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Corporate Intellectual Capital Reporting: the Case of Germany

Göbel, Viktoria

Meyer=Stiftung, Vol. 13


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Intellectual capital (IC) consists of intangible resources and is considered to equip a company with competitive advantages, encompassing efficient internal structures, beneficial relations to primary stakeholders and employee competencies. IC has been argued to considerably contribute to corporate value creation. As IC reporting represents a central communication platform for this important form of capital, a separate area of research has developed on IC reporting.

This study examines potential motivations for IC reporting in management reports of 428 listed German companies for the accounting year 2010. Germany offers a unique research setting for IC reporting due to a mandatory Management report containing information on IC. To infer motivations, agency theory and legitimacy theory are applied to test which theory better explains IC reporting. According to agency theory, companies report on their IC to reduce the Information gap between managers and owners, interpreted in this study as explaining the value creation process for IC. In contrast, legitimacy theory suggests that corporate IC reporting serves as a tool to legitimise the company’s market position, which is investigated by looking at corporate mispricing and the proportion of intangible resources. The study is structured in three research projects.

The first two projects analyse methodological approaches, providing the Basis for testing theories in project three. In the first project, a novel measure to estimate IC value is identified in the area of mergers and acquisitions research and innovatively applied to IC research. The second project supports a parsimonious design of a research framework for an IC content analysis. In the final project, the results show that legitimacy theory better explains IC reporting compared to agency theory. According to the findings, IC reporting is motivated to legitimise a company’s market position and to justify the use of intangible resources.

