The Extent of Disclosure on Intangibles in Annual

Reports



by

Susanne Arvidsson

Paper presented at the 4
th
annual SNEE congress in Mlle, 20-23 May, 2003.





Department of Business Administration
Lund University
PO Box 7080
220 07 Lund, Sweden
Phoneno. +46-46-222 79 81
E-mail: Susanne.Arvidsson@fek.lu.se

May not be copied, reproduced or quoted without permission from the author
2
Abstract
The purpose of this paper is to analyse the extent of
disclosure on intangibles in annual reports and to
identify company related factors, which explain the
extent of disclosure. The focus is both on the extent of
overall disclosure on intangibles and on the extent of
disclosure related to five categories of intangibles,
i.e. Human, Relational, Organisational, R&D and
Environ/Social.

The methodology underlying this study is a comprehensive
analysis of the extent of disclosure on intangibles in
annual reports. The disclosure study focuses on 36 annual
reports made by Danish, Finnish, Norwegian and Swedish
companies belonging to the pharmaceutical, biotechnology
or health care equipment & supplies industries during
1999.

The present study provides evidence that the management
teams use the opportunity to voluntarily supply outsiders
with information on intangibles. The extent of disclosure
on intangibles in annual reports is, however, not
overwhelming. Only half of the items in the checklist is
on average disclosed in the annual reports. R&D is the
category, which the knowledge-intense companies disclose
most information on. Like R&D, information related to
relationships with suppliers, customers and partners also
appears to be deemed highly relevant when the management
teams design their disclosures on intangibles. Social and
environmental disclosure does not appear to be
prioritised. The disclosure scores also reveal that the
management teams do not seem to follow up the old adage
the employees are our most valuable asset with
information related to this high-valued asset.

Four hypotheses were posed to test the relationship
between company related factors and the extent of
disclosure on intangibles. Company size was found to be
positively related to the extent of disclosure on
intangibles. The regression result did not lend support
to the hypothesis that high leveraged companies disclose
3
more information on intangibles than low leveraged
companies do. The hypothesis that Swedish companies
disclose more on intangibles than companies from the
other Nordic countries do was confirmed in the
regression. Inconsistent with earlier disclosure studies,
internationally listed companies were not found to
disclose more information on intangibles than only-
domestically listed companies.


4
The Extent of Disclosure on Intangibles in
Annual Reports
1.1 Introduction
During the last decades the number of knowledge-intense companies, e.g.
biotechnology, informationtechnology and telecommunication companies, have
increased. The most striking difference between these companies and traditional
companies, e.g. manufacturing and forest companies, is that the knowledge-intense
companies to a greater extent base their competitive strength and, thus, their value
creation on intangibles (Holland, 2002; Lev, 2001; Sullivan and Sullivan, 2000;
Sveiby, 1997; Wallman, 1996). According to a study conducted by the Brookings
Institution (Blair and Kochan, 2000) 83 percent of corporate value was in 1978 due to
tangible assets and 17 percent was due to intangible assets. In 1998 the proportions
were almost reversed, i.e. 69 percent of corporate value stemmed from intangible
assets and only 31 percent was associated with tangible assets. Considering the nature
of todays corporate value-creation process an important task for a management team
is to communicate information related to intangibles and their role in the companys
value-creation process.

Holland (2002) concludes that the major changes in the corporate value-creation
process have resulted in both companies and actors on the capital market
acknowledging the relevance of disclosures on intangibles. Several studies have
confirmed that actors on the capital market in addition to financial information require
more information on intangibles (Holland, 2001; Ernst and Young Center for Business
Innovation, 1997; Mavrinac and Siesfeld, 1997; Eccles and Mavrinac, 1995). Bukh,
Gormsen, Mouritsen and Nielsen (2002) conclude after analysing the information
content in IPO prospectuses that the disclosure on intangibles has increased
substantially between 1990 and 2001. There is, however, an oft-stated concern that the
disclosure on intangibles has not kept pace with the capital markets demand for
increased information (Johanson, Mrtensson and Skoog, 2001; Hoegh-Krohn and
Knivsfl, 2000; Wallman, 1995). Consequently, the shift in the nature of value
creation is argued to render difficulties for the valuation of knowledge-intense
companies (Lev, 2001; Sullivan and Sullivan, 2000; Chan, Lakonishok and
Sougiannis, 1999).

More informative disclosures are found to result in an overall more effective
allocation of capital due to reduced information asymmetry, decreased bid-ask
5
spreads, increased stock liquidity, a lower average cost of both equity and debt capital
and, consequently, better investment decisions (Botosan and Plumlee, 2002;
Richardson and Welker, 2001; Healy, Hutton and Palepu, 1999; Sengupta, 1998;
Botosan, 1997; Lang and Lundholm, 1996; Welker, 1995). These findings along with
the rising demand, from the users of financial statements, for more information on
intangibles have resulted in an intense activity in accounting bodies, at both national
and international level, directed at examining if and how the boundaries of financial
statements can be extended to also incorporate information on intangibles (see, e.g.
FASB, 2001a,b, IAS No. 38; AICPA, 1994). Although more or less meritorious
efforts, the problems with defining, classifying and valuing intangibles prolong the
process. Even though accounting methods do not explicitly prescribe companies to
disclose information on intangibles, the management team can compensate the lack of
information on intangibles in financial statements by voluntarily disclose this type of
information (FASB, 2001a). IAS No. 1 (Presentation of Financial Statements. rev.
1997) paragraph 8c implicitly encourages companies to include information on
intangibles, which are paramount to the value creation but unrecognised in the balance
sheet.

The purpose of this paper is to analyse the extent of disclosure on intangibles in
annual reports and to identify company related factors, which explain the extent of
disclosure. The focus is both on the extent of overall disclosure on intangibles and on
the extent of disclosure related to five categories of intangibles, i.e. Human,
Relational, Organisational, R&D and Environ/Social. Thus, the present study aims at
making a contribution to the research frontier focused at understanding how
information suppliers (i.e. management teams) communicate intangibles in annual
reports. A secondary purpose is to determine if the five categories measure a common
entity, i.e. intangibles. Therefore, the structure of the disclosure scores is also
examined in the paper.

The study is motivated for four reasons. First, due to the importance intangibles are
emphasised to play in the value-creation process (Holland, 2002; Sullivan and
Sullivan, 2000) and the findings of reduced information asymmetry and a lower cost
of capital following more informative disclosures (e.g. Richardson and Welker, 2001;
Sengupta, 1998; Botosan, 1997), it is relevant to examine if and how the management
teams use the opportunity to voluntarily supply outsiders with information on
intangibles, in order to pave the way for a better understanding of what creates value
in the company. Although there is a body of empirical studies examining the
disclosure in annual reports (see, e.g. Ahmed and Courtis, 1999; Marston and Shrives,
1991), there is a lack of studies focused on the disclosure on intangibles. Second, the
information process surrounding the valuation of companies involves a demand side,
i.e. the actors on the capital market and a supply side, i.e. the management teams. The
present study provides us with useful information concerning the emphasis the supply-
side places on intangibles. Third, establishing the extent of overall disclosure on
intangibles in annual reports, as well as which categories of intangibles the disclosure
is focused on, should be relevant input for management teams when they design their
disclosure on intangibles. Fourth, the result of the study should be valuable in the
6
accounting societys current work with preparing rules and policies concerning how
soft information related to intangibles should be disclosed in financial statements.

The methodology underlying this study is a comprehensive analysis of the extent of
disclosure on intangibles in annual reports. The disclosure study focuses on 36 annual
reports made by Danish, Finnish, Norwegian and Swedish companies belonging to the
pharmaceutical, biotechnology or health care equipment & supplies industries during
1999. The reason to focus on annual reports is motivated by the argument that this
document is a good proxy for the level of voluntary disclosure a company provides
across all different forms of disclosure (Botosan, 1997).
1
The argument is supported
by Gelb (2002) and Lang and Lundholm (1993) who find the disclosure level in
annual reports to be positively correlated with the extent of disclosure provided via
other types of communication. The reason to focus on knowledge-intense companies
is motivated by these companies heavy reliance on intangibles in their value-creation
process (see, e.g. Holland, 2002). The choice to include companies from all the Nordic
countries enables an analysis of the potential existence of country specific disclosure
styles (see discussion related to hypothesis 3 in section 3.3).

