Does Corporate Governance Affect the Quality of Integrated Reporting?

Abstract

This study examines how governance mechanisms affect the quality of integrated reporting (IR), which is fast emerging both as a tool to help firms understand their value creation process and to communicate effectively with external stakeholders. This study first developed an index to assess the quality of integrated reports. Subsequently, 132 integrated reports of Sri Lankan public listed companies selected over a three-year period were content analysed. The hypotheses formulated on the relationship between corporate governance and the quality of IR based on the agency theory were analysed using multivariate linear regression and panel regression. The results show that there is limited support from the corporate governance system for providing quality information to stakeholders on the value creation process through IR, except for board size and the availability of a separate risk management committee. This is the result of the heavy emphasis of corporate governance requirements and the resulting mechanisms of Sri Lankan companies on mandatory corporate reporting requirements compared to a voluntary reporting model such as IR. Since many corporate governance aspects are meant to fulfill mandatory reporting requirements, the results imply that the directors have given limited attention to providing quality information through voluntary disclosure practices such as IR, although they use resources to prepare integrated reports.

Does Integrated Reporting Enhance the Value Relevance of Information? Evidence from Sri Lanka

“…As IR aims to explain to the providers of financial capital how an entity creates value over time, one of the main questions that arises is whether investors find integrated reports more decision-useful than traditional annual reports [4][5][6]. Although several studies have seemingly addressed this issue, they have only provided inconclusive and mixed results while being constrained by their choice of method and contextual setting.…”

Determinants, mechanisms and consequences of corporate governance reporting: a research framework

“…Board characteristics The size of a board (number of board members) can signal managerial ability and expertise, which should improve the quality of information disclosure, and several studies support this view (Cooray and Senaratne 2020 ; Jizi et al 2014 ). Board size is also positively related to CSR (Endrikat et al 2020 ).…”

“…Diversity (of gender, race, and experience) is also studied extensively, with studies investigating the impact of different characteristics of the board on firm performance. Gender diversity (usually measured as the proportion of women on boards) is argued to have a positive impact on the quality of voluntary disclosures including environmental disclosures (Cooray and Senaratne 2020 ; De Villiers 1998 ) and it is possible that gender diversity also contributes to the quality of corporate governance disclosures. Certainly research has found women to have a different attitude towards risk than men (Croson and Gneezy 2009 ).…”

“…Entrenchment provisions such as staggered boards and supermajority voting requirements for takeovers have been found to reduce firm value, as measured by Tobin’s Q (Bebchuk et al 2009 ). The transparency of financial and non-financial information should therefore be associated with value creation opportunities (Cooray and Senaratne 2020 ). However, other theories can also explain the links between board characteristics and corporate governance outcomes.…”

“…A key concept of corporate governance is accountability, and corporate governance mechanisms can be used to extend managerial accountability beyond just shareholders to a wider set of stakeholders (Cooray and Senaratne 2020 ). There have been increasing calls to consider corporate governance from a broader perspective than the shareholder primacy perspective that still dominates the literature (Cheung 2018 ; Endrikat et al 2020 ; Grove et al 2011 ).…”