Theoretical foundation of IC disclosure strategies in high-tech industries

The purpose of this article is to examine the Intellectual Capital (IC) disclosure strategies of high-tech companies under different theoretical perspectives (agency, signalling and proprietary costs theories). According to the agency theory, the failure of traditional financial statements to report the ‘soft assets’ would lead knowledge-intensive firms (where the components of IC are structurally higher) to provide a higher level of disclosure in order to reduce the greater information asymmetries with external firm agents. However, because of the highly proprietary nature of IC information (proprietary costs theory) as well as the relevance of IC information to externally signal the key sources of superior quality of a company (signalling theory), different IC disclosure strategies may be adopted by managers of intellectual-capital-rich firms, depending on the particular motivations associated with firm-specific characteristics of these companies. Therefore, this study aims to better understand which theoretical framework under examination (if any) is best at interpreting the observed IC disclosure policies of high-tech companies. To this end, we deduce, and test, a set of hypotheses in accordance with the theoretical frameworks considered. The study also takes into account the effects of changes in the governmental regulation concerning non-financial information that occurred during the period examined. The empirical analysis is conducted on all Italian high-tech listed companies and based on longitudinal data (of 5 years: 2007–2011). By using longitudinal data and the population of all of the high-tech Italian companies, the analysis overcomes the well-known limitations of the sampling and the cross-sectional data that provide snapshot results. The findings reveal that the companies’ disclosure strategy primarily depends on the specific category of the IC information. In particular, the results suggest that the proprietary costs theory prevails in explaining the companies’ disclosure behaviour on internal IC information. The signalling theory prevails in the explanation of the communication strategies about external IC most likely to enhance investors’ confidence in the intangible key value drivers relating to relational capital. Finally, for companies examined, higher levels of ownership diffusion represent the primary incentive to disclose human capital information to reduce agency/monitoring costs (in presence of higher leverage) or signal to the market the superior quality (in presence of higher profitability). This article extends the existing empirical literature on IC disclosure behaviour in high-tech industries by analysing the disclosure strategies of high-tech companies under different theoretical perspectives including proprietary cost theory. In addition, the comprehensive regression model (with specific two-way interaction terms) used in this study expands on the extant approaches for the analysis of IC disclosure determinants allowing to capture some aspects that could be omitted when only the explanation variables taken separately are considered. This study has practical implications for various parties, such as regulators. It provides empirical evidence for the primary limits (relating to the proprietary costs) to an introduction of mandatory law requirements regarding the information on internal structure of IC. In particular, our findings prove that companies exposed to the threat of competitive disadvantages prefer not to provide – by formal channels, such as annual reports – additional internal IC information.