Determinants of Intellectual Capital Disclosure: Evidence from Indian Pharmaceutical Sector

Globalization and rapid technological development have created the lot of changes in the different sects of human life, including business sector. One of it is that traditional accounting and reporting practices couldn't explain the exact status of the business because of increasing importance of intangible assets rather than tangible. As an evidence for this, researchers have identified the growing disparity between book value and market value of the company. Hence, this paper is an effort to identify the determinant of Intellectual capital disclosure which is firm-specific in Indian context. As far IC concerned, it possesses a vital role because of as said before increasing disparity between market value and book value of companies. Literature are saying IC can explain or at least can reduce this disparity. This study has chosen leading pharmaceutical companies included in Pharma sector. For this study, annual reports of a sample of 10 companies from NSE Pharma Index are analyzed over a three-year period from 2015-2017. Content analysis has been applied to calculate Intellectual Capital Disclosure score and Regression models are used to examine the relationship between IC disclosure and the selected variables. Results reveal that IC disclosure in Indian pharmaceutical sector is increasing year by year. While considering multiple regression analysis, the age of the company and number of independent directors are showing a significant positive relationship with Intellectual Capital disclosure. In other hand, variables such as value added intellectual coefficient (VAIC) and leverage, size of the firm and profitability are showing an insignificant relationship with IC disclosure.


Introduction
Knowledge and information are considered as most important factors in the present knowledge intensive era. Presently performance of a firm not only depending on physical assets but intangible assets too. Service sector companies like pharmaceutical companies, software companies, finance companies etc. mostly depend on intangible assets for value creation and sustain their survival. Past studies are revealing that the disparity between book value and market value are increasing and effect of tangible assets to explain the value of a firm. Stewart (1997) and Edvinsson and Malone (1997) argue that the value of a firm's Intellectual Capital can be represented by the difference between the book value and the market value of the firm. So the evidence is asking for to inculcate more information on intellectual capital to enhance accurate decision of stakeholder with regard to the company. Disclosure of Intellectual capital is not mandatory in any country because of that most of the studies on intellectual capital disclosure are evidencing a less count of information in the annual reports.
Indian pharmaceutical industry has a wider space in the country. A large number of the population provides a broader market to the pharmaceutical products. This industry occupies the front position among science-based industries and which belongs in the complex field of drug manufacture and technology. It also occupies a very high rank in the third world in terms of technology, quality and amount of drugs manufacturing. It is the one sector in India which has got many patents for their product as well as a high knowledge-intensive industry. Those intangible assets are giving an edge in the market. Hence, it is crucial for a stakeholder to know about companies' intellectual capital to reach into the right decision. Indian companies have the capacity to compete with other companies, which are situated in developed countries. Hence it is essential to disclose sufficient information about the immaterial resources and intellectual capital in their annual report.
Intellectual Capital includes the value of employee knowledge, business training and proprietary information of the business organization that provides the competitive advantage to that organization in the market. Apart from that past studies are proving that merely physical assets couldn't explain the value of a firm. Intellectual assets have a significant influence on the market value of the company. Most of the studies indicate that the increased intellectual capital disclosed firms have more value in the market. Nowadays, intellectual capital became an essential part of every company. Enormous intellectual capital offers more acceptability in general public.

