Impact of intellectual capital disclosure practices on volatility of stock returns

Abstract

In recent years intellectual capital has emerged as an important factor of value-creation in many companies. However, traditional financial reporting often fails to account for some of the major categories of intellectual capital. We conduct an exploratory and empirical study of intellectual capital reporting by UK companies. The primary goal of our research is to examine the relationship between intellectual capital disclosure and volatility of stock returns. Besides, we also intend to analyze the differences in intellectual capital disclosure practices among different industries. The major tasks of our research comprise analysis and systematization of theoretical and empirical literature on intellectual capital and volatility, content analysis of disclosure practices in annual reports, development of a regression model to test for the relationship between disclosure and volatility and drawing conclusions based on the results obtained. Our study illustrated that the disclosures of intellectual capital remain low and mostly narrative. Significant variations in disclosure content exist, and they can be mostly attributed to industry specifics. The regression analysis showed mixed results as to the impact of intellectual capital disclosure on volatility. In particular, disclosure index is negatively correlated with the change in stock trading volumes; however, no such relationship was revealed with respect to stock price fluctuations. Thus, this question calls for further investigation.