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Review of Quantitative Finance and Accounting

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01.11.2016 | Original Research

The association between integrated reporting and firm valuation

verfasst von: Kin-Wai Lee, Gillian Hian-Heng Yeo

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 4/2016

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Abstract

This paper examines the association between Integrated Reporting and firm valuation. Using a sample of listed firms in South Africa, we examine the association between cross-sectional variation in Integrated Reporting disclosures and firm valuation in the period after the implementation of Integrated Reporting. We find that firm valuation is positively associated with Integrated Reporting disclosures. This result suggests that on average, the benefits of Integrated Reporting exceed its costs. We predict that Integrated Reporting reduces the information processing costs in firms with complex operating and informational environment. Consistent with our prediction, we find that the positive association between firm valuation and Integrated Reporting is stronger in the firms with higher organizational complexity, suggesting that Integrated Reporting improves the information environment in complex firms such as firms with high intangible assets, firms with multiple business segments and large firms. Furthermore, we find that in firms with higher external financing needs, the sub-sample of firms with higher Integrated Reporting have higher firm valuations, suggesting that Integrated Reporting mitigates the information asymmetry between corporate insiders and external suppliers of capital. Additional analysis indicates that firms with high Integrated Reporting outperform those with low Integrated Reporting both in terms in stock market and accounting performance.

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IIRC International Integrated Reporting Framework. Available at http://www.theiirc.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf.

Over 100 companies participating in the IIRC Pilot Programme have contributed to the development of the International 〈IR〉Framework and demonstrate global leadership in this emerging field of corporate reporting. Available at http://www.theiirc.org/companies-and-investors/pilot-programme-business-network/.

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We note that the〈IR〉 framework posits that 〈IR〉 can potentially benefit multiple stakeholders such as investors, bondholders, regulators, competitors, employees, managers, suppliers and customers and society at large. However, it is outside the scope of this study to examine the effect of 〈IR〉on multiple stakeholders such as investors, bondholders, regulators, competitors, employees, managers, suppliers and customers and society at large. We leave to future research to examine the effect of 〈IR〉 on other stakeholders such as investors, bondholders, regulators, competitors, or society at large.

We thank the referee for highlighting this point.

Durnev and Kim (2005) measures the quality of corporate disclosures using disclosures related to corporate governance practice compiled by Credit Lyonnais Securities Asia (CLSA 2001). CLSA groups the scores of corporate governance practices into six categories of governance: discipline (managerial incentives and discipline towards value-maximizing actions), transparency (timely and accurate disclosure), independence (board independence), accountability (board accountability), responsibility (enforcement and management accountability) and protection (minority shareholder protection). In contrast, our measure of integrated reporting score (IRSCORE) employed in this paper is more holistic because corporate governance practice constitutes one of the eight components of the IRSCORE (see Sect. 3 for details).

Firms in weaker legal regimes have difficulty in raising external capital because investors have lower trust in legal protection of their rights. Since this distrust leads to higher costs of capital, firms with external financing needs have incentives to mitigate investors’ concerns by providing better quality disclosures.

To provide a perspective of the strength of country-level shareholder rights and disclosure quality, we compare South Africa and United States. Using a sample of 49 countries, La Porta et al. (2006)) develop a “shareholder-right” index to measure the strength of country-level shareholder rights that ranges from zero (weak shareholder rights) to five (strong shareholder rights). The mean country-level shareholder right is 3. Both United States and South Africa have a shareholder right of 5. Furthermore, La Porta et al. (2006) also developed a country-level “disclosure index” to measure the depth and quality of disclosure listing requirements that ranges from 0 % (weak disclosure rules) to 100 % (strong disclosure rules). The mean disclosure index for 49 countries is 59 %. The disclosure index for United States and South Africa are 100 and 83 % respectively.

During the sampling period, 13 firms entered the sample and 5 firms exited the sample. In robustness test, we obtained qualitatively similar results by excluding firms that entered or exited the sample during the sampling period.

Due to the principle-based nature of the IR framework, we acknowledge that our scoring process is subjective. To reduce the subjectivity of the coding process, both research assistants completed the coding process independently (see Appendix A for details). Furthermore, the validity of the coding is strengthened by the consistency between the self-constructed IR scores using the IR framework and the external ratings from Ernst and Young (2012) on the quality of the integrated reports produced by the top 50 listed firms on Johannesburg Stock Exchange in 2011. The mean total IR scores for firms ranked by Ernst and Young as Top/Excellent/Good are 120/96/71 respectively.

In this study, we did not examine the firms involved in the IR pilot program as these firms are not randomly assigned. For example, firms in the pilot IR program tend be large listed firms with long operating history. We thank the referee for highlighting this point.

As a robustness check, any deviation of more than 20 points in the firm-specific IRSCORE between the two research assistants was manually reviewed by the authors to resolve the deviations. Since the maximum IRSCORE is 200, based on a parsimonious materiality threshold of 10 %, we select 20 points as a cut-off for checking deviations of IR scores compiled by the two research assistants. The difference in IRSCORE coded by the two research assistants exceeded 20 points affect approximately 4 % of our sample. For these cases, the authors manually resolve the differences in the IRSCOREs. Our test results are qualitatively similar if we exclude these firms.

Gold Fields Ltd was also evaluated the best company in Ernst & Young Excellence in Integrated Reporting Awards 2012.

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Titel: The association between integrated reporting and firm valuation
verfasst von: Kin-Wai Lee
Gillian Hian-Heng Yeo
Publikationsdatum: 01.11.2016
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 4/2016
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-015-0536-y

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