Objectives of the study
This study aims to identify the extent of Intellectual Capital disclosure in Indian pharmaceutical industry and identify the firm-specific factors which impact the disclosure of intellectual capital.  (2000) proved that the role of intangible capitalis more dominant as compared with tangible capital. Teece (2000) states that intangible assets of the firm and its ICare the keys to gaining the sustainable competitive advantage and considered as the drivers of the economic growth. Researchers like D. In the meantime, several empirical studies have been conducted in various countries to examine the extent of intangible assets reporting in the corporate annual reports. Guthrie &Petty (2000), for example, examine the intellectual capital reporting practices of top 20 Australian companies (in terms of size). They have employed content analysis of the published annual reports using Sveiby(1997) developed IC framework to determine the extent of intellectual capital disclosure (ICD). In their study, they have found that the key components of IC are poorly understood, inadequately identified, inefficiently managed, and inconsistently reported in the Australian context. In another study, Oliveras et al. (2008) have analyzed the annual reports of 14 listed companies over a time period from 1998 to 2002 in Spain. Their empirical results show the decreasing trend in the hidden value (differences betweenmarket value and book value) of Spanish companies and the level of disclosure of intellectual capital items in the annual reports is low. However, they find increasing trend in the reporting of intellectual capital and the style of reporting is 'narrative'. April et al. (2003) conducted an empirical analysis of intellectual capital measurement, management, and reporting of South African mining companies. They also have employed 'content analysis' technique to analyze the annual reports of 20 listed mining companies besides collecting necessary data through interviews with senior officials. They use 24 intellectual capital indicators covering main three categories of human, internal, and external capital for data analysis. Empirical results show that South African mining companies report the low amount of intellectual capital information in their annual reports and external intellectual components like business collaborations, favourable contracts comprise the major part of IC disclosure. They conclude that South African mining companies rate IChighly but due to the non-existence of proper reporting systems and structures companies are lacking in measurement and reporting of intellectual capital. In another study by Guthrieet al. (2006) investigate the reporting of intellectual capital items by the listed companies in Australia and Hong Kong. Their results reveal that voluntary IC disclosure is low and qualitative rather than quantitative in both countries.
Singh &Kansal (2011) investigate inter-firm intellectual capital (IC) disclosures and its variations in top 20 listedpharmaceutical companies in India and they find that IC disclosure of sample companies are low, narrative and varying significantly among companies. Chander&Mehra(2011) examine the extent of intangible asset disclosure by243 companies in India. To examine the level of disclosure of intangible asset information they analyze the annual reports of these companies using content analysis and study results show that the overall disclosure of intangible assets is low in India. Bhasin (n.d.) makes a survey about IC reporting practices of 16 Indian IT companies in their annual reports. He concludes that IC reporting of these companies is 'almost negligible and it had not received any preference from the mentors of these corporations'. In another study (Mondal andGhosh), we find that Indian knowledge companies disclose the lesser amount of IC information in their annual reports and the most reporting items are external capital.

Intellectual Capital Efficiency
IC components are intangible in nature which are not getting importance in the financial statement of the company. It is not included in accounting information disclosure criteria. Companies frequently report information about their activities than mandated by regulatory authorities (Williams-2001) Shareholders require information about assets those are vital for increasing value of the firm. Intellectual capital is an essential part of knowledge-intensive Industries like pharmaceutical sector, IT sector, biotechnology industry etc. which increases the performance and creating the value of the firm. Botosan (1997) argues that voluntary disclosure of intellectual capital may empower investors and other related parties to better assess future wealth creation capabilities of the firm. Therefore, the knowledge-based companies disclose positive information about their intellectual capital through their annual report.
H1: There is a positive relationship between the level of IC disclosure and IC efficiency.

Independent Directors
The roles of independent directors become vital over the years due to the need to meet the changing business, economic and social environment. Therefore, a large number of independent directors may be more effective will ensure to disclosure more information to outside stakeholders to ensure transparency and equity in the company dealings. So, the large number of independent directors can be expected to have an impact on voluntary disclosure of relevant information including IC related issues in the annual reports. the literature has generally posited that independence of the board of directors from management provides effective control and monitoring and control of firm activities(Fama and Jensen,1983). Bueno et al. (2004) consider that the number of independent directors leads to greater supervision and to the maximization of the value of the organization.
H2: There is a positive relationship between the level of IC disclosure and number of independent directors.

Firm size
According to Roberts et al. (2005), firm size plays an important role in determining the extent of information disclosure in annual reports. Ousama& Fatima (2010)explain the relationship between firm size and the extent of disclosure. Inchausti (1997) explains that agency cost will increase due to conflicts between the company's managers and their stakeholders and the source of such conflicts in large companies is the complex relationships of the managers with the stakeholders. In order to mitigate agency costs burden, large companies voluntarily disclose more information. Guthrie et al. (2006) argue that large companies are more progressive and innovative because they have the financial resources that enable this type of behaviour. Since intellectual capital is considered as vital assets, information about those assets also is to be disclosed. Prior studies by Guthrie et al. Highly profitable companies are voluntarily providing more information in their annual reports in order to justify their financial performance and to reduce political costs (Watts & Zimmerman-1986). Another opinion is that profitable companies signal that they are better companies and the contributory factor for the huge profitability of these companies could be due to their intellectual capital (Ousamaet al., 2012).
H4: There is a positive relationship between the level of IC disclosure and profitability.

