Accounting, Auditing &
Vol. 16 No. 1, 2003
# MCB UP Limited
Received April 2002
Revised September 2002
Intellectual capital and the capital market:
the circulability of intellectual capital
Copenhagen Business School, Frederiksberg, Denmark
Keywords Intellectual capital, Intangible assets, Capital markets, Assets valuation
Abstract This paper argues that intellectual capital and intangible assets are difficult resources
for two different reasons. First, intellectual capital and intangibles assets are not (yet)
disentangled by the institutions of the capital markets, and therefore they are not (yet)
translatable with any degree of confidence into predictions about stock price behaviour. Second,
intellectual capital and intangibles are not absent from capital market intelligence; they are just
typically translated into financial form, when they are presented to actors in the capital markets,
even if in forms that are themselves ``invisible''. The capital market may have limited
understanding of intellectual capital, but it is also always seeking to understand the complexity of
business and (im)possible futures. Its appreciation of intellectual capital is therefore fragile.
There is a widespread conviction that capital market participants do not
appreciate information on intangible assets and intellectual capital, even if
surveys suggest that they appreciate information on ``soft'' resources. This
paradox was raised at a Symposium on Intellectual Capital and the Capital
Market held at the European Accounting Association (EAA) Conference in
Copenhagen (2002). The discussions of this Symposium presented a variety of
views as to the reasons for this. In this special section of AAAJ, the views are
given voice and the four presenters ± who all prepared a commentary for this
special section ± present explanations ranging from the culture of the capital
market, its possible inability to understand intellectual resources and its lack of
time to attempt to comprehend business models which include intangibles and
Intellectual capital (IC) is a drama, because even if it is presently very difficult
to make distinct boundaries around it, IC is presented as the intangibles stuff,
out of which ``value'' in a knowledge society and therefore knowledge
organisations are created. The drama is that the value is created which cannot
be accounted for by traditional management and financial accounting means ±
as the production function of the knowledge society is in the unknown ± and the
ownership and control of intellectual capital are not clear.
Intellectual capital is partly a problematisation of how the conventional
balance-sheet is unable to present a convincing account of the resource value of
firms that navigate in the knowledge economy and draw heavily on intangibles
(e.g. knowledge systems, human competencies, relationships with customers
The Emerald Research Register for this journal is available at
The current issue and full text archive of this journal is available at
The author wishes to thank James Guthrie for friendly and very helpful comments on an earlier
draft of the paper. He cannot be blamed for omissions and errors.
and suppliers), rather than tangible traditional resources (e.g. plant and
machinery, land and buildings). The meta-justification of this drama is found in
the capital market because the existence of intangible resources, it is argued,
can be made into a visible, from the (large) difference between the value of the
firm's stock in markets and its traditional book value (e.g. Lev, 2001). The
capital market has been a major player in the creation of stories about
intellectual capital not least during the ``dot com boom'' and helps to justify the
existence sources of wealth creation, which are not strongly accounted for by
the traditional accounting rules and practices.
However, the paradox is that capital market participants are typically not
very interested in intellectual capital statements. They may be interested in
more information generally, but when they face particular intellectual capital
statements or reports on intellectual resources, they are often sceptical.
Somehow, the circulability of intellectual capital information appears to be
limited. It tends not to have a strong readership or understanding in capital
markets, as suggested by the contributions to the 2002 European Accounting
Association (EAA) symposium on intellectual capital (IC) and the capital
market by Ulf Johanson (this Issue), John Holland (this Issue), Per Bukh (this
Issue), and Manuel GarcõÂa-Ayuso (this Issue). These authors ask questions
regarding why it may be that, by and large, the capital market is not
comfortable with information on intellectual capital resources, even if such
information is currently presented in certain firms' disclosure practices. They
draw attention to the paradox that the financial markets, or more precisely the
financial analysts and investors, in surveys say that they need more
information on various kinds of intangibles, and yet they appear ``nonplussed''
with the actual specific propositions made by firms' intellectual capital
statements. Why can this be? And does it make any difference? Why is it that
intellectual capital information does not circulate freely and far? Why is it that
the story about intellectual capital reporting does not have a happy ending?