The paper has the following disposition: The next section provides the reader with the
theoretical and empirical foundation upon which the study rests. The hypotheses to be
tested in the study are posed in section 1.3 along with a discussion on their theoretical
and empirical basis. Thereafter, in section 1.4, the reader is presented with a detailed
report on the research design and empirical methodology. In section 1.5, the empirical
results from the analyses of the annual reports are presented. The paper ends with a
discussion on the results and some concluding remarks along with suggestions for
future research.
1.2 Theoretical and empirical foundation
1.2.1 Information asymmetry
Since information asymmetry exists between the insiders of a company, i.e. the
management team and the outsiders of a company, i.e. the shareholders, voluntary
disclosure can be seen as originated from a principal-agent problem (Jensen and
Meckling, 1976). Thus, to reduce the information asymmetry a company can choose
to disclose voluntary information that exceeds mandatory disclosure regulations
(Tasker, 1998).
2
The information gap between insiders and outsiders is argued to be
especially wide when knowledge-intense companies are involved (Aboody and Lev,

1
Considering the adoption by the Securities and Exchange Commission of new rules (SEC, 2000,
Regulation, FD, effective as of October 2000) against selective disclosure of significant information,
it can be expected that the importance of the annual report as a disclosure medium is going to
increase.
2
See Marston and Shrives (1991) for a discussion on the differences between voluntary and required
(i.e. mandatory) disclosure.
7
1999; Barth, Kasznik and McNichols, 1999). This is due to the importance intangibles
play for the value creation in knowledge-intense companies combined with the
difficulties outsiders are faced with trying to acquire and interpret information on
intangibles.

Barth, Kasznik and McNichols (1999) conclude that analyst coverage is much higher
for knowledge-intense companies than for traditional companies. They explain their
findings with the difficulties financial analysts encounter when they try to acquire and
interpret information related to intangibles. These difficulties result in more time
having to be spent on covering knowledge-intense companies. Analogous with these
findings, Amir, Lev and Sougiannis (1999) find that financial analysts contribution to
valuation is largest in high-tech industries characterised by a large proportion of
intangibles. These findings are explained by the fact that the informativeness of
financial statements is especially low in these industries and that financial analysts,
therefore, play an important role in acquiring the information needed for valuation
directly from these companies management teams. Several studies have confirmed a
decreased value relevance of financial statements (Brown, Lo and Lys, 1999; Lev and
Zarowin, 1999). The results of these studies are often taken as an evidence of an
inadequacy of todays accounting methods to capture the whole value of knowledge-
intense companies (Hall, 2001; Barth, Kasznik and McNichols, 1999; Hall, 1993).
Sullivan and Sullivan (2000:328) argue that:
Traditional accounting methods, which were created to account for tangible assets, are
inadequate for valuing companies whose assets are largely intangible.
Thus, the presence of information asymmetry between the insiders and outsiders of a
company especially significant for knowledge-intense companies risks impairing
the efficient allocation of capital due to larger bid-ask spreads, higher average cost of
capital and more illiquid capital markets (FASB, 2001a; Diamond and Verrecchia,
1991).
1.2.2 Cost-benefit analysis
Although more informative disclosures are found to result in a more effective
allocation of capital due to reduced information asymmetry (see, e.g. Botosan and
Plumlee, 2002; Sengupta, 1998; Welker, 1995) perfectly informative disclosures will
probably never be achieved. There is a non-negligible trade-off between supplying
and withholding information, i.e. the choice between exceeding mandatory disclosure
regulations by disclosing voluntary information or only disclosing mandatory
information. Thus, designing a disclosure strategy calls for performing a cost-benefit
analysis.
3
Considering the company and its owners, a lower average cost of capital,
more liquid capital markets with smaller bid-ask spreads resulting in smoother
valuation, better investment decisions, enhanced credibility and improved investor
relations are argued to be the prime benefits stemming from enhanced disclosure (see,

3
See Elliott and Jacobson (1994) for a comprehensive discussion on costs and benefits related to
business information disclosure.
8
e.g. FASB, 2001a; Holland, 1997; Lang and Lundholm, 1996; Elliott and Jacobson,
1994).

Proprietary costs is put forward as the chief factor on the cost side (Wallman, 1996;
Gray, Meek and Roberts, 1995). Proprietary costs arise when a company discloses
information, which is sensitive and may result in competitive disadvantage due to
increased competition or government regulations. Johanson, Mrtensson and Skoog
(2001) find that companies emphasise that their extent of disclosure on intangibles is
decided by their business-protection policy. According to Elliott and Jacobson (1994)
there are three types of information, which might create competitive disadvantage: (1)
information about technological and managerial innovations, (2) strategies, plans and
tactics and (3) information about operations. Holland (1997) concludes from his case
study that companies regard information on corporate innovations to be particularly
sensitive in a disadvantage perspective. Analogous with Hollands (1997) findings,
Meek, Roberts and Gray (1995) argue that companies with substantial R&D activities
(e.g. chemical companies) are likely to be more sensitive about disclosing information
than companies in other industries are. Besides proprietary costs, information
production costs associated with gathering, processing and disseminating information
appear on the cost side.
1.2.3 Earlier empirical studies
There is a body of empirical studies analysing the disclosure in annual reports (see,
e.g. Ahmed and Courtis, 1999; Marston and Shrives, 1991). The focus in these
disclosure studies varies from only considering voluntary information (Adrem, 1999;
Gray, Meek and Roberts, 1995; Chow and Wong-Boren, 1987) to wider perspective
where both voluntary and mandatory information are considered (Inchausti, 1997;
Choi, 1973; Singhvi and Desai, 1971). Some studies examine the extent of disclosure
in one specific country (Bukh, Gormsen, Mouritsen and Nielsen, 2002; Inchausti,
1997; Hossain, Perera and Rahman, 1995; Cooke, 1989b), while other studies
compare the extent of disclosure in different countries (Gray, Meek and Roberts,
1995; Barrett, 1976). In common to all disclosure studies is that they share the notion
that informative disclosures are useful for the investment-decision process (Inchausti,
1997) a notion, which the present study also rests upon.

Following Cookes (1989b) argument it is assumed in the present study that a
company has found the benefits to exceed the costs when voluntary disclosure on
intangibles are made. Although disclosure studies usually focus on the extent of
voluntary disclosure (e.g. Gray, Meek and Roberts, 1995; Hossain, Perera and
Rahman, 1995; Cooke, 1989b), there is a lack of studies, which have used a checklist
consisting of items exclusively related to intangibles. In an analysis of IPO
prospectuses, Bukh, Gormsen, Mourtisen and Nielsen (2002) conclude that the
disclosure on intangibles has increased substantially between 1990 and 2000.
Williams (2001:201)
4
arrives at the same conclusion when he analyses annual reports

4
Williams (2001:192) analyses annual reports over the period 1996-2000.
9
from 31 U.K. companies listed on FTSE 100. In Bukh, Gormsen, Mourtisen and
Nielsens (2002) study the most comprehensive disclosures on intangibles are found
in the IPO prospectuses of knowledge-intense companies. This is argued to support
the notion that companies with a large proportion of intangibles, as compared to
companies with a small proportion of intangibles, are more prone to disclose
information on intangibles in order to reduce the information gap and, thus, decrease
the information asymmetry present between insiders and outsiders. This notion is
empirically supported by Gelb (2002) who finds that companies with higher levels of
intangibles are the ones, which to a greater extent rely on voluntary disclosure.

Thus, the present study differs from prior disclosure studies in that: firstly, it examines
the extent of disclosure on intangibles, instead of, as usually, examining the overall
extent of voluntary disclosure, secondly, the disclosure on intangibles is broken down
into five different categories of intangibles, thirdly, the potential existence of country
specific disclosure styles is examined by including companies from all the Nordic
countries, fourthly, instead of including companies from miscellaneous industries the
study exclusively focuses on companies belonging to knowledge-intense industries.
1.3 Determinants of the extent of disclosure on
intangibles
To examine what determines the extent of disclosure on intangibles, four hypotheses
are posed. The hypotheses are based on four company related factors, which
considering the sample structure, the literature on intangibles and earlier disclosure
studies are relevant for inclusion in the regressions. Each of the four company related
factors, which are tested as determinants of the extent of disclosure on intangibles are
discussed in relation to them being a demand-driven determinant, i.e. demand from
actors on the capital market drives the extent of disclosure or a supply-driven
determinant, i.e. characteristics of the company drive the extent of disclosure. Figure
1.1 presents an outline of how the extent of disclosure on intangibles is both demand
and supply driven. Thus, the extent of disclosure is the result of pull and push forces,
i.e. the actors on the capital market pull information from the company, while the
company pushes information on to the capital market.
Figure 1.1 How demand and supply drive the extent of disclosure






