Intangible Asset Disclosure and Impact on Firm Value - Evidence from Swedish Listed IT Firms

Abstract

Background: In this changing economy, firm are gaining larger amounts of intangible assets. Along with these changes there are several challenges, including not only reporting these intangibles but also measuring them. Many of these intangible assets are treated as expenditures and are therefore not capitalized. As a result, a firm’s external reporting might become less likely to fully mirror the firm’s true value. Purpose: Our study aims to examine whether a larger gap between market and book values of equity (also, hidden values) may explain a higher voluntary firm disclosure of intangible assets. We also aim to examine whether firms with higher disclosures of intangible assets might contribute to higher market values. Methodology: By analyzing the annual reports from listed firms, we retrieve the total length of their disclosures of intangible assets. In order to test our first hypothesis and see whether hidden values impact the intangible asset disclosure, we use a model based on a study by Whiting and Miller (2008). To test the second hypothesis and examine the impact of the intangible asset disclosure on market capitalization, we use a model based on Abdolmohammadi’s (2005) study. The study has a focus on Swedish listed IT companies, and studies the years 2010-2014. Findings: When analyzing the impact of hidden values on the intangible asset disclosures, we find evidence suggesting a positive relationship. This indicates that firms which have more (identifiable and non-identifiable) intangible assets have a tendency to disclose more of these intangible assets. In the second analysis we find a positive relationship between intangible asset disclosure and market capitalization, suggesting that firms that disclosure more about their intangible assets have higher market capitalizations.