Australian sell-side analysts' use of intellectual capital information

This paper explores what types of intellectual capital (IC) information is referred to by sell-side analysts in their initiating coverage reports and how this information is embedded in analysts' valuation decision-making processes and justification of forecasts, valuations and recommendations. Empirical data is collected through the content analysis of 64 analysts' initiating coverage reports written on an equivalent number of companies included in the S&P/ASX 300 index. The content analysis is based on a categorisation scheme consisting of external, internal and human capital. The data analysis has benefited from both qualitative and quantitative attributes of content analysis. This study finds that sell-side analysts place greater importance on particular types of IC information over others, and several types of IC information are rarely or never used. At the same time IC plays a varying and broader role in analyst reports. IC is used to: (1) provide background information to understand the firm and its operations; (2) build the firm value creation story; (3) explain the strategies and methods of realising the value potential; (4) generate forecasts and valuations; (5) justify forecasts, valuations and recommendations; and (6) promote the firm as a good investment. The paper also reports: (1) inconsistency in the use of IC information; (2) lack of systematic analysis of IC information; and (3) an absence of any explicit references to key terminology used in the academic literature concerning IC. Practical implications - The findings of this study have implications for policy makers and professional associations in developing models and guidelines for reporting as well as analysing IC information and in re-evaluating current initiatives. Also, the findings may help curriculum development in organisations providing training and education for financial analysts and in planning continuous professional development programs for analysts. The paper addresses several unanswered questions on the importance of types of IC information to the capital market and the role of IC within the context of analysts' valuation decision-making processes.