Supply-driven
Push






Demand-driven
Pull

Capital
market

Company

10
Company related factor 1: Company size
Many different arguments have been proposed as reasons for why company size is
found to be positively related to the extent of disclosure. Agency theory (Jensen and
Meckling, 1976) is probably the most commonly used approach for deriving the size
hypothesis. The underlying notion is that agency costs increase with company size and
that more extensive disclosures is a way to reduce information asymmetry between the
management team and the companys owners and, thereby, reduce agency costs (see
Marston and Shrives, 1996). Cooke (1989b) can be seen to elaborate further on the
reduced information asymmetry-approach when he argues that larger companies
have more complex business structures (e.g. a large number of business divisions,
several product lines and global sales) and that this explains why they are prone to
have extensive disclosures. Thus, companies with complex structures simply have
more information to disclose. Meek, Roberts and Gray (1995) put forward lower
information production costs as yet another potential explanation to why larger
companies disclose more information in their annual reports than smaller companies
do. Considering the theoretical origin of the size hypothesis, size could be argued to
be both a demand- and a supply-driven determinant. While the objective to reduce
agency costs and information asymmetry primarily is demand driven, the complexity
of a companys business structure, as well as its information-production costs are
supply driven. In view of the theoretical arguments underlying the size hypothesis, the
following hypothesis is posed:
Hypothesis 1: Larger companies disclose more on intangibles than smaller companies
do.
Considering earlier disclosure studies, company size
5
appears to be the most
frequently tested determinant of the extent of disclosure. Williams (2001) did not find
a relationship between size and the extent of disclosure on intangibles. The results of
studies where the extent of overall
6
disclosure has been examined do, however,
strongly suggest that size is positively related to disclosure extent (see, e.g. Inchausti,
1997; Hossain, Perera and Rahman, 1995; Cooke, 1989b, 1989c; Chow and Wong-
Boren, 1987; Singhvi and Desai, 1971).
7

Company related factor 2: Leverage
Following the argument that agency costs increase with leverage (Jensen and
Meckling, 1976), companies with high leverage are expected to disclose more

5
Company size has been operationalised in several different ways, e.g. total assets (Cooke, 1989c;
Singhvi and Desai, 1971), logarithm of assets (Inchausti, 1997; Hossain, Perera and Rahman, 1995),
total sales (Adrem, 1999; Meek, Roberts and Gray, 1995), logarithm of sales (Inchausti, 1997),
market value of equity plus book value of debt (Chow and Wang-Boren, 1987) and number of
shareholders (Cooke, 1989c).
6
The term overall disclosure is used to define disclosure, which is not exclusively focused on
intangibles.
7
See Ahmed and Courtis (1999) and Marston and Shrives (1996) for comprehensive reviews of the
results of studies, which have tested company size as a determinant of the extent of disclosure.
11
information than companies with low leverage. Their propensity to increase their
disclosure is driven by a wish to reduce information asymmetry and, thereby, reduce
agency costs. Due to increased financial risk, the demand from e.g. lenders,
shareholders, authorities and employees, for disclosure increases with a companys
leverage. All of these parties have some sort of claim on the company, e.g. a loan,
invested capital or salaries/pensions. With high leverage, the probability of the
company getting into financial distress increases, which risks the value of the claims.
Demanding more extensive disclosures is a way for external parties to assess a
companys financial risk. Thus, leverage could be argued to primarily be a demand-
driven determinant. The theoretical arguments underlying the leverage hypothesis are
relevant to test and the following hypothesis is posed:
Hypothesis 2: High leveraged companies disclose more on intangibles than low
leveraged companies do.
Considering earlier disclosure studies the support for a positive relationship between
the extent of disclosure and leverage is weak. While Inchausti (1997) and Chow and
Wong-Boren, (1987) find no relationship between leverage and the extent of overall
disclosure, Hossain, Perera and Rahman (1995) find a weak positive relationship. A
weak positive relationship has also been found between leverage and the extent of
disclosure on intangibles (Williams, 2001).
Company related factor 3: Country affiliation
Swedish companies are regarded as precursors when it comes to disclose information
on intangibles (Bukh, Larsen and Mourtisen, 2001; FASB, 2001b). The relatively long
tradition Swedish companies have with disclosing information on intangibles in
annual reports could mean that their disclosures, with respect to intangibles, are more
extensive than the disclosures made by companies in the other Nordic countries are.
Since the focus on intangibles has a relatively long tradition in Sweden, Swedish
companies could be expected to have been exposed to a large demand for disclosure
on intangibles, which has influenced the emphasis they place on intangibles in their
disclosures. Thus, country affiliation could be argued to primarily be a demand-driven
determinant. Following the above line of reasoning, the following hypothesis is posed:
Hypothesis 3: Swedish companies disclose more on intangibles than companies from
the other Nordic countries do.
The relationship between country affiliation Sweden and the extent of disclosure on
intangibles has not been tested in earlier disclosure studies.
Company related factor 4: Listing status
Like the size and leverage hypotheses, the listing-status hypothesis is often derived
from agency theory (Jensen and Meckling, 1976). For example, Cooke (1989c) argues
that monitoring costs are higher for companies with multiple quotations due to the fact
that these companies usually have a greater number of shareholders and that increased
12
disclosure is one way to reduce monitoring costs and, thus, minimise agency
problems. The notions that internationally listed companies, as compared to only-
domestically listed, are exposed to more extensive listing requirements (Cooke,
1989c; Singhvi and Desai, 1971) and additional capital-market pressure (Meek,
Roberts and Gray, 1995; Cooke, 1989b) have also been used as support for the listing-
status hypothesis. It could be argued that a company does not have to be
internationally listed to be exposed to extensive capital-market pressure. A company
with a large share of foreign owners could be expected to be equally exposed to
capital-market pressure. Testing listing status as a determinant does, however,
include the disclosure pressure stemming from listing requirements.
8
Taken together,
listing status could be argued to primarily be a demand-driven determinant. The
listing-status hypothesis originates from listing requirements and capital-market
pressure, which both exercise a demand for disclosure. Since the sample included in
the present study consists of both internationally and only-domestically listed
companies, the following hypothesis is posed:
Hypothesis 4: Internationally listed companies disclose more on intangibles than only-
domestically listed companies do.
Reviewing the results of earlier studies reveals that international listing is positively
related to the extent of overall disclosure (see, e.g. Inchausti, 1997; Hossain, Perera
and Rahman, 1995; Cooke
9
, 1989b; 1989c). A positive, however, inconclusive
relationship is found between listing status and the extent of disclosure on intangibles
(Williams, 2001).
1.4 Research design and empirical methodology
1.4.1 Selection criteria for companies
The disclosure study focuses on annual reports made by Nordic companies belonging
to knowledge-intense industries. In order for a company to be included in the study,
the following selection criteria had to be fulfilled:

Danish, Finnish, Icelandic, Norwegian or Swedish companies belonging to the
pharmaceutical, biotechnology or health care equipment & supplies industries.
10

11


8
Reviewing my sample shows that companies, which are internationally listed have a larger share of
foreign owners than companies only-domestically listed have. Thus, since the two determinants are
positively correlated, testing share of foreign owners as a determinant of extent of disclosure on
intangibles would probably yield similar results as testing listing status.
9
In Cooke (1989b; 1989c) both listed and unlisted companies have been included in the samples. His
findings show that companies, which are internationally listed have more extensive disclosures than
only-domestically listed companies have. Furthermore, only-domestically listed companies have
more extensive disclosures than unlisted companies have.
10
Annual reports from four sub-Nordic companies have been included in the study.
13
Listed on either of the Nordic countries Stock Exchanges during 1999
12
.

The selection process resulted in 36 companies (19 Swedish, 11 Danish, 4 Norwegian
and 2 Finnish). There were no Icelandic companies, which fulfilled the imposed
selection criteria. See Appendix 1 for a list of the 36 companies from which annual
reports
13
were included in the study.
1.4.2 Disclosure checklist
When it comes to analyse the extent of voluntary disclosure, previous research has
shown that a disclosure index is a useful research instrument (Marston and Shrives,
1991). A disclosure index is based on a disclosure checklist, which includes a number
of different items. The number of items included in a disclosure checklist varies
substantially from one study to another. For example, Barret (1976) used a checklist
of 17 items, while Cooke (1989a) included 224 items in his checklist.

