Intellectual capital reporting and mandatory adoption of post-IFRS – An empirical analysis using computational linguistic tools

Abstract

Purpose

The study aims to report empirical evidence on the impact of mandatory adoption of International Financial Reporting Standards (IFRS) in India on the voluntary intellectual capital reporting (ICR) and its value relevance. The study also tests the effect of term-weighting schemes used for information retrieval studies in the domain area of ICR.

Design/methodology/approach

The study uses computational linguistics tools to measure ICR by Indian firms in the period 2014–2019. The study developed term frequencies for 23 ICR attributes using bag-of-words methodology from the annual reports. The word counts were used to construct two distinct measures of ICR, quantity and quality, deploying different term-weighting schemes, equal weighting and the term frequency-inverted document frequency (TF-IDF) weighting, respectively. A combination of parametric and non-parametric tests has been employed to examine the different hypothesis.

Findings

The quantity of ICR was found to have increased post-IFRS adoption. However, the quality of ICR had fallen significantly, which resulted in the loss of value relevance of ICR. Firms making higher disclosures but of inferior quality experienced suboptimal market returns. Variation in inter-firm ICR has reduced. Size effect and sector effect continue but have attenuated. The study acknowledges the enormous impact of term-weighting schemes, used for information retrieval studies, in the domain area of ICR.

Practical implications

The study strongly adds to the momentum in favour of a formal ICR standard to improve its quality, restore its value relevance and facilitate more effective decision-making where the valuation of a firm is a critical input. The study presages the firms not to make poor-quality disclosures to avoid suboptimal stock performance.

Originality/value

The study sheds light on the impact of the adoption of post-IFRS on ICR in India. The study establishes the effect of term-weighting schemes, used for linguistic studies, in the domain area of ICR and adds to the literature by explaining one of the critical reasons for the dichotomy in ICR trends.

Citation

Kulshrestha, A. and Patro, A. (2021), "Intellectual capital reporting and mandatory adoption of post-IFRS – An empirical analysis using computational linguistic tools", Journal of Intellectual Capital, Vol. 22 No. 6, pp. 1147-1179. https://doi.org/10.1108/JIC-07-2020-0249