Leverage
Debt holders always wanted to disclose more information. Therefore highly levered companies are expected to disclose more Intellectual Capital in order to reduce agency cost. According to Botosan (1997), disclosures reduce the cost of equity of a firm. The voluntary disclosures include not only financial information but also IC information to convince external parties that the company is strategically competent.
H5: There is a positive association between the level of IC disclosure and leverage

Age
Age is included in this study as a proxy measure of risk. Studies show that there is a positive relationship between risk and information disclosure by a firm. Researchers also agree that investors of higher risk firms can reduce their information cost if they are given additional information (Lang &Lundholm, 1993). According to Whiting & Woodcock (2011), firms will disclose less than the younger one, which is considered as risky firm. Kim & Ritter (1999) argues that younger companies need to disclose more non-financial information than older companies for their valuation.
H6: Age has a negative association with the level of IC disclosure.

Significance of the study
Therefore, above literature review presents that in the knowledge economy, intellectual capital is considered as strategic assets but companies are not interested to disclose much about it. In many countries including India, there are no guidelines for disclosure of intellectual capital. Companies voluntarily disclose such information but research results show that such disclosure is very low. Companies in the service sector, where intellectual capital plays a vital role as compared to tangible assets, also report the low amount of information about their important assets. Hence it is important to know what are the factors which are specific to a firm determine the intellectual capital disclosure.

Research Method
Under this paper, examined the level of intellectual capital disclosure in the pharmaceutical sector apart from that identified the firm-specific determinants of the intellectual capital disclosure. This study is based on 10 pharmaceutical sector firms which are included in the National Stock Exchange (NSE) pharma index. This study consists of data for the period of 2015 to 2017, the annual report of 2015,2016,2017 financial years of selected companies are collected from prowess database. Content analysis has been used to calculate Intellectual Capital Disclosure Index (ICD).The sources of data, for this study used, are annual reports.According to Lang &Lundholm (2003) corporate annualreport is important for two reasons; firstly, it is considered as an important source of company information by externalusers and secondly, the disclosure level in annual reportis positively correlated with the amount of corporateinformation communicated to the market and to stakeholdersusing other media. The annual reports also offer an opportunityfor a comparative analysis of management attitudes andpolicies across reporting periods (Niemark 1995, Guthrie etal., 2004). Panel data regression has been used here to know the firm-specific factors which are determining the Intellectual capital disclosure.

Dependent variable:
The main objective of this study is to determine the factors that influence the voluntary disclosure of IC information in sample companies' annual reports. Therefore, the dependent variable of this study is the extent of IC disclosure. 33 IC disclosure items are selected used by (Badrul, Khan, & Rahman, 2015) and some elements are added by researchers with a notion that elements will be appropriate in the Indian context, which are collected from past studies. In order to measure the extent of IC disclosure. The disclosure list consists of three categories of intellectual capital: namely, human capital (15), internal capital (8) and external capital (10). Since IC disclosure list is prepared based on literature from developed countries, a pre-test is conducted taking 10 annual reports for the year 2010 of randomly selected companies and no major discrepancies found in pre-testing results. An unweight dictums procedure is followed in calculating the index. Under this procedure, the disclosure of a specific item in the annual report is given a score of 1. On the other hand, if the item is not disclosed, it is scored as 0. This scoring technique is selected to avoid any potential issues of subjectivity that may arise when a weighted scoring format is applied (Williams, 2001). The extent of IC disclosure is a ratio of the total number of items found in the annual report divided by the maximum number of items in the disclosure list. The extent of intellectual capital disclosure is calculated as follows:

Independent Variable:-
The independent variables of this study are measured as follows: (1) Efficiency of Intellectual Capital (VAIC™): The independent variable intellectual capital efficiency is measured by Pulic's (2000) VAICTM model (value creation efficiency of intellectual capital) in this study. It is the very popular model among the researchers in measuring corporate intellectual capital efficiency. It is a measure of corporate intellectual ability (Pulic, 2000), providing an easy-to-calculate, standardized, and consistent basis of measure, enabling effective comparative analyses across firms. Data used in the calculation of VAIC are based on financial statements. The procedures for calculating VAIC are as follows: (2) Firm Size (FS): It is measured by the natural log of total assets of a company at the end of a reporting year (e.g. Bozzolanet al., 2003).
(3) Profitability (PF): It is measured by the return on assets (ROA), i.e., the ratio of net profit -after tax to total assets.