How to understand information on intellectual capital in the capital
How are intellectual capital assets to be understood? One distinction is
presented by the Eustace (2001) model which divides it into three categories:
conventional assets (tangible assets) recognised in the contemporary balance-
sheet; ``new'' intellectual assets (intellectual goods) recognised (e.g. brand value
and patent value); and innovation, structural, market and human resources
(intangible competencies). This model defines a map of assets, where it adds
new forms of assets in addition to conventional traditional assets, namely
intellectual capital in two forms depending on whether it is recognised as a
separable asset or not.
This model develops or extends the well-known idea that to explain the
``true'' value of the firm it is necessary to supplement the financial value of the
firm, with a value of the firm's intellectual capital (Edvinsson and Malone,
1997). The firm's market value is the sum of financial and intellectual capital,
or ± as in the Eustace (2001) model ± the value is the sum of recognised
conventional assets, recognised intangibles, and non-recognised competencies.
These are conceptual models, which seek to create analytical distinctions in an
attempt to represent in an increasingly refined form possible aspects of
intellectual capital as a collection of items of separable assets. This is a useful
accounting logic. Whether this will eventually be able to actually close the gap
between market values and traditional accounting book values is highly
But what is ``value''? Is it a noun? Or is it a verb? It could be both. In
conventional accounting values are created on the basis of a procedure found in
and around the firm's accounting database. It is constructed by a disciplined,
rule-based manipulation of business transactions that make up book values by
assigning entries as expenses or assets; or as liabilities, revenues or capital.
This story is typically a conservative form of accounting, even if market values
can be used for certain non-current assets. It will hardly fill the contemporary
significant gap between market and accounting book values of the company as
The finance perspective story is different. Focusing on the possible net
present value of the firm's cash flows, shareholder value is created as
increments to the firm's capital market value. Here, value is dependent on a
justified forecast of earning capabilities and cash flow projections. Gu and Lev
(2001) value intangibles on this basis, but obviously the resulting value is
highly dependent on the firm maintaining a stable earnings-generating ability.
Therefore, in contrast with the conventional accounting statement, the focus
here has changed from stability in the balance-sheet numbers, to stability in the
P&L statement's numbers. Recent experience with large corporate collapses
would suggest that earnings are fragile under traditional accounting.
Both the conventional accounting and the finance perspectives are concerned
to describe a set value of the firm's intellectual assets. What happens if it is a
verb? In this situation, the value of intellectual capital is a process by which it is
in construction and remoulding all the time (Mouritsen, 1998; Mouritsen et al.,
2001a, b). In this drama, intellectual capital is in itself a process of value
creation, and somehow it makes little sense to say that the future is a set
function of the past, because, as knowledge grows in firms, new opportunities
surface all the time. Knowledge and value are interconnected and, as it is
impossible to predict the growth of knowledge, as Popper (1972) indicated, it is
impossible to arrive at one finite and set value of intellectual capital. In contrast,
intellectual capital is also a process of discovery and development. It is a
concern to produce new attributes of the firm that allow it to develop, share and
stabilise knowledge. In this story, value therefore means not (only) to measure or
calculate value, but to understand the creation and development of value
(Guthrie, 2001; Mouritsen et al., 2002a; Petty and Guthrie, 2000).
This may be part of why the capital market participants have problems with
understanding knowledge and its creation. Its trajectory into the future is
hardly linear. But to understand the task that faces capital market participants,
it is useful to explore Eustace's (2001) model of assets around the distinction
between recognised conventional assets, recognised ``new'' assets and
complementary competency assets. The drama here is one of entanglement and
disentanglement in the recognition of assets.
Dis-/entanglement, framing, overflow, displacement
How does this model of assets work? Eustace's (2001) model is an extension of
Edvinsson's (Edvinsson and Malone, 1997) framework by creating several new
distinctions. In effect, it attempts to re-create the boundaries between what is
a separable, recognisable asset and what are ``merely'' organisational
competencies. It pushes the traditional boundaries as to what can be put on the
firm's balance-sheet and it includes more intangible items.