Table of Contents

Section Title Page Action Price
Foreword 5
Meyer-Stiftung 6
Preface 9
Table of Contents 11
List of Tables 17
List of Figures 19
Abbreviations 20
1 Introduction 21
1.1 Motivation for this study 21
1.1.1 New reporting models for intellectual capital 21
1.1.2 Intellectual capital reporting in Germany 22
1.2 Research questions and contribution 24
1.2.1 Research questions 24
1.2.2 Overview of the research approach 26
1.2.3 Focus of this study 26
1.2.4 Contribution 27
1.3 Main results 27
1.3.1 Estimating a measure of IC value 27
1.3.2 Designing a parsimonious research framework for IC content analysis 28
1.3.3 Applying agency theory and legitimacy theory to IC reporting 29
1.4 Structure of thesis 30
2 Review of literature on intellectual capital reporting 33
2.1 Introduction 33
2.2 The concept of IC 34
2.2.1 Definitions of IC 34 Defining IC based on its effect 34 Defining IC in categories 35 Defining IC by setting outer boundaries 35 Different terminologies for IC 36
2.2.2 IC within corporate reporting 36 IC in the balance sheet 36 IC in the income statement 37 IC in corporate documents 37
2.2.3 Development of IC research in three stages 38
2.3 IC reporting research 39
2.3.1 Approaching IC reporting 39
2.3.2 Investigating IC reporting in content analysis studies 40 Developing research frameworks for IC reporting 40 Influences between and across IC research frameworks 41 Comparability across IC reporting studies 43
2.4 Methodological considerations in IC reportingresearch 44
2.4.1 Comparison of approaches in IC reporting research 44
2.4.2 Theories related to IC reporting 44
2.4.3 Sample selection for IC reporting studies 47 Sample size 47 Focus on large companies 47
2.4.4 Considerations of time 48 Controlling for time 48 Longitudinal studies 48
2.4.5 Country focus in IC reporting studies 49 Country-specific issues in IC reporting 49 Cross-country studies 50 Controlling for country-specific issues in IC reporting 51
2.4.6 Communication channels under review 51 Range of communication channels 51 Investigating several communication channels 52
2.4.7 IC reporting across industry sectors 53 IC reporting across different industries 53 Single or dichotomous industry grouping 53 Numerous industry groupings 54
2.4.8 Unutilised IC reporting information in prior studies 54
2.5 Conclusion 55
3 German context for researching intellectual capital reporting 59
3.1 Introduction 59
3.2 German management report 60
3.2.1 Historic development of the management report 60
3.2.2 German Accounting Standard 15 (GAS 15) 62
3.2.3 GAS 15 recommendations related to IC 64
3.2.4 Revision of GAS 15 in 2010 66
3.2.5 New standard on combined management and risk reporting GAS 20 67
3.3 Movements towards IC management and reporting in Europe 69
3.3.1 European projects and guidelines on IC reporting 69
3.3.2 German ‘Wissensbilanz’ 71
3.4 German setting for IC reporting 72
3.4.1 National efforts on knowledge resources 72
3.4.2 Strong stakeholder representation 73
3.5 Conclusion 74
4 Methodology overview 77
4.1 Introduction 77
4.2 Research questions 77
4.2.1 Summary of research questions 77
4.2.2 Underlying assumptions 78
4.3 Research design 79
4.3.1 Research setting 79
4.3.2 Approaching the research questions in three projects 79 Overview of research approach 79 Project one: estimating a measure of IC value 80 Project two: designing a parsimonious framework for IC content analysis 81 Project three: applying agency theory and legitimacy theory 81
4.3.3 Intended interviews for triangulation 82
4.4 Sample selection 84
4.4.1 Sample for measuring IC value in project one 84
4.4.2 Sample for investigating IC reporting in projects two and three 85
4.4.3 Industry grouping 86
4.4.4 Issues with database Datastream 90
4.5 German company characteristics 91
4.5.1 Variety of shares 91
4.5.2 Proportion of debt 92
4.5.3 Adoption of international reporting standards in Germany 93
4.6 Limitations of the study 94
4.7 Conclusion 95
5 Estimating a measure of intellectual capital value to test its determinants 97
5.1 Introduction 97
5.2 Literature review 99
5.2.1 Importance of measuring IC value 99 IC as strategic advantage for corporate performance 99 Purposes of measuring IC value 100 Difficulties in measuring IC value due to data availability 100
5.2.2 Approaches to measure IC value 101 Overview of approaches to measure IC value 101 Resource-based approaches to measure IC value 101 Component-based approaches to measure IC value 103 Holistic market-based approaches to measure IC value 104
5.2.3 Addressing weaknesses of MtB as measure of IC value 106 Historic cost accounting in MtB 106 Focus on long-run value to account for fluctuations in MtB 107
5.2.4 Aspects to be considered when measuring IC value 108 Importance of industry 108 Levels of IC value rather than monetary values 109 Lagged effect of IC value 109
5.2.5 Potential determinants of IC value 110 Applying the measure of IC value to test its determinants 110 Potential determinants of IC value from financial statements 110 Potential determinants of IC value in the financial structure 111 Potential determinants of IC value in company characteristics 112
5.3 Research design 113
5.3.1 Sample of German companies 113
5.3.2 Estimating Tobin’s q 114
5.3.3 Estimating LRVTB 116 Decomposing MtB 116 Three models for estimating LRVTB 117 Applied model for estimating LRVTB 118
5.3.4 Comparing IC value measures 122 Regression model to compare IC value measures 122 Vuong’s closeness test to test hypotheses on IC value measures 123
5.3.5 Testing hypotheses on determinants of IC value 125
5.4 Results 127
