Does it pay off? Integrated reporting and cost of debt: European evidence

Abstract

Although the <IR> (Integrated Reporting) Framework defines providers of financial capital as both equity and debt holders, there is a distinct lack of research on the association between IR and debt. This study is the first to examine the effect of the voluntary preparation of an integrated report on the marginal cost of public debt. From an agency theoretical standpoint, we assume that IR decreases information asymmetries, facilitates lenders' assessments of a firm's risk of default, and thus is negatively related to a firm's cost of public debt. On the basis of a European sