Financial Statement Informativeness and Intellectual Capital Disclosures: With Special Reference to the Listed Companies in Sri Lanka

Abstract

Growing demand for financial and non-financial information by the users of financial reports leads to an emphasis on the informativeness of financial statements. Thus, reporting reliable and relevant financial and non-financial information becomes vital, and investments in intellectual capital, being highly demanding information by the users, hold an important place in providing informative financial reports despite the lack of proper accounting recognition criteria in financial statements. Thus, our study aims to analyze the relationship between financial statement informativeness and intellectual capital disclosure in Sri Lanka. Financial Statement Informativeness was measured using the explanatory power of financial information in explaining market value. Content analysis of annual reports followed by a quantity and quality index of Intellectual Capital Disclosure was used to measure the Intellectual Capital Disclosures. A sample of 48 companies listed on the Colombo Stock Exchange that disclose Intellectual Capital was used, and empirical analysis was carried out using the Poisson regression method. A significant relationship between Financial Statement Informativeness and Intellectual Capital Disclosures has been found, suggesting that Financial Statement Informativeness plays a substantial role in providing disclosure on intellectual capital in financial reports. This study confirms to make managers aware of its significant and positive effect on financial statement informativeness in financial reports, given the importance of Intellectual Capital Reporting in mitigating the disparity of financial information. An important implication of the findings is that policymakers and regulators need to establish a uniform methodology for reporting Intellectual Capital to establish consistent disclosure practices.