5.4.1 Results for comparing measures of IC value 127 Descriptive results for IC value measures 127 Regression results of comparing measures of IC value 129 Results for Vuong’s closeness test for IC value measures 131
5.4.2 Results for determinants of IC value 132 Regression results for determinants of IC value 132 Results for testing hypotheses on determinants of IC value 134
5.5 Conclusion 135
6 Content analysis of intellectual capital reporting – Parsimony in research design 139
6.1 Introduction 139
6.2 Literature review 140
6.2.1 Investigating IC reporting with research frameworks 140
6.2.2 Comparison of high-level IC categories in research frameworks 141 Development of high-level IC categories 141 Differences in labelling IC categories 142 Variations in the number of IC categories 144 Tendency to a common terminology for IC categories 144 Views on ‘strategy’ as IC category 145
6.2.3 Comparison of lower-level IC components in research frameworks 145 Synopsis of IC components in research frameworks 145 Concentration on widely-used IC components 146 Different hierarchies in lower-level IC components 146 Varying classifications of IC components 150 Different labels for IC components 151
6.2.4 IC sub-groupings as suggested solution for disparities 151
6.2.5 Framing the research question 152
6.3 Research methods 153
6.3.1 Sample of German companies 153
6.3.2 German language characteristics 153
6.3.3 Content analysis 154 Coding words with repetition 154 Software-aided coding 154 Test for reliability of reporting scores 155 Summary of content analysis procedures 156
6.3.4 Pilot study to develop a research framework for German setting 157
6.3.5 Correlation analysis of IC components 158 Correlation analysis for a parsimonious research framework 158 Correlation analysis for comparability of prior studies 160
6.4 Pilot study to develop a research framework forIC reporting 162
6.4.1 Developing a research framework for IC reporting 162 Approaching IC reporting in Germany 162 IC research framework developed from pilot study findings 163 Pilot study findings on ‘strategy’ within the IC research framework 163
6.4.2 Pilot study results for German annual reports 167 Overview of pilot study results 167 Pilot study findings in management reports and CEO letters 167
6.5 Testing for parsimony and comparability 169
6.5.1 Content analysis results for the German sample 169 Descriptive results for total IC reporting by size 169 Role of widely-used IC components compared to total IC reporting 171
6.5.2 Correlation analysis for parsimony in the IC research framework 173 Correlation results for a parsimonious research framework 173 Interpretation of results for parsimony in research framework 177 Interpretation regarding corporate definition of IC reporting 177
6.5.3 Correlation analysis for comparability of prior studies 178 Correlation results for comparability of selected frameworks 178 Interpretation of results regarding comparability of prior studies 181
6.6 Conclusion 182
7 Applying agency theory and legitimacy theory to intellectual capital reporting 187
7.1 Introduction 187
7.2 Literature review 189
7.2.1 Calls for theory testing in the IC reporting literature 189
7.2.2 Potential motivations for IC reporting 190 Theories suggested to explain IC reporting motivations 190 Agency theory to explain IC reporting motivations 191 Signalling theory to explain IC reporting motivations 191 Stakeholder theory to explain IC reporting motivations 192 Legitimacy theory to explain IC reporting motivations 192
7.2.3 Agency theory and IC reporting 193 The concepts of agency theory 193 Linking agency theory to IC reporting 194 IC reporting to reduce information asymmetry 195 IC reporting to explain IC value 196
7.2.4 Legitimacy theory and IC reporting 197 The concepts of legitimacy theory 197 Linking legitimacy theory to IC reporting 198 IC reporting under legitimacy threat 199 IC reporting to legitimise intangible resources 200
7.3 Research methods 201
7.3.1 Sample of German companies 201
7.3.2 Measures of IC value and mispricing 202
7.3.3 Content analysis of IC reporting 202
7.3.4 Distinction of reporting types: required, recommended, voluntary 203
7.3.5 Statistical analysis of IC reporting 204 Statistical regression model to test hypotheses 204 Separate analyses regarding IC categories and reporting types 208 Considerations of proprietary costs 208
7.4 Results 209
7.4.1 Analysis of IC reporting by IC categories 209 Descriptive results by IC categories 209 Results of regression analysis by IC categories 211
7.4.2 Analysis of IC reporting by reporting types 215 Descriptive results by IC reporting types 215 Results of regression analysis by IC reporting types 217
7.5 Sensitivity test 220
7.5.1 Propensity score matching approach 220
7.5.2 Propensity score matching results 223
7.6 Conclusion 224
8 Conclusions 229
8.1 Introduction 229
8.2 Summary and discussion 230
8.2.1 Summary of research objectives 230
8.2.2 Summary of research approach 231 Overview of research approach 231 Project one: estimating a measure of IC value 232 Project two: designing a parsimonious framework for IC content analysis 233 Project three: applying agency theory and legitimacy theory 234 Dataset 235
8.2.3 Discussion of key findings 236 Estimating a measure of IC value 236 Designing a parsimonious content analysis for IC reporting research 237 Applying agency theory and legitimacy theory to IC reporting 238
8.3 Contribution of research 239
8.3.1 Contribution to the literature 239
8.3.2 Implications for policy and practice 240
8.4 Limitations and suggestions for future research 242
References 247
Appendix 259
List of IC components in English and German resulting from pilot study 259
Alphabetical Index 277