Recognizing intellectual capital in financial reports boosts earnings relevance and value.
The article discusses how accounting rules may not fully recognize the value of intellectual capital in company financial reports. By using a measure called M/B value ratio, the researchers show that current accounting standards can limit the recognition of intellectual capital. They suggest that updating these standards could help bridge the gap between a company's market value and its book value. The study proposes a model to assess how the conservatism of accounting impacts the relevance of earnings.