Multiple Regression Model
Panel Data Regression Model is applied to know determinants of IC disclosure. The model as follows: Where ICDit= extent of intellectual capital disclosure of company i in year t, VAIC™it = intellectual capital efficiency of company i in year t, PFit = profitability of company i in year t, FSit = size of company i in year t, DEit = leverage of company i in year t, AGEit = age of company i in year t, IDit = number of independent directors in the board i in year t, α = regression intercept, βi = parameters to be estimated, i = 1,2,………….6, ε = error term of the regression.

Result and Discussion
As mentioned earlier, the objective of this study is to investigate the effects of ICefficiency and some firm-specific factors on the voluntary disclosure of IC items on the annual reports of leading pharmaceutical companies in India and the categorized level of IC. In this section, we will present and analyzethe categorized level of IC, descriptive results, correlation analysis and multiple regression results of the study.

Element Based IC Disclosure
The below tables and charts shows Intellectual Capital disclosure of selected pharmaceutical companies based on the three elements of Intellectual Capital namely internal capital, external capital, and human capital. which is the lowest percentage among the three elements of IC. It is clear that all the three elements are increasing year-byyear. It showing the evidence that the firms are knowing the importance of ICD and gradually improving the disclosure of IC information through their annual report.   So selected sample companies are not that much intellectually efficient. The average profitability (PF) of sample companies is 11.59%.

Multicollinearity test
Table-3 represents the correlation between the explanatory variables and existence of multicollinearity problem if any. The correlation table reveals that the correlation coefficient of the explanatory variables among themselves are almost normal in general except VAIC with profitability (PF) and profitability with firm's size (FS). These two are less than 90%. The study of Gujrati (2004) says that if the correlation between two variables is not exceeding 90%, the variables may be considered as free from the problem of multicollinearity. These findings suggest that multicollinearity among variables is unlikely to create a serious problem in the interpretation of the multiple regression results.

Multiple Regression Analysis
Fixed effect regression model is selected as the suitable one for regression analysis. It is based on Hausman specification model which is reported in Table-15. In Hausman test, the null hypothesis is that random effect is appropriate when P value is more than 5% and the alternative hypothesis is that fixed effect is appropriate when P value is less than 5%. 14.420663 0.0253 Here P-value against chi-square value is less than the significant level 0.05 (5%), then the null hypothesis is rejected and the alternative hypothesis is accepted i.e. fixed effect model is appropriate.   Here the age of the companies (AGE) and extent of Intellectual Capital disclosure is statistically significant at 5% level. So there is a positive relationship between company's age and disclosure of Intellectual Capital. More experienced companies are showing more Intellectual Capital in their annual reports. In the case of independent directors, there can see a significant relationship at 20% level. For a small sample study, we can consider p-value as large as .20 but there are no hard rule (Learning, Reserved, & Learning, n.d.). So this result is evidence for, there has a positive relationship with the number of independent directors and intellectual capital disclosure. in other words, if the firm's board of directors effectiveness is more it will lead to disclosing more kind of information on intellectual capital.
VAIC shows a value of 0.2915. It means that the Intellectual Capital performance and the extent of Intellectual Capital disclosure are not significant even though it has shown a relationship as expected. Firm size (FS), profitability (PF), leverage (DE) are showing the value more than 5% level of significance and the relation are also as not expected.

Conclusion
The pharmaceutical sector is one of the knowledgeintensive industry and intellectual capital in this sector is the primary capital. In case of pharmaceutical industry, accounting numbers are not that much efficient due to the less ability of the financial statements to reflect the Intellectual Capital of a company. Intellectual Capital information is essential to investors to know the ability to increase the value of the company. This study is conducted to find out factors influencing the extension of Intellectual Capital disclosure by using three years' annual reports (2015-2017) of top 10 indexed Indian pharmaceutical companies.
Age of the companies influencing the extent of Intellectual Capital disclosure. It is inconsistent with previous studies in this field. It shows that more experienced companies are intended to show more Intellectual Capital in their annual reports. The study reveals that the effectiveness of the board of directors has an impact on intellectual capital disclosure. Other variables such as VAIC, firm size, leverage, profitability, are not significant at the level. So further studies are required to understand the clear picture of the determinants of Intellectual Capital disclosure. This study can be used as a reference for future studies examining the extent and determinants of the Intellectual Capital disclosure in the Indian context.