To develop the checklist used in the present study an explorative qualitative approach
was applied. A review of the literature on intangibles was conducted to examine,
which different categories of intangibles are most frequently discussed (see
Arvidsson, 2002). Then, in order to distinguish all of the different categories of
intangibles, briefly or elaborately, discussed in the annual reports, the annual reports
were read and re-read twice. The analysis identified that the annual reports disclosed
information related to 5 categories of intangibles. The analysis also distinguished a
number of different items, which were discussed in relation to each of the 5
categories. The next step in developing the checklist, involved a review of checklists
used in earlier disclosure studies.
14
The checklists, which were most influential on the
design of the checklist used in the present study were the ones used in Bukh,
Gormsen, Mouritsen and Nielsen (2002), Adrem (1999) and Gray, Meek and Roberts
(1995). The final version of the disclosure checklist includes 81 items related to
intangibles, which are categorised into 5 categories (see Appendix 2). Thus, by

11
The companies industry codes have been collected either from the Stock Exchanges GICS codes or
the Stock Exchanges own coding systems. The Copenhagen Stock Exchange, the Oslo Stock
Exchange and the Stockholm Stock Exchange all use GICS (i.e. Global Industry Classification
Standard) codes to classify stocks into different industries. The GICS coding system is developed by
Morgan Stanley Capital International Inc. and Standard & Poors. The Helsinki Stock Exchange and
the Reykjavik Stock Exchange use their own coding systems.
12
At the time of data collection, the latest annual reports available were the once covering the financial
year 1999. Four of the included annual reports cover the split financial year 1998/1999.
13
The analysis primarily focused on the English language version of the 1999 annual reports. However,
2 of the 36 analysed annual reports were only published in a non-English language version (i.e. two
annual reports were only published in Swedish). The choice to focus on the English language version
of the reports was intentional since it reduces the potential of a conceptual confusion originated from
an analysis including reports written in different languages. A conceptual confusion would risk
affecting the stringency of the results from the analysis.
14
The following studies were reviewed in the process of designing the checklist: Bukh, Gormsen,
Mouritsen and Nielsen, 2002; Adrem, 1999; Inchausti, 1997; Gray, Meek and Roberts, 1995;
Hossain, Perera and Rahman, 1995; Meek, Roberts and Gray, 1995; Cooke, 1989a; 1989b; Chow
and Wong-Boren, 1987; Barrett, 1976; Choi, 1973; Singhvi and Desai, 1971.
14
reviewing the literature on intangibles, reading annual reports and examining earlier
disclosure checklists, the checklist was developed to be valid in the analysis of the
extent of disclosure on intangibles in annual reports.

The disclosure checklist, see Figure 1.2, has a hierarchical structure with two levels,
i.e. the aggregated level represented by the total disclosure score and the level below
represented by the five categories. In earlier dated disclosure studies it has been most
common to focus the analysis of disclosure to one (aggregated) level, i.e. the total
disclosure score (Chow and Wong-Boren, 1987; Barrett, 1976). However, a
hierarchical structure enables a more refined analysis of the extent of disclosure. Gray,
Meek and Robert (1995) introduced a hierarchical structure of their disclosure
checklist, which enabled them to conduct an analysis on two levels. Adrem (1999)
refined the analysis further when he used a three-level structure in his checklist. The
notion underlying the use of a hierarchical structure is that the decision relevance of
information varies by type and that the variables affecting the choice of disclosure
extent also may vary by information type (Meek, Roberts and Gray, 1995).
Figure 1.2 The structure of the disclosure checklist







Although each of the five categories measures a common entity, i.e. intangibles, they
represent five distinct categories of intangibles. The categories and their items have
been carefully reviewed to minimise the probability of double counting.
15
The first
level of the disclosure checklist is represented by the five categories, which are
labelled Human, Relational, Organisational, R&D and Environ/Social,
respectively. The category Human consists of items focused on information related
to board members, directors of the management team and employees. Items related to
recruitment policy and competence development program are also included in the
category Human. Relational focuses on information related to a companys
relationships with, e.g. partners, suppliers, distributors, customers and the public. The
category Organisational- consists of items focused on information on knowledge
sharing, IT, organisational routines and processes. R&D includes items, which focus
on information concerning, e.g. R&D operations, R&D projects, product portfolio and
patents. The final category is labelled Environ/Social and consists of items related to
a companys policy and agenda for engaging in ethical, environment friendly and
socially responsible actions as well as the outcome of these efforts.


15
In order to determine if the checklist consists of five distinct categories with separate items, the
checklist was also reviewed by two independent researchers. Their conclusions were that the
categories are related, however, distinct and that the probability of double counting was negligible.

Total Disclosure
Score
(81 items)
Human
(28 items)

Relational
(16 items)
Organisation
al
(11 items)
R&D
(15 items)
Environ/Soci
al
(11 items)
15
On the second level of the disclosure checklist, all disclosure items originated from
the five categories are aggregated to a total disclosure score. Thus, the total disclosure
score is a measure of the extent of overall disclosure on intangibles in each of the
annual reports.
1.4.3 Scoring procedure
16

The disclosure checklist was used to examine the content of the entire annual report. If
the report disclosed information on an item it was assigned 1, otherwise 0. Companies
were not penalised if they did not disclose information on an item, which was
irrelevant with respect to their business activities (see Adrem, 1999, Hossain, Perera
and Rahman, 1995; Cooke, 1989b). To assess if an item was relevant or irrelevant to a
particular company the annual report was studied in detail before the scoring
procedure was initiated.
17


Thus, the disclosure score for each annual report is additive and unweighted. Using an
unweighted scoring technique assumes that each item is of equal importance. By using
this technique the subjectivity otherwise involved in assigning weights to the different
items when user preferences are unknown is reduced (Adrem, 1999; Gray, Meek and
Roberts, 1995). Due to the critique against using a weighted scoring technique, an
additive and unweighted scoring technique has been most commonly used in earlier
disclosure studies (see, e.g. Inchausti, 1997; Gray, Meek and Roberts, 1995; Cooke,
1989b). Courtis (1996) goes one step further and concludes that an unweighted
scoring technique has become the norm in this type of studies.

For each of the annual reports, the disclosure score was calculated as the number of
items disclosed in the report divided with the total number of items relevant to the
particular company, which the report covers:
D
j
=

=
j
n
i j
ji
n
d
1

where D
j
is total disclosure score for company j, d
ij
is disclosure item i, which is 1 if
the item is disclosed and 0 otherwise and n
j
is the total number of items relevant for
company j, which the report covers.

16
To ensure the reliability of the study, i.e. that it is apt for replication the disclosure checklist
underlying the analysis is presented in its full version in Appendix 2 along with a list of the sample
companies (Appendix 1). Although the 81 items are carefully specified, practical problems do arise
in the scoring procedure. To mitigate these problems detailed scoring instructions and comments on
the actual score related to each item have been drawn up. These scoring instructions and comments
can be requested from the author.
17
For example, if a company only has R&D projects in pre-clinical stages it was not penalised for not
disclosing information on items related to product portfolio.
16
1.4.4. Analysis of reliability and structure of the disclosure
scores
To test the internal consistency of the disclosure scores (SPSS, 1994), the reliability
test Cronbachs alpha (Cronbach, 1951) was used. Cronbachs alpha, measures how
well a set of items, in this case the five categories, measures a common entity, i.e.
intangibles (SPSS, 1994). The test is based on the average correlation among items
within a test (Nunnally and Bernstein, 1994). Thus, the logic behind the test is that if
the inter-correlations among the items are high the items measure the same underlying
construct. A Cronbachs alpha coefficient of 0.60-0.70 or higher indicates that there is
an internal consistency in the disclosure scores.
18
The following formula is used to
calculate Cronbachs alpha:

r N
r N
* ) 1 ( 1
*
+
=

where N is equal to the number of items and r is the average inter-item correlation
among these items.
1.4.5 Regression analysis
To examine what determines the extent of disclosure on intangibles, four hypotheses
were posed in section 3.3. The four company related factors underlying the hypotheses
are: Company size, Leverage, Country affiliation: Sweden and Listing status. The four
hypotheses were tested using OLS regressions.
19


To analyse if and how a companys extent of overall disclosure on intangibles is
related to the company related factors, the total disclosure score was used as
dependent variable in the multivariate regression.
20
Following Meek, Roberts and
Grays (1995) argument that the factors affecting the choice of disclosure extent may
vary by information type, the hierarchical structure of the checklist was used to
examine if and how the extent of disclosure related to each of the five categories (i.e.
Human, Relational, Organisational, R&D and Environ/Social) were affected by the
company related factors. Thus, five additional multivariate regressions were run where
each of the five categories disclosure scores was used as dependent variable. The
same four company related factors were used as independent variables in all the
multivariate regressions. The choice to use the same independent variables for all
different types of information is the common approach used in earlier disclosure
studies (see, e.g. Adrem, 1999; Meek, Gray and Roberts, 1995).