This process of committing more items to the balance-sheet is a process of
disentanglement, where a separation between entities is constructed, and where
the framing of the phenomenon in question is established (Callon, 1998). This is
how all kinds of balance-sheet assets are created ± conventional assets and
``new'' recognised intellectual assets, such as patents and brand assets. These
are made visible by a procedure of inscription through which they are made
recognisable and represented by names and numbers on paper. This is what
happens when accounting transactions are added, subtracted, divided and
multiplied with one another. To recognise assets is to show how they are
separate from other assets, and therefore the process of disentanglement is one
where the asset is ``taken away'' from the sphere of the firm's production
process where in use it is complementary to other assets. To ``take items away''
is therefore also a transformation of the item because it is described not in
action but on hold. In addition, it is typically mobilised by institutions ``outside''
the firm such as accounting rules defined in International Accounting
Standards. These rules help identify the asset ± in fact, these are the only
criteria that speak loudly for the asset. It is thus disentangled from the firm by
accounting rules stipulated elsewhere, that the strength of disentanglement
comes from the logic of inscription defined elsewhere.
Disentangled assets come, according to Eustace (2001), in two types: the
conventional assets and the ``new'' intellectual assets. How do they differ? Why
is it that analysts consider conventional assets to be more trustworthy, far
more understandable and better than the ``new'' intellectual assets? The point
probably is that the two kinds of assets are located institutionally in different
ways, which makes their overflow different.
Overflow is a matter of how much a phenomenon can relate to other
phenomena. If there is considerable overflow, then there are many ways in
which the asset will flow and live, or die, for that matter. The conventional
asset has relatively ``little'' overflow because the institutions interpret the
``value'' of the traditional asset as having a long history and thus a capability to
understand it. Such institutions relate a reading to the asset just as it delivers
the rules and procedures that control the inscription process. Therefore there is
a close linkage between the traditional asset and the institution that produces it
and there is little overflow.
This stands in contrast with the ``new'', recognised intellectual assets. Here,
there is more ``overflow'' because the story is less clear to readers on how to
appreciate brand values and patent values. Even if there are rules for the
inscription ± recognition rules, these are loosely coupled to a readership. No
generally accepted procedures have been developed to appreciate the value of
information (e.g. on the valuing of brands and patents). Therefore, there is no
systematic experience with such indicators in the capital market, and this
makes their interpretation a difficult one. As a consequence, to interpret them,
presently the capital market has to couple them to other areas of interest (e.g. to
consider a patent an option whose net present value depends on its application).
There is considerable overflow because the ``new'' asset can move in many
directions, or it can easily get lost as an element in a value-creating activity. It is
not connected as clearly to institutions and therefore it is not as strong as the
This difference in ``overflow'' explains some of the problems with the ``new''
intellectual assets. It is not that they are calculated in new ways, because the
rules for their creation follow the rules used for conventional assets. The
difference is that the institutions that make the calculation relevant are
different. Or, more precisely, the institutions that can read conventional assets,
cannot read the ``new'' intellectual assets, with similar confidence.
These disentangled resources exist as separate entities in the form either of
conventional or of the ``new'' assets. There is a third type of intellectual
resource, according to Eustace (2001), consisting of the competencies found in
the relationships between human, organisational and customer ``capitals''.
These are all entangled resources or assets and are not separated. They exist in
action ± as a competency mobilised on the basis of complementarity between
various kinds of assets or resources. They are interesting for their joint effects.
They are seen as not being individually calculable, because they exist only in
instances of collective performance. In this way, the resource or asset does not
conform with the requirements of an external rule-setting institution, but more
with the idiosyncratic principles of value creation that can be found in the
specific firm. This is often quite unsatisfactory, even to internal managers
because, if all is connected to all, there is little way out. Therefore, inscriptions
develop that to a certain degree disentangle the complementary resources, but
they are often inscribed in collective kinds of outputs that stand out as local
indicators, such as productivity or satisfaction.
Entangled networks of resources exist as competencies. They have
considerable overflow because they cannot be seen in any distinctive way
because they function in connection with one another. They are bound to the
place where they are put to use, and not only managers, but more so the capital
market, may have difficulties not only in seeing how they work, but indeed also
in merely seeing them. Also this is why, for this type of entangled resource,
there is some kind of ``need'' to separate them, because otherwise they cannot be
made manageable. To manage, somehow and to a certain extent,
disentanglement is necessary.
