Sori et Al. ( 2001 ) on the conformity of Audit Committee demand of the chief and 2nd board houses, it was found that most of Malayan Audit Committee fulfilled the minimal figure of members required, which is three people.
6.4 Board Size
The size of the board is different across geographical boundary lines. Rebeiz and Salameh ( 2006 ) studied 100 US houses and pointed out that the mean board size in Australia, the United States, and the United Kingdom is around 10 members. In contrast, a board size of 40 members is rather normal for Nipponese houses. In Malaysia, the mean figure of board of managers is 8 people.
Jensen ( 1993 ) pointed out that in instances where the figure of board members exceeds seven or eight, it weakens the map of the board and allows the CEO to easy derive control of the board. When the figure of board members is little, the board ‘s communicating improves and the board members are more likely to make consensus.On the topic IC revelation, Abeysekera ( 2010 ) studied 52 top Kenyan listed houses. It was mentioned that Board size can be a “ resource ” to companies that inform investors about future net incomes through rational capital. Such revelations can assist houses to better their portion monetary value by informing investors about resources non disclosed in fiscal statements. In a survey done on Kenyan listed companies, houses that unwrap more human capital resources have larger boards.
Larger boards effort to show that they maintain future net incomes from rational capital resources by codifying strategic human capital that is silent in nature with tactical internal capital ; the boards unwrap to investors that silent cognition is made explicit in houses to prolong future net incomes from rational capital resources ( Abeysekera, 2010 ) .
2.7 Theoretical model
The theoretical model of this survey is to find the sum of rational capital disclosed in the IPO and besides to analyze the association between rational capital revelation and industry differences, house age and house size, which can be stated as house features. This survey besides examines the relationship between rational capital revelation and board construction concentrating on board size, president dichotomy function, board ethnicity and audit commission size.
It is besides noted from old literature that there are few factors that are found to act upon the degree of rational capital revelation. In order to avoid any influence by these factors/variables on the consequences being generated, these variables are therefore controlled. The control variables in this survey are under pricing and hearer ‘s repute.The theoretical model besides touches on the relationship between Intellectual Capital Disclosures, Firm Characteristics and Board Structure.
Industry DifferencesFirm AgeFirm Size
Intellectual capital degree of revelation
Under pricing and hearer ‘s reputeAudit Committee SizeChairman Duality RoleBoard EthnicityBoard Size