18
According to Sureshchandar, Rajendran and Anantharaman (2002), a Cronbachs alpha of 0.70 and
above testifies strong scale reliability. Liouville and Bayad (1998) use the threshold 0.60 to
determine strong scale reliability.
19
In the regression analysis the regressions are run under the assumption of a super population of
Nordic knowledge-intense companies over time.
20
The disclosure scores are assumed to disclose interval scale properties.
17
1.4.6 Operationalisation of company related factors
The company related factors, which were used as independent variables in the
regressions, were operationalised as follows:

Company size (SIZE) was operationalised as the logarithm of total assets in 1999.
21

Leverage (LEV) was measured as the ratio of total liabilities to equity in 1999.
22

Country affiliation: Sweden (D1
Country
) was indicated by a dummy variable, which
took the value 1 if the company was Swedish and 0 otherwise. Listing status (D2
Listing
)
was indicated by a dummy variable, which took the value 1 if the company was
internationally listed and 0 if it was only listed on the domestic market.
1.5 Empirical results
In this section, the empirical results from the analyses of the annual reports are
presented. The section starts with a presentation of the results from the disclosure
scoring. Then the reliability and structure of the disclosure scores are examined.
Finally, the disclosure scores are analysed with OLS regressions in order to test the
four hypotheses.
1.5.1 Disclosure scores
Table 1.1 summarises the results of the disclosure scores for the full sample and for
the four sub-samples Swedish companies, Danish companies, Norwegian companies
and Finnish companies, respectively.

21
The logarithm of total sales was also tested as a size variable. There was, however, no significant
difference in the results of the regressions when the logarithm of total assets was replaced with the
logarithm of total sales.
22
Considering that securitiesed debt normally involves stricter information requirements than regular
debt, securitiesed debt, e.g. bond issues could be expected to be more related to the extent of
disclosure on intangibles than leverage operationalised as total liabilities to equity. Reviewing my
sample, however, shows that very few of the companies have securitiesed debt, why such an analysis
would be of no consequence.
18
Table 1.1 Summary of disclosure scores
Human Relational Organisational R&D Environ/Social Total
Swedish companies (N=19)
Highest 0,929 0,875 1,000 1,000 0,636 0,875
Lowest 0,308 0,250 0,200 0,545 0,000 0,328
Average 0,495 0,632 0,512 0,789 0,243 0,546
Median 0,500 0,667 0,400 0,769 0,182 0,514

Danish companies (N=11)
Highest 0,500 0,750 0,727 0,923 0,818 0,639
Lowest 0,154 0,222 0,000 0,500 0,000 0,288
Average 0,287 0,519 0,421 0,664 0,338 0,425
Median 0,259 0,500 0,455 0,667 0,222 0,425

Norwegian companies (N=4)
Highest 0,536 0,769 0,636 0,929 0,818 0,667
Lowest 0,111 0,500 0,100 0,786 0,111 0,377
Average 0,330 0,645 0,423 0,875 0,343 0,509
Median 0,336 0,656 0,477 0,893 0,222 0,496

Finnish companies (N=2)
Highest 0,630 0,750 0,700 0,818 0,222 0,644
Lowest 0,407 0,583 0,545 0,800 0,222 0,500
Average 0,519 0,667 0,623 0,809 0,222 0,572
Median 0,519 0,667 0,623 0,809 0,222 0,572

Full sample (N=36)
Highest 0,929 0,875 1,000 1,000 0,818 0,875
Lowest 0,111 0,222 0,000 0,500 0,000 0,288
Average 0,415 0,601 0,481 0,761 0,282 0,506
Median 0,415 0,620 0,477 0,760 0,222 0,503
1.5.1.1 Disclosure scores: Full sample
Considering the full sample, the companies disclose on average 50.6 percent of the
items in the checklist. To determine if this is a high or low disclosure percentage, the
results were compared to the disclosure scores in Bukh, Gormsen, Mouritsen and
Nielsen (2002). Although the Danish study focuses on IPO prospectuses and the
present study focuses on annual reports, the comparison of the two studies disclosure
percentages should provide relevant information about the disclosure scores. The
comparison focused on 37 items, which are included in both the present checklist and
the disclosure checklist used by Bukh, Gormsen, Mouritsen and Nielsen (2002) on 68
Danish IPO prospectuses. The companies included in the present study do on average
disclose 50.4 percent of the 37 items. In the Danish study, the companies, which
belong to both knowledge-intense (pharmaceutical, research, IT and technology) and
traditional industries (trade and production), disclose on average 24.9 percent of the
19
37 items. Separating out companies in the Danish study, which belong to the
pharmaceutical and research
23
industries, gives a disclosure percentage of 35.9. The
comparison shows that the disclosure percentage for the present sample is
significantly higher than the percentages reported in Bukh, Gormsen, Mouritsen and
Nielsen (2002). Thus, the comparison results in to indications. First, knowledge-
intense companies appear to disclose more on intangibles than traditional companies
do. Second, Danish knowledge-intense companies appear to disclose less on
intangibles relative Nordic knowledge-intense companies do.

The category, which the companies disclose definitely most information on is R&D
where 76.1 percent of the items on average is accounted for in the annual reports. This
result is predictable since the companies have their affiliation in knowledge-intense
industries where R&D is the predominant business activity. The result is in line with
the study conducted by Bukh, Gormsen, Mouritsen and Nielsen (2002) in which they
found pharmaceutical and research companies to be the ones, which are best at
disclosing information related to R&D.

Relational is the category, which the companies disclose second most information on.
Reviewing the disclosure scores in Table 1.1 shows that 60.1 percent of the items
related to a companys relationships with, e.g. other companies, suppliers and
customers on average is accounted for in the annual reports.

The companies do not appear to prioritise disclosure on items related to the
Organisational category. Neither does employee-related information appear to be high
up on the management teams disclosure agenda. Thus, the scoring results indicate
that companies are not very good at following up the old adage the employees are
our most valuable asset with disclosure related to their employees.

The results of the disclosure scores reveal that the companies disclose least
information on items related to environmental and social responsibility. Considering
the environmental trend, which resulted in an increase in companies environmental
reporting in the beginning of the 1990
th
(see, e.g. Ljungdahl, 1999), the result is
somewhat unexpected. The result is, however, consistent with Gray, Javad, Power and
Sinclair (2001) who conclude, after analysing the content in annual reports from 31
U.K. companies listed on FTSE 100, that the extent of social and environmental
disclosure is relatively small.
1.5.1.2 Disclosure scores: Sub-samples
Both in the full sample and in the Swedish and Finnish sub-samples are R&D the
category with the highest disclosure scores followed by Relational, Organisational,
Human and Environ/Social. The ordering is the same in the Danish and Norwegian
sub-samples except for Human being the category with the lowest average disclosure

23
The research category in Bukh, Gormsen, Mouritsen and Nielsen (2002) includes companies with
businesses in biotechnology and health care.
20
scores and Environ/Social being the category with the second lowest average
disclosure scores.

It should be noted that the Finnish sub-sample only consists of two companies.
24

These two companies are large in size and one of them is foreign-listed, which
following the accuracy of the hypotheses should imply that they are good at disclosing
information on intangibles. Thus, the interpretation of the results of the Finnish sub-
sample should take this into consideration. Reviewing Table 1.1 reveals that the
Finnish sub-sample is exhibiting the highest total average disclosure scores followed
by the Swedish, Norwegian and Danish sub-samples. Also in the categories Human,
Relational and Organisational do the Finnish companies disclose most information.
Although they appear to master the disclosure technique, they are the ones with the
lowest scores in the Environ/Social category.

The Danish sub-sample is not only the one, which has the lowest total average score
but it also positions itself as the sub-sample, which discloses least information related
to the Human, Relational, Organisational and R&D categories. These results
contradict the argument that Danish companies should have informative disclosures
on intangibles (see Bukh, Rosenkrands Johansen, Garca Meca and Mourtisen, 2002).
1.5.2 Reliability and structure of the disclosure scores
A calculation of Cronbachs alpha for all the five categories resulted in a coefficient of
0.68. Considering the rule of 0.60-0.70 or higher, the result is somewhat inconclusive
and the coefficient might indicate that the disclosure scores have a mild tendency
towards a multidimensional structure.