The more resources are disentangled, the more they become displaced or
translated into a new form that has only little resemblance with its entangled
form. This is important: the more disentangled the resource is, the more it is
made separate; the more the resource has been made separate, the more it is
different from the materials from which it gained its power and action.
Therefore, the more the resource is disentangled, the more it is transformed into
something quite different, governed not by the logic of the complementarity of
assets, but by the logic of the institutional rules found outside the locus of
Coping with intellectual resources
Disentangled resources are separated by other means than the resource ``itself''.
In some sense, to disentangle is to bring away from the ``life'' of the resource. In
a biological setting, as Latour (1999) has shown, to identify a plant means to
separate it in order to make it discernible, and this is to separate it from other
flowers and from the soil. The flower has to die to become disentangled!
To a certain extent this is also the case for conventional and ``new'' assets. To
be recognised, they have to ``die'' because they are taken out of context. This is
the case when the financial value of an asset, conventional or ``new'', is
calculated on the bookkeeping system's entries ± original expenses ± or from its
market value, which only rarely will correspond to the net present value of the
asset in the organisation's use.
For entangled assets this is different, because they exist only in relation to
the firm's production process. As ``competencies'', human, structural or
customer-oriented, they exist in interaction. They exist in a different plane from
conventional and ``new'' intellectual assets, and they are inscribed partly via
various batteries of indicators, and partly via explicit recognition of the
business model or the narrative of achievements that make the individual
efforts to develop competences relevant. They are always related to a specific
collective purpose, and the promise of the linguistic separation between human
and structural capital will not work. Rather, the battery of indicators becomes
relevant, if they can explain or support the path towards the proposed business
model or narrative of achievement proposed. The problem for the manager or
analyst is to create assurance that this development is unfolding. There is an
irony here, namely that, when it is acknowledged that there are entangled
competency resources, these cannot be separated from the disentangled ones.
When there are identifications of competencies in the firm, they draw also on
the conventional, tangible assets and on the ``new'' immaterial goods or
intellectual assets. They cannot be separated and therefore, even if the ``map
metaphor'' dividing between recognised assets and competencies is beautiful
and renders meaning, it is not the ground surface itself. There is a difference
between the map and the road because the separation between the types of
assets does not refer to the same plane of representation.
There is a difference between how it is possible to cope with disentangled and
entangled assets and resources. Disentangled resources require the support of
powerful institutions. Conventional assets have strong institutions. Thousands
of people spend their days interpreting traditional balance-sheets and P&L
statements. Business schools and universities train people in becoming readers
and, after years of practical experience, suddenly it is possible to read a balance
sheet in a ``natural'' way. For many it is hard to gain literacy; it is a process where
the language game played out around the balance-sheet and the P&L statement
is rehearsed, acted on and re-visited again and again. Training is important here,
because institutionalised readings are identified here: for instance, we are always
interested in profitability, cash flows and resources. Irrespective of the situation,
these problematising readings can always be mobilised ± they are institutional
because they always count. Disentangled assets may be the property of the
institutions more than the property of the firm!
When institutions do not have reading ability, the inscriptions made (e.g.
about ``new'' recognisable assets such as brands and patents) will be weak. There
is no consensus about their relevance and, even if firms say that such assets are
integral to their future (and thus cash flows), the capital market reads the
situation differently. It is conscious of the novelty of ``new'' assets and therefore
they are not part of the flow of interpretations that are created automatically. It
requires a reflexive moment, which is difficult, because experience does not in
itself guide interpretation. It has to be explicit rather than intuitive. Resistance
therefore is abundant. Critique is present, and opposition is in place often based
on the rules created by the traditional accounting principles. Questions arise:
Where are relevance and reliability? Where is conservatism? Where is ``true and
fair''? Is it material? Can it be verified?
Even if the asset can be recognised, it may not convey meaning, because
meaning is not carried in the inscription of the asset itself, but rather by the
way the asset is made part of certain other things, e.g. other assets. On the face
of the balance-sheet the asset promises more than it can honour, because it does
not have an immutable referent. It is part of a (language) game where first it has
to be realised that the asset to be valuable has to be mobilised for some end.
And when experience does not clarify how this is done, the asset is not directly
interpretable. Therefore, the inscription made in ``new'' intellectual assets is not
strong. It may abide with accounting rules, but the rules of interpretation are
still not stabilised and made accessible.
