Intellectual capital reporting and its relation to market and financial performance

Purpose - This paper aims to examine the relationship between the level of intellectual capital information voluntarily disclosed in the annual reports of companies listed on the Kuwait Stock Exchange (KSE) and their market and financial performance. Design/methodology/approach - The classical framework developed bySveiby (1997) and modified byGuthrieet al.(2006) forms the basis for the content analysis of annual reports published by KSE-listed companies in 2013. An intellectual capital disclosure (ICD) index is developed from this material. Two traditional indicators of corporate performance, namely, market-to-book ratio and return on assets are used to assess market and financial performance. Regression models are constructed to examine the association between the level of ICD and corporate performance. Findings - Empirical findings indicate that better ICD has a positive, statistically significant impact on corporate performance. More specifically, the findings suggest that intellectual capital reporting plays a significant role in enhancing market and financial performance. Research limitations/implications - This study only focuses on intellectual capital information disclosed in annual reports; other means of corporate communication were not considered. Nevertheless, the annual report has stood the test of time as the best source of corporate disclosure. Practical implications - Given the importance of intellectual capital reporting in enhancing corporate performance, a practical implication of this study is to make managers aware of its positive and significant effect on market and financial performance, which may encourage companies to develop better disclosure policies. An important implication of the findings is that the policymakers and regulators need to encourage listed companies to disclose their intellectual capital information to exploit the associated benefits. Originality/value - This paper extends the literature by examining the influence of ICD on corporate performance in the context of frontier markets, where economic, social, political and cultural conditions have particular characteristics.