To examine the structure of the disclosure score a factor analysis was conducted. The
Kaiser-Meyer-Olkin measure (KMO) was calculated to determine how adequate the
sample is for a factor analysis. For the present sample the value of KMO is 0.60,
which indicates a mediocre sampling adequacy (SPSS, 1993). Thus, the KMO
suggests that the results of the factor analysis might be indistinct. Considering the
value of the Cronbachs alpha-coefficient it is, however, relevant to proceed with the
analysis of the disclosure scores.
Table 1.2 Correlation matrix
Human Relational Organisational R&D Environ/Social
Human 1,000
Relational 0,416 1,000
Organisational 0,483 0,566 1,000
R&D 0,335 0,348 -0,025 1,000
Environ/Social 0,189 0,330 0,543 -0,090 1,000

24
The choice to include the two Finnish companies in the study is motivated by the fact that they are
contributing with valuable information related to the company factors (i.e. company size, leverage,
country affiliation and listing status), which are analysed in the regressions.
21
Table 1.3 Unrotated and rotated factor matrix

Unrotated
a
Rotated
a,b

Factor Factor Cummunalities
1 2 1 2
Human 0,716 0,307 0,391 0,674 0,607
Relational 0,807 0,163 0,550 0,613 0,678
Organisational 0,836 -0,337 0,872 0,229 0,813
R&D 0,330 0,840 -0,238 0,871 0,815
Environ/Social 0,613 -0,565 -0,829 -0,086 0,695

Eigenvalue 2,349 1,260 1,960 1,649
% of variance 47,0 25,2 39,2 33,0
a) Extraction method: Principal component analysis
b) Rotation method: Varimax with Kaiser normalisation

The factor analysis on the disclosure scores of the five categories resulted in two
factors
25
, which together explain 72.2 percent of total variance. The unrotated factor
matrix (see Table 1.3) reveals that the four categories Human, Relational,
Organisational and Environ/Social are strongly correlated to factor 1, while R&D only
exhibits a weak correlation with factor 1. Instead, R&D is the category, which exhibits
the strongest correlation with factor 2. The results are a bit blurred when a rotated
factor analysis is run (see Table 1.3). R&D is still the category with the strongest
correlation with factor 2. Organisational and Environ/Social exhibits a stronger
correlation with factor 1 and a weaker correlation with factor 2. However, in the
rotated factor analysis Human and Relational both exhibit a weaker correlation with
factor 1 and a stronger correlation with factor 2, which makes the results less distinct.
Although the results of the factor analysis are somewhat indistinct there is an
underlying trend in the results implying that the R&D category is causing the mild
tendency towards a multidimensional structure in the disclosure scores.

Thus, to further examine the structure in the results of the disclosure scores a cluster
analysis, based on Wards method, was conducted. The analysis reveals that there are
three distinct clusters. The clusters are neither country-specific nor is their
distinctiveness related to company related factors. Instead the distinctiveness of the
clusters is related to disclosure styles. A prediction value of 92 percent was obtained
when a step-wise discriminant analysis was run. When prior probabilities were
computed from group sizes, 13 of the 15 companies in cluster 1 were correctly
classified, 7 of the 8 companies in cluster 2 were correctly classified and all of the
companies in cluster 3 were correctly classified. Table 1.4 presents the descriptive
data for the three clusters regarding their disclosure scores in the five categories.


25
The number of factors was chosen according to the Kaiser-Guttman rule, which states that a factor
should have an eigenvalue exceeding 1 (see Nunnally and Bernstein, 1994).
22
Table 1.4 Summary of cluster analysis
Human Relational Organisational R&D Environ/Social
Cluster 1 (N=15)
Highest 0,607 0,813 0,636 1,000 0,818
Lowest 0,154 0,462 0,100 0,636 0,000
Average 0,408 0,649 0,423 0,845 0,227
Median 0,423 0,625 0,400 0,857 0,182

Cluster 2 (N=8)
Highest 0,500 0,500 0,455 0,923 0,222
Lowest 0,111 0,222 0,000 0,545 0,000
Average 0,278 0,398 0,207 0,707 0,068
Median 0,290 0,441 0,200 0,667 0,000

Cluster 3 (N=13)
Highest 0,929 0,875 1,000 1,000 0,818
Lowest 0,231 0,500 0,455 0,500 0,182
Average 0,506 0,670 0,715 0,699 0,477
Median 0,500 0,667 0,727 0,692 0,545

Full sample (N=36)
Highest 0,929 0,875 1,000 1,000 0,818
Lowest 0,111 0,222 0,000 0,500 0,000
Average 0,415 0,601 0,481 0,761 0,282
Median 0,415 0,620 0,477 0,760 0,222

Companies in cluster 1 are the ones, which are best at disclosing information related
to category R&D. Considering the other four categories, these companies disclose
around average compared to full sample average. Cluster 2 is characterised by
companies, which are well below average when it comes to disclose information.
Their deficiency in disclosing information applies to all five categories. It can,
however, be noted that the category, which they are best at disclosing information on
is R&D were they are only moderately below average. Compared to the other two
clusters, companies in cluster 3 are characterised as being the ones, which are best at
disclosing information related to the four categories Human, Relational,
Organisational and Environ/Social. For all of these categories they disclose above
average (i.e. Relational) or well above average (i.e. Human, Organisational and
Environ/Social). Also in cluster 3, R&D is the category, which stands out. This cluster
includes those companies, which are worst at disclosing information related to R&D.
26


Thus, the results from the cluster analysis indicate that the difference in disclosure
styles is especially apparent when the R&D category is concerned. Furthermore,

26
The term around average is used to define a deviation from full sample average with less than 20
percent. Well below/above average is used to define a deviation from full sample average with
more than 20 percent.
23
Cronbachs alpha is improved from 0.68 to 0.73 when it is calculated for all categories
except R&D. This further strengthens the notion that the R&D category might be
causing the mild tendency of a multidimensional structure in the disclosure scores.
1.5.3 Factors influencing the disclosure scores
The correlations between the independent variables are presented in Table 1.5. The
table shows that company size is significantly correlated with listing status. No other
significant correlations appear between the independent variables. Thus, studying the
correlation matrix does not imply that there should be any problem of isolating the
influence of the different independent variables in the regression analysis.

Table 1.5 Correlation between the independent variables
SIZE

LEV

D
Country
D
Listing
SIZE 1
LEV 0,328 1
D
Country
-0,114 -0,065 1
D
Listing
0,434** 0,214 -0,047 1
** Correlation is significant at the 0.01 significant level (2-tailed)

Table 1.6 presents the results from the multivariate regressions where total disclosure
score and the score from each of the five categories, respectively are used as
dependent variables.
24
Table 1.6 Summary of results from multivariate analyses

The multivariate regressions
27
are run as:

SCORE
i
= +
1
SIZE +
2
LEV

+
3
D1
Country
+

4
D2
Listing
+
i


where SCORE
i
is company is total score and its score for each of the five categories, respectively (i.e.
Human, Relational, Organisational, R&D and Environ/Social) and the independent variables are: SIZE
= logarithm of total assets in 1999 for company i, LEV = company is ratio of total liabilities to book
equity in 1999, D1
Country
= dummy variable, 1 if company i is Swedish and 0 otherwise and D2
Listing
=
dummy variable, 1 if company i is internationally listed and 0 if it is only domestically listed.

The regressions are run with White-adjusted standard errors
28

Independent variables
Dependent
variable
Intercept SIZE LEV

D1
Country
D2
Listing
Adjusted R
2
Total score 0,1730*
(1,513)
0,0214**
(2,541)
-0,0276
(-0,768)
0,0888**
(2,525)
0,0380
(0,875)
0,187
Human 0,3070**
(1,973)
0,0034
(0,302)
-0,0469
(-1,111)
0,1580***
(3,278)
0,0623
(1,203)
0,172
Relational 0,2187*
(1,337)
0,0262**
(2,342)
-0,0442
(-1,044)
0,0738*
(1,613)
0,0409
(1,092)
0,127
Organisational -0,4926**
(-1,950)
0,0677***
(3,979)
-0,0292
(-0,747)
0,0996*
(1,476)
-0,0209
(-0,230)
0,314
R&D 0,9581***
(7,169)
-0,0164**
(-1,767)
-0,0436
(-0,982)
0,0554
(1,284)
0,1310**
(2,460)
0,099
Environ/Social -0,6346**
(-2,568)
0,0670***
(3,647)
0,0661
(0,945)
-0,0546
(-0,767)
-0,1307
(-1,169)
0,274
Note: The t-values are presented in the parentheses
*** Significant at the 1% level for one-tailed tests
** Significant at the 5% level for one-tailed tests
* Significant at the 10% level for one-tailed tests
N = 35
29

Multivariate regression: Total Score
The result of the multivariate regression, where Total score was dependent variable, is
presented on the first row of Table 1.6. Reviewing the result shows that the
coefficients of SIZE and D1
Country
are positive and significantly different from zero.
This strengthens the support for hypothesis 1 and 3, which assumed company size and
country affiliation Sweden to be positively related to the extent of disclosure on
intangibles. The coefficients of LEV and D2
Listing
are both insignificant and do,
thereby, not lend any support to hypotheses 2 and 4, i.e. that high leveraged

27
Univariate regressions were also run. The results were consistent with the results from the
multivariate regressions.
28
To control for the presence of heteroskedasticity, the White-adjusted standard errors were calculated
(White, 1980). The White-adjusted standard errors did not affect the significance of the results.
29
Due to negative equity, one of the 36 companies had to be excluded from the regressions.
25
companies and internationally listed companies disclose more on intangibles than low
leveraged and only-domestically listed companies do.

The evidence that larger companies disclose more on intangibles than smaller
companies do is not consistent with the result in Williamss (2001) study on
intangibles where no relationship was found. The result is, however, consistent with
earlier disclosure studies, which have examined the effect size has on the extent of
overall disclosure (Hossain, Perera and Rahman, 1995; Cooke, 1989b;1989c; Chow
and Wong-Boren, 1987).