Coping with entangled resources is a completely different matter again.
Here, the ``valuation'' of the individual asset is near to impossible, if by that we
mean assigning a future financial value to it. Entangled resources co-exist and
enter the story as bundles of assets. Instead, they have to be understood in their
totality, which means that they have to be understood in their particular setting
rather than in the context of rules of accounting suggested elsewhere.
Therefore, the indicators of the asset have to be understood against their
specific purpose. This typically means the purpose they are to serve in creating
the business of the firm. Here, they are entangled not only with other assets, but
also with strategy and organisational visions. This is a different story that
capital markets have to understand, and this is why it may be necessary to
include a statement on how the bundling of the resources, as it develops over
time, is an ingredient in managing the firm towards a future.
Can the capital market do this? Nobody suggests that the capital market is
stupid, but the question is whether it can take on information that is not
institutionalised? If it cannot, then there will continue to be contests in
attempting to develop the boundaries of accounting.
The capital market, analysis of intellectual capital, and the
language of finance
The capital market can to a certain degree accommodate information on
intangibles, as shown by Lev and Sougiannis (1996). Capital market
participants may be able somehow to figure out how the ``potentialities'' of
intellectual capital can be made interesting and relevant. A few observations,
which are to be described further below, suggest that the capital market to a
certain degree can perform conditional analysis, and that indeed, because
intangible resources are often entangled, they will also make conditional
statements about their decisions to fund activities. This suggests that the
capital market is aware of the intricacies of intellectual resources as
potentialities. Potentialities require conditional statements and, consequently,
the future cannot be predicted simply from the firm's past. How can the capital
market perform conditional analyses and produce conditional propositions?
One attempt to understand this is a study of how financial analysts make
decisions about whether to finance immaterial technological ideas often in the
context of venture financing (Mouritsen et al., 2002b,c). This study analysed the
procedures followed and materials used by analysts to come to decisions about
such potentialities. It appeared that analysts are committed to finding and
developing ``alternative'' representations of these potentialities. They actively
engage in dividing the technological ideas into parcels and circulate them to
specialists in areas of technology, markets, and public institutions in order to
gain expert insights into aspects of the projects. The analysts then combine these
various kinds of feedback and produce their opinions about the projects. And
then they embark on restating their conclusion in terms of financial models. This
financial modelling is a framework to re-tell the story of the project in order to
make it presentable not only to the project maker and the analyst himself, but
also to his superiors. They want a financial story and not a story of technology.
The effect is a conditional answer to the request for finance. Financial capital will
never just be passed on. Additional wise capital, network capital and social
capital are also passed on. This required the project maker to reorganise his
technology, his business and his network of collaborators. The technological
project is transformed into a techno-commercial enterprise.
The above study shows that analysts are concerned not only to understand
the firm and project they are to investigate. The position from which analysis
arises is not only an analytical one. The analyst is much more involved in
developing the conditions under which the financial capital will work than
could be expected. The additional wise capital, which reorganises the project,
network capital, which positions the project in relationship to cooperation, and
social capital, which creates a milieu for the project, are conditions that have to
be in place. Such conditions constitute a process of entangling. Even if the
project stands forward as a framed and disentangled technological project, the
analyst performs a re-entangling, that will allow the project as a whole to live.
The whole translation from a technological project into a techno-commercial
agenda is a process of entanglement.
Another study of the Swedish capital market (HaÈgglund, 2001) explored
analysts who follow listed companies. The findings indicate that the financial
models are important references to establish a coherent narrative of the firm's
prospects, but typically as an organising mediator. To make sense of the firms,
analysts attempt to evaluate strategies and compare projections and actual
results. Strategy, however, is a notoriously nebulous concept. It is badly related
to cash flows, and therefore this link is produced as some form of inspiration.
Even if strategy is important, it is stronger if it be communicated and justified
in the framework of financial models. The financial models are the descriptions
and performance devices that generally allow utterability, and that strategic
analysis ± for want of a more precise word ± is the game.
Both these studies suggest that the capital market in various ways makes
sense of more than financial insights and knowledge. They suggest that analysts
perform a series of mechanisms to account for conditional values of intangibles.
They collate various kinds of materials, and many of them are about
``intangibles'' and ``intellectual capital'' but they report them in financial language.
