CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

In the knowledge-based economy, the intellectual capital of the organization is to create value in today's world; the success of any organization depends upon the ability to manage these assets. Today, the growing importance of intellectual capital as an effective tool is for enhancing the competitiveness of our companies. Measuring intellectual capital in order to compare different companies is necessary to determine their true value and improve their controls. Knowledge of today's top tools of economics is, where heroic acts economics, science and technology, there is increasing use of information. Knowledge-based companies have a large proportion of their investments in intangible assets and for finance and accounting management for companies that traditionally have Unobtrusive performance in different financial situations did not reflect a real challenge of remains (Seetharaman et al, 2002). Intellectual capital, in one form or another, is implicated in recent economic, managerial, technological, and sociological developments in a manner previously unknown and largely unforeseen.

        Recent changes in the global economy have led to an increasing focus on intellectual capital (IC). Factors such as globalisation, new technology, relatively free capital, increased competition, changes in customer demands, the demand for innovation and changes in economic and political structures, and the growing role of the state in supporting knowledge economies, are constantly reshaping the way business is carried out, and highlighting the importance of IC and IC reporting (ICR) for firms (Buckley and Carter, 2000; Garcia-Ayuso, 2003; Thorne and Smith, 2000; Volberda, Baden-Fuller and van den Bosch, 2001).

        Several authors have taken a long-term view in defining and nature of IC, though their definitions have varied significantly (Edvinsson and Sullivan, 1996; Brooking, 1997; Edvinsson, 1997; Edvinsson and Malone, 1998; Stewart, 1997, p. x; Klein, 1998, p. 1; Nasseri, 1998; Saint-Onge, 1998; Ulrich, 1998; CMA, 1998, p. 3; ASCPA and CMA, 1999, p. 4; Knight, 1999). For the purposes of this study, IC is defined as knowledge that can be converted into value (Edvinsson and Sullivan, 1996, p. 358). The IC held by a firm can be thought of as a form of ‘unaccounted capital’, to borrow a term used in the traditional accounting system. This ‘unaccounted capital’ can be described as the knowledge-based equity that supports the knowledge-based assets of a firm. IC includes both intellectual assets (IFAC, 1998, p. 12) and intellectual liabilities (Caddy, 2000, pp. 141-142).

1. STATEMENT OF THE PROBLEM

The IC held by a firm can be thought of as a form of ‘unaccounted capital’, to borrow a term used in the traditional accounting system. This ‘unaccounted capital’ can be described as the knowledge-based equity that supports the knowledge-based assets of a firm. IC includes both intellectual assets (IFAC, 1998, p. 12) and intellectual liabilities (Caddy, 2000, pp. 141-142). There is however little discussion in the literature in relation to a definition of the reporting of IC. Therefore this paper refers to the definition proposed by Abeysekera and Guthrie (2002) of ICR as “external reporting intended to meet the information needs common to users who are unable to command the preparation of reports about IC tailored so as to satisfy, specifically, all of their information needs”. While several ICR studies have been carried out in developed nations, there is a dearth of research on the ICR practices of firms located in developing nations and, in particular, of comparative studies with firms in developing nations. This study seeks to fill this gap – a gap that has become increasingly significant as developing countries find themselves competing with firms in developed countries due to globalisation, lower transaction costs, and more freely available capital. As Daley (2001, p. 5) points out, in today’s knowledge economy the competitive advantage of firms lies in IC attached to products and services, rather than in the actual products or services themselves.

1.3 AIM AND OBJECTIVES OF THE STUDY

The main aim of the research work is to examine the intellectual capital reporting practices and financial performance of listed firms in Nigeria. The specific objectives of the study are:

1. to determine the relationship between intellectual capital reporting practices and financial performance of listed firms in Nigeria
2. to determine the effect intellectual capital reporting practices on financial performance of listed firms in Nigeria
3. to determine the extent to which intellectual capital reporting practices will influence the financial performance of listed firms in Nigeria 
4. to investigate the factors affecting the intellectual capital reporting practices and financial performance of listed firms in Nigeria
5. to recommend ways to improve the financial performance of firms through intellectual capital reporting practices

1.4 RESEARCH QUESTIONS

The study came up with research questions so as to ascertain the above stated objectives of the study. The following research questions guide the objectives of the study:

1. What is the relationship between intellectual capital reporting practices and financial performance of listed firms in Nigeria?
2. What are the effect intellectual capital reporting practices on financial performance of listed firms in Nigeria?
3. To what extent will intellectual capital reporting practices influence the financial performance of listed firms in Nigeria? 
4. What are the factors affecting the intellectual capital reporting practices and financial performance of listed firms in Nigeria?
5. What are the ways to improve the financial performance of firms through intellectual capital reporting practices?

1.5 STATEMENT OF THE HYPOTHESIS

H0: there is no significant relationship between intellectual capital reporting practices and financial performance of listed firms in Nigeria

H1: there is significant relationship between intellectual capital reporting practices and financial performance of listed firms in Nigeria

1.6 JUSTIFICATION FOR THE STUDY

The study on the intellectual capital reporting practices and financial performance of listed firms in Nigeria will be of immense benefit firms in Nigeria. The study will explore the concept of intellectual capital reporting practices and relate them with the financial performance of listed firms in Nigeria. The study will serve as a repository of information to other researchers and students that desire to carry out similar research on the above topic. Finally study will contribute to the body of existing literature on the intellectual capital reporting practices and financial performance of listed firms in Nigeria

1.7 SCOPE OF THE STUDY

The study will cover on the intellectual capital reporting practices and financial performance of listed firms in Nigeria

1.8 OPERATIONAL DEFINITION OF TERMS

INTELLECTUAL CAPITAL REPORTING: The main idea behind intellectual capital reporting is that financial information informs about the past performance of the enterprise but tells nothing about its future potential. The future potential of an enterprise does not lie within its financial capital, but in its intellectual capital.

FINANCIAL PERFORMANCE: Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm's overall financial health over a given period