For some of the years in the period 1996-2000, Williams (2001) found leverage to be
positively related to the extent of disclosure on intangibles. In the present study,
leverage does not appear to be influential. Also this result is, however, in line with
earlier studies, where the relationship between leverage and overall disclosure extent
has been non-existent or weak (Inchausti, 1997; Hossain, Perera and Rahman, 1995;
Chow and Wong-Boren, 1987).

The argument that Swedish companies are precursors when it comes to disclose
information on intangibles (Bukh, Larsen and Mourtisen, 2001; FASB, 2001b) is
confirmed in the present study.

Although listing status is found to be positively related both to the extent of disclosure
on intangibles (Williams, 2001) and to the extent of overall disclosure (Inchausti,
1997; Hoasain, Perera and Rahman, 1995; Cooke, 1989b;1989c), the result from the
multivariate regression does not indicate that there is a relationship between listing
status and the extent of disclosure on intangibles. Considering that Sweden is argued
to be the place where disclosures on intangibles are originated from, a possible
explanation could be that the demand for disclosures on intangibles is greater in the
Nordic countries than in the U.K. and in the U.S. and that this makes the listing-status
hypothesis less relevant when Nordic countries and disclosures on intangibles are
concerned.
Multivariate regression: Human
D1
Country
is the only coefficient, which is significantly different from zero when the
multivariate regression is run with Human as dependent variable. The coefficient is
positive and significant on the 1% significant level. Thus, the result suggests that
Swedish companies disclose more information on items related to board members, the
management team and employees than companies in the other Nordic countries do.
An explanation to the result might be that human resource costing and accounting
(Grjer and Johanson, 1996), has a long tradition in Sweden and that this has
influenced companies to place a greater emphasis on employee-related disclosure.
Multivariate regression: Relational
The result of the multivariate regression run with Relational as dependent variable
(row 3 of Table 1.6) is similar to the result when Total score was dependent variable,
i.e. the coefficients of SIZE and D1
Country
are positive and significantly different from
26
zero. D1
Country
is, however, only significant on the 10% significant level as compared
to the 5% level in the total score regression. Thus, large companies and Swedish
companies appear to have more extensive disclosures on items related to a companys
relationships with its, e.g. owners, partners, suppliers and customers than smaller
companies and non-Swedish companies have. The size effect might be explained by
larger companies having more ongoing projects, collaboration agreements and
alliances with external parties than smaller companies have. Consequently, they have
more information to disclose on items related to the Relational category.
Multivariate regression: Organisational
The SIZE-coefficient is significantly positive on the 1% significant level when the
multivariate regression is run with Organisational as dependent variable. D1
Country
is
the only other coefficient, which is significantly different from zero. The dummy
variable is, however, only significant on the 10% significant level. Thus, like with the
regressions run with Total score and Relational, respectively as dependent variable,
SIZE and D1
Country
are the only two coefficients significantly different from zero. The
result suggests that large companies disclose more on items in the Organisational
category than smaller companies do. This result could probably be expected since
large companies tend to have a complex organisational structure with many different
divisions located in different countries or even on different continents. To be able to
run this type of company it is vital to have clear policies on organisational routines
and processes as well as systems for communication and knowledge sharing. Thus,
larger companies may disclose more on items in the Organisational category simply
because organisational routines, processes and systems are more developed than they
are in smaller companies with organisational structures less complex.
Multivariate regression: R&D
Considering the regression result, the extent of disclosure on R&D appears to be
positively related to a companys listing status. The coefficient D2
Listing
, which is
significant on the 5% significant level, indicates that an internationally listed company
discloses more information related to R&D than a company only listed on its domestic
stock exchange does. The result also suggests that there is a significant and negative
relationship between company size and disclosure on R&D.
30
The listing effect might
be explained by the fact that companies, which are internationally listed are likely to
issue informative disclosures on their R&D-activities since they are not so well known
in the country where they are foreign-listed as they are in their home country. Smaller
companies might have informative disclosures on their R&D-activities for the same
reason, i.e. a small companys business activities are usually not so well known as the
business activities of a large company, which is more visible in the media. Thus, this
might explain why smaller companies are more prone to disclose information on their
R&D activities in annual reports.

30
To check the robustness of the results a univariate regression was run with R&D as the dependent
variable and SIZE as the independent variable. There was no significant difference in the results,
which implies that the results are robust.
27
Multivariate regression: Environ/Social
The multivariate regression shows that the extent of disclosure on items related to the
Environ/Social category is positively related to company size. The size coefficient,
which is the only coefficient significantly different from zero, is significant on the 1%
significant level. This result is consistent with earlier studies, which have found
company size to be positively related to the extent of social and environmental
disclosure (Gray, Javad, Power and Sinclair, 2001; Adams, Hill and Roberts, 1998;
Hackston and Milne, 1996; Trotman and Bradley, 1981). The result can be explained
with larger companies being more scrutinised and watched by the media, the
government and pressure groups than smaller companies are. The annual report might
be regarded an important media to use for communicating that they are conducting
businesses in compliance with the societys environmental, social and ethical code.
Thus, Environ/Social disclosure might be seen as a way for large companies to
achieve an environmental, social and ethical certificate.
1.6 Discussion and concluding remarks
The present study provides evidence that the management teams use the opportunity
to voluntarily supply outsiders with information on intangibles. The extent of
disclosure on intangibles in annual reports is, however, not overwhelming. Although
the value-creation process in knowledge-intense companies is argued to rely heavily
on intangibles only half of the items (50.6 percent) in the checklist is on average
disclosed in the annual reports. To determine if the disclosure percentage was high or
low, the results were compared to the disclosure scores in Bukh, Gormsen, Mouritsen
and Nielsen (2002). The comparison focused on 37 items, which were included in
both studies checklists. The results of the comparison showed that the disclosure
percentage for the present sample (50.4) is significantly higher than the percentages
reported in Bukh, Gormsen, Mouritsen and Nielsen (2002). The disclosure percentage
(50.4) was not only higher than the disclosure percentage for the Danish total sample
(24.9), which includes both knowledge-intense and traditional companies, but also
higher than the Danish sub-sample (35.9), which exclusively includes companies
belonging to the pharmaceutical and research industries. Thus, the results of the
comparison indicate that the disclosure percentage in the present study is relatively
high. Furthermore, the results lend credence to the notion that companies belonging to
knowledge-intense industries disclose more on intangibles than traditional companies
do.

Four hypotheses were posed to test the relationship between company related factors,
i.e. size, leverage, country affiliation and listing-status, and the extent of disclosure on
intangibles.
31
Consistent with the hypothesis, company size was found to be positively
related to the extent of disclosure on intangibles. This result is not consistent with
Williams (2001:200) who found no relationship between size and extent of disclosure

31
The present section refers to the results of the multivariate regression, which were run with Total
score as dependent variable.
28
on intangibles. The result is, however, in line with earlier studies, which have
examined the size effect on the extent of overall disclosure (Hossain, Perera and
Rahman, 1995; Cooke, 1989b;1989c; Chow and Wong-Boren, 1987). The regression
result did not lend support to the hypothesis that high leveraged companies disclose
more information on intangibles than low leveraged companies do. Also this result is
inconsistent with Williamss (2001) findings and consistent with the findings in earlier
studies on the extent of overall disclosure (Inchausti, 1997; Hossain, Perera and
Rahman, 1995; Chow and Wong-Boren, 1987). The hypothesis that Swedish
companies disclose more on intangibles than companies from the other Nordic
countries do was confirmed in the regression. This may in part be explained by
Swedens relatively long tradition with disclosing voluntary information on
intangibles. A tradition, which with justice it seems has earned them the epithet
precursors. Inconsistent with both the hypothesis and with earlier disclosure studies,
internationally listed companies were not found to disclose more information on
intangibles than only-domestically listed companies. Following the notion that
disclosures on intangibles are originated from Sweden, a possible explanation could
be that the demand for disclosures on intangibles is greater in the Nordic countries
than in the U.K. and in the U.S. Thus, the listing-status hypothesis might be less
relevant when Nordic countries and disclosures on intangibles are concerned.

Also in the regressions, which were run with each of the five categories disclosure
scores as dependent variable, did size and country affiliation Sweden appear to be the
two independent variables, which are most related to the extent of disclosure in the
five categories of intangibles. This lends further support to the hypotheses stating that
larger companies and companies from Sweden disclose more on intangibles than
smaller and non-Swedish companies do irrespective of if the overall disclosure on
intangibles or a specific category of intangibles is at focus.