The financial analyst knows that the financial models are organising
devices. When evaluating intangibles and intellectual capital assets they
attempt to grasp their dynamic character via a procedure for probing. This
includes extending the concepts and methods used to identify the strength of
ideas and intellectual capital and adding to them hypothetical conditions that
show when the idea could be successful. The financial instruments are used as
rationalising and organising devices of particular importance in showing that
the analyst did a good job ± s/he is also accountable to a manager who has to
accept the analysis. The analyst has to convince not only her-/himself; s/he also
has to convince a set of superiors that may favour the language of finance. In
this way, the capital market minds intangibles, but this is a ``hot'' forum where
lots of tacit knowledge are manoeuvred and mobilised. The rules used do not
pass ordinary tests of rationality and are thus difficult to stabilise in public.
The circulability of intellectual capital
The four following papers in this special section of AAAJ on intellectual capital
and the capital market each in its own way address the problem of how it may
be possible for the capital market to understand intellectual resources and to
act on information about them. This is about the circulability of intellectual
capital. Is it possible to learn about a firm's intangibles and intellectual capital
at a distance? Will it be possible to read intellectual capital statements and pass
their information on?
Ulf Johanson (2003) indicates that there are four types of problems that inhibit
the circulation of intellectual capital. There are problems regarding knowledge
about how knowledge works, uncertainty about the validity of information, lack
of ownership of intellectual resources particular in the area of human capital, and
lack of insight into problems of implementation. These obstacles are about the
ability of people to understand how knowledge resources are to work in a
knowledge society. Johanson points out that it is clear to managers and analysts
that knowledge society requires new modes of analysis and insight. He is also
adamant about the possibilities of changing a lot, because, as he describes, the
mentality of the capital market appears to be so numbers-oriented that it is
difficult to see how it may be possible to reframe the perspective currently taken
on by capital market participants. He suggests as follows:
Perhaps the most important deterrent to account for capital market actors' reluctance toward
human capital indicators is related to the general mentality of the capital market actors as a
group . . . [This] is of specific importance for highlighting the apparent lack of understanding of
the importance of knowledge and human capital in-value creation process (Johanson, 2003, p. 36).
There may be a cultural barrier to the appreciation of information on
intellectual resources, Ulf Johanson argues.
John Holland (2003) suggests that funds managers are in fact attempting to
use information about intangibles in their decision-making activities. They are
concerned to understand the firm's hierarchical, horizontal and network value
creation processes. He explains how it is that exchanges of information often
take place in other forms than numerals and more in the form of narratives,
sketches etc. There seems to be an increasing attention to such information in
their activities to understand the value of their investments. However, there are
problems with understanding and thus utilising information. The barriers are
primarily in terms of understanding, as Johanson also points out, and therefore
more attention to the value creation process is needed. He explains:
The knowledge-intensive changes in corporate value creation processes have altered and
increased the information asymmetry between corporate users and fund manager suppliers
of equity and bond capital. This is because the intangibles concerned are difficult to
categorise, to define, to set up indicators of, to measure, as well as to measure costs and assign
benefits to (Johanson, 2003, p. 40).
This is particularly interesting, John Holland adds, because it appears that
fund managers are not proficient in developing and sharing knowledge among
There are differences between Ulf Johanson's and John Holland's arguments.
They concern the degree to which numbers speak for themselves in the capital
market. There is evidence pro et contra, and a valuable avenue for research is
exactly to develop more of an appreciation of how it is that capital market
participants become knowledgeable about the projects they investigate. Such a
process view may add significantly to our understanding of the role of
intangibles and intellectual capital in valuing firms and projects.
Per Bukh (2003) discusses the content of Initial Public Offerings (IPOs) and
identifies a paradox. In spite of analysts saying that they are not conformable
with ``soft'' information on intangibles and intellectual capital, the IPOs flow
over with such information. He also suggests that this type of information has
been increasing throughout the 1990s. Comparing the content of intellectual
capital statements with the content of IPOs, Bukh identifies a remarkable
similarity. He also suggests, however, that it may be a problem that there is no
recognised way to interpret this information. Again the knowledge problem
arises: what to do with information on intangibles and intellectual capital. Here
Bukh proposes that the business model, the strategy for managing intellectual
capital, must be a corner-stone:
Value creation based on knowledge resources, i.e. intellectual capital, is complicated and more
research into how knowledge intensive companies create value, how knowledge-based
business models work and how their functioning and value creation could be disclosed is
needed (Bukh, 2003, p. 54).
Manuel GarcõÂa-Ayuso (2003) analyses the analysts' difficulties in making
forecasts and suggests that the market for financial analysis is hardly effective
in its entirety, even if analysts on average perform a good job. However, he
suggests that there is a need to develop a varied set of methods to be used in
valuation processes, and he points out that an increased understanding of
firms' specific strategies has to be put in place.
However, looking into the knowledge problem does not solve all issues:
. . . unethical behaviour of market participants [may be] the most suitable source of
inefficiencies . . . Managers, auditors and analysts must undertake efforts aimed at improving
their credibility in the eyes of investors. Codes of good governance and codes of ethics in audit
and financial firms are not sufficient. Market regulatory frameworks and accounting standards
must be improved to ensure the efficient functioning of capital markets and any that guarantee
conduct causing damage to the financial system is identified and punished (GarcõÂa-Ayuso,
2003, p. 65).
Manuel GarcõÂa-Ayuso and Per Bukh share the view that the capital market is
able to mobilise a lot of information, but they also suggest that the barrier to
advancing the use of information on intangibles and intellectual capital is to
understand the firm's business model for knowledge. They thus suggest that
the process of entanglement is important and that, to advance insight into the
usefulness of knowledge resources in firms, probably analysts have to entangle
themselves with rather than disentangle themselves from intellectual capital. It
may be added, GarcõÂa-Ayuso says, that there are also fundamental problems in
the regulation of the capital markets that need to be looked into.
All four authors help us ask questions that make us just a little bit uncertain
about the ways in which the capital market may or may not reflect information on
intellectual capital. The limits to the intelligibility of such information are indeed
there. The question to ask is whether it is possible to invent a readership for whom
information on intellectual capital will eventually make a systematic difference?
Intangibles and intellectual capital are probably the resources of the ``new''
economy and knowledge society. However, how such resources work is not
understood and the micro-drama of valuation creation is not clear yet. There are
two elements in the process towards a higher institutional appreciation of
information of such assets that have to be contemplated and brought together. One
element is the process of disentanglement. This is the process where ``new''
intellectual assets are identified and recognised as separable assets. The second
element is the process of entanglement, which should make visible to analysts (and
managers) how it is that intangibles and intellectual resources work in practice.
This will increase the appreciation of how to deal with complementary assets.
The first process towards increased disentanglement goes via accounting
rules and standards. The second process, via increased entanglement, goes
through an appreciation of the production function and the business model of
1. There are several reasons why the model can only function as a conceptual scheme and not a
representation of the world. First, by defining intellectual capital as the difference between
market and book value, then a change in book value via, for example, accelerated depreciation,
would impact on the value of intellectual resources. This is obviously absurd and intellectual
capital is argued to be outside conventional assets. Second, if it were possible to close the gap
between market and book values, then there would be no information problem, and therefore
there would be no need to disclose information on intellectual capital. This model is therefore
not interesting because it describes the world of intellectual capital accurately; it is interesting
because it connects intellectual capital and financial value. The models developed on this basis
attempt to define a new conceptual space which will not explain the difference between
market and book values, but which will direct attention to new possible ways in which to
account for assets. It is a prescriptive rather than a descriptive endeavour.
2. It is possible to develop a general analytical method that can help accomplish this so that
the battery of indicators can be ``tested'' for its relationship to the firm's business model or
narrative of achievement (Mouritsen et al., 2001a).
3. In addition, it is clear now, that it is also ``natural'' that people disagree on the reading of
the balance-sheet, and it is clear that investors in capital markets may actually fail to
understand the balance-sheet correctly and make losses. Therefore, the institutions also
can justify mis-readings.
4. But they are probably not irrational. Behavioural finance suggests that there are cognitive
limits to the information-processing abilities of capital market participants (Cohen, 2001;
Tvede, 2002). This does not make them irrational, however. It merely suggests that one has
to understand the decision-making mechanisms which make it possible for people situated
in time and space to overcome information overload.