The disclosure scores revealed that R&D is the category, which the knowledge-intense
companies disclose most information on in their annual reports. Considering that
R&D is the predominant business activity in companies belonging to high-tech
industries, the result lends support to the notion that industry membership exerts an
influence on a companys disclosure focus (Meek, Roberts and Gray, 1995). Their
argument that companies with substantial R&D activities are likely to be more
sensitive about disclosing information than companies in other industries are is,
however, refuted in the present study. Instead the result is in line with Lang and
Lundholms (1993) argument that R&D-intense companies are prone to disclose
information on R&D to reduce the information asymmetry between the management
team and the investors. Like R&D, information related to relationships with suppliers,
customers and partners also appears to be deemed highly relevant when the
management teams design their disclosures on intangibles. The result is probably a
direct outcome of the increasing trend in knowledge-intense industries towards
engaging in collaboration agreements with, e.g. other companies, suppliers and
customers. Thus, with the increasing prevalence of collaborative activities comes a
motive for companies to supply more information related to their collaborations, e.g.
choice of partners, purpose and effect of the collaboration. This motive is likely to be
intensified by a greater demand from the actors on the capital market for detailed
29
information on the companies collaboration activities. Social and environmental
disclosure does not appear to be prioritised. Although the result is consistent with
earlier studies (Gray, Javad, Power and Sinclair, 2001) it is somewhat unexpected
considering the prevailing social and environmental trend. The disclosure scores also
reveal that the management teams do not seem to follow up the old adage the
employees are our most valuable asset with information related to this high-valued
asset.

The descriptive analysis of the disclosure scores indicates that there are differences,
both in type and extent of disclosure on intangibles, between the companies in the four
Nordic countries. The Finnish companies have the most extensive disclosures on
intangibles followed by the Swedish, Norwegian and Danish companies. While the
Finnish companies are the ones with the highest average scores in the categories
Human, Relational and Organisational, the Danish companies are the ones with the
lowest average scores in all categories except Environ/Social. The disclosure scores
revealed that all of the four Nordic sub-samples disclose most information related to
the R&D category followed by the categories Relational and Organisational. Human
and Environ/Social appear to be the less prioritised disclosure categories.

When the internal consistency of the disclosure scores was tested there appeared to be
a mild tendency towards a multidimensional structure. Further analyses indicated that
the R&D category might be causing the mild tendency of a multidimensional structure
in the disclosure scores. This pattern was also present in the results of the cluster
analysis. The cluster analysis revealed that the companies position themselves in three
distinct clusters, which exhibit different disclosure styles. The clusters are neither
country-specific nor is their distinctiveness related to company related factors.
Companies in cluster 1 are the ones, which are best at disclosing information on R&D.
Considering the other four categories of intangibles they disclose about average
compared to full sample. Cluster 2 is characterised by companies, which are well
below average when it comes to disclose information on intangibles. Their deficiency
applies to all categories. Their disclosure on R&D is, though, only moderately below
average. Companies in cluster 3 are the ones, which are best at disclosing information
related to the categories Human, Relational, Organisational and Environ/Social. They
are, however, the ones with the worst disclosures on R&D.

After conducting the present study, some suggestions concerning the design of future
studies have arisen. First, considering that the interest in intangibles has gradually
increased since the beginning of the 1990
th
, it would be relvant to conduct a
longitudinal study to examine if and how the extent of disclosure on intangibles in
annual reports has changed over time. Second, to determine if a companys extent and
style of disclosure are industry specific, the present checklist could be used on
companies belonging to other industries than knowledge-intense. Third, the checklist
could be used on other types of documents. Since the information process surrounding
the valuation of companies involves both a demand side, i.e. the actors on the capital
market and a supply side, i.e. the management teams, it would be relevant to also
examine the emphasis the demand side places on intangibles. Especially relevant
would be to examine if the disclosure in analyst reports focuses on the same categories
30
of intangibles as the annual reports were found do. This would give a clue to which
categories of intangibles financial analysts regard as important when they make
company valuations. Besides being relevant for deciding if there is an information gap
between the demand side and the supply side concerning intangibles, the result of this
type of study could be useful to management teams when they design their disclosures
on intangibles. Fourth, although the choice to use the same independent variables for
all different types of information is the common approach used in earlier disclosure
studies, it would be relevant for future studies to include additional factors, which
could be thought of as explaining the extent of disclosure in each of the five
categories. For example, number of collaborations to explain disclosure extent in
Relational and number of ISO-certificate to explain disclosure extent in
Environ/Social.
31
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36
Appendix 1 Companies, which annual reports have been
included in the study
COMPANIES INDUSTRY
Swedish Companies
Active Biotech Biotechnology
Artema Health Care Equipment
Artimplant Biotechnology
AstraZeneca Pharmaceuticals
Biacore Health Care Equipment
Biogaia Biotechnology
Biophausia Biotechnology
Biora Biotechnology
Elekta Health Care Equipment
Gambro Health Care Distribution & Service
Getinge Health Care Equipment
Karo Bio Biotechnology
Medi Team Biotechnology
Medivir Biotechnology
Nobel Biocare Health Care Supplies
Ortivus Health Care Equipment
Perbio Science Biotechnology
Pharmacia & Upjohn Pharmaceuticals
Q-Med Biotechnology
Danish Companies
Ambu International Health Care Equipment
Bavarian Nordic Biotechnology
Chr. Hansen Holding Pharmaceuticals
Coloplast Health Care Supplies
H. Lundbeck Pharmaceuticals
M&E Biotech Biotechnology
NeuroSearch Biotechnology
Novo Nordisk Pharmaceuticals
Radiometer Health Care Equipment
Torsana Health Care Equipment
William Demant Holding Health Care Equipment
Norwegian Companies
Axis Shield Health Care Equipment
Medi Cult Biotechnology
Natural Health Care Supplies
Nycomed Amersham Health Care Equipment
Finnish Companies
Instrumentarium Health Care Equipment
Orion Pharmaceuticals


37
Appendix 2 Disclosure checklist
Human (N=28)
1 Name and age of board members
2 Their educational background (academic career)
3 Their work experience (professional career)
4 Comments on the abilities of the Board
5 Name and age of CEO
6 His/hers educational background (academic career)
7 His/hers work experience (professional career)
8 Comments on the abilities of the CEO
9 Name and age of directors of top management team
10 Their educational background (academic career)
11 Their work experience (professional career)
12 Comments on the abilities of the top management team
13 Employees by age
14 Employees by level of education
15 Employees by functionality
16 Employees by sex
17 Rate of employee turnover
18 Comments on changes in employment
19 Comments on the abilities of the employees
20 Recruitment policy
21 Statement of policy on competence development
22 Description of competence development program and activities
23 Statement of policy on employee participation/involvement
24 Statement of dependence of key employees
25 Incentive program top management team
26 Incentive program other employees
27 Comments on employee safety and health
28 Employee satisfaction measures
Relational (N=16)
29 Statement on strategic alliance(s)
30 Objectives and reasons for strategic alliance(s)
31 Description of alliance partner(s)
32 Comments on the effects of the strategic alliance(s)
33 Statement on collaboration agreement(s)
34 Objectives and reasons for collaboration agreement(s)
35 Description of collaboration partner(s)
36 Comments on the effects of the collaboration agreement(s)
37 Description of the network of suppliers and distributors
38 Identification of customer groups
39 Description of customer relations
40 Statement of policy on customer involvement
41 Statement of dependence of key customers
42 Customer satisfaction measures
43 Description of investor relations
44 Statement of policy on external communication activities
Organisational (N=11)
45 Description of internal communication policy
46 Comments on internal sharing of knowledge and information
47 Description of IT systems
38
48 Objectives and reasons for investments in IT
49 Statement of organisational culture
50 Statement of image and brands
51 Statement of corporate quality performance
52 Description of investments in organisational routines/processes
53 Comments on organisational flexibility/adaptability
54 Description of status of production technology
55 Comments on production efficiency/capacity
R&D (N=15)
56 R&D expenses
57 Number of employees in R&D
58 Statement of policy, strategy and/or objectives of R&D activities
59 Comments on the competitive strength of R&D activities in relation to competitors
60 Comments on R&D invested in basic research
61 Comments on R&D invested in product development
62 Description and status of R&D projects by position in pre-clinical/clinical stage
63 Description and status of product portfolio
64 Description and status of license agreements
65 Status of application process registration/sales/FDA
66 Details of company patents
67 Comments on patents pending
68 Assessment of generic competition
69 Statement of policy regarding patent protection
70 Future prospects regarding R&D
Environ/Social (N=11)
71 Statement of environmental policy
72 Objectives and strategy for environmental program
73 Comments on achievements in environmental program
74 Information on environmental approvals
75 Utilisation of energy, raw materials and other input goods
76 Future prospects regarding environmental program
77 Statement of working environmental and safety policy
78 Statement of policy regarding corporate social responsibility
79 Statement of ethical business policy
80 Description of community involvement
81 Statement of charity policy