Bukh, P.N.D. (2003), ``The relevance of intellectual capital disclosure: a paradox?'', Accounting,
Auditing & Accountability Journal, Vol. 16 No. 1, pp. 49-56.
Callon, M. (1998), ``Introduction: an essay on framing and overflowing: economic externalities
revisited by sociology'', in Callon, M. (Ed.), The Laws of the Market, Blackwell Publishers,
Cohen, D. (2001), Fear, Greed and Panic. The Psychology of the Stock Market, John Wiley & Sons
Edvinsson, L. and Malone, M.S. (1997), Intellectual Capital, Piatkus, London.
Eustace, C. (2001), The Intangible Economy: Impact and Policy Issues, Report of the High Level
Expert Group on the Intangible Economy, EU Commission, Brussels.
GarcõÂa-Ayuso, M. (2003), ``Factors explaining the inefficient valuation of intangibles'',
Accounting, Auditing & Accountability Journal, Vol. 16 No. 1, pp. 57-69
Gu, F. and Lev, B. (2001), ``Intangibles assets. Measurement, drivers, usefulness'', working paper,
New York University, New York, NY, April.
Guthrie, J. (2001), ``The management, measurement and reporting of intellectual capital'', Journal
of Intellectual Capital, Vol. 2 No. 1, pp. 27-41.
HaÈgglund, P. (2001), FoÈretaget som investeringsobjekt. Hur placerere och analytker arbeter med
att ta frem et investeringsobjekt, HandelshoÈgskolan, Stockholm.
Holland, J. (2003), ``Intellectual capital and the capital market ± organisation and competence'',
Accounting, Auditing & Accountability Journal, Vol. 16 No. 1, pp. 39-48.
Johanson, U. (2003), ``Why are capital market actors ambivalent to information about certain
indicators on intellectual capital?'', Accounting, Auditing & Accountability Journal, Vol. 16
No. 1, pp. 31-8.
Latour, B. (1999), Pandora's Hope. Essays on the Reality of Science Studies, Harvard University
Press, Cambridge, MA.
Lev, B. (2001), Intangibles. Management, Measurement and Reporting, The Brookings
Institution, Washington, DC.
Lev, B. and Sougiannis, T. (1996), ``The capitalization, amortization and value relevance of R&D'',
Journal of Accounting and Economics, Vol. 21, pp. 107-38.
Mouritsen, J. (1998), ``Driving growth: economic value added versus intellectual capital'',
Management Accounting Reserach, Vol. 9, pp. 461-82.
Mouritsen, J., Larsen, H.T. and Bukh, P.N.D. (2001a), ``Intellectual capital and the `capable firm':
narrating, visualising and numbering for managing knowledge'', Accounting,
Organizations and Society, Vol. 26, pp. 735-62.
Mouritsen, J., Larsen, H.T. and Bukh, P.N. (2001b), ``Reading intellectual capital statements:
describing and prescribing knowledge management strategies'', Journal of Intellectual
Capital, Vol. 2 No. 4, pp. 359-83.
Mouritsen, J., Bukh, P.D., Larsen, H.T. and Johansen, M.R. (2002a), ``Developing and managing
knowledge through intellectual capital statements'', Journal of Intellectual Capital, Vol. 3
No. 1, pp. 10-29.
Mouritsen, J., Munk Nielsen, J., Lindhart, J. and Stakemann, B. (2002b), ``Klog kapital, social
kapital og finansiel kapital: episoder i formidlingen af kapital i videnùkonomien'', Ledelse
& Erhvervsùkonomi, Vol. 65 No. 4, pp. 199-215.
Mouritsen, J., Munk Nielsen, J., Lindhart, J. and Stakemann, B. (2002c), ``Kapitalmarkedet og
videnùkonomien: analytikernes reprñsentationer og den videnbaserede virksomhed'',
Petty, R. and Guthrie, J. (2000), ``Intellectual capital literature review: measurement, reporting and
management'', Journal of Intellectual Capital, Vol. 1 No. 2, pp. 155-76.
Popper, K. (1972), Objective Knowledge, Oxford University Press, Oxford.
Tvede, L. (2002), The Psychology of Finance. Understanding the Behavioural Dynamics of
Markets, John Wiley & Sons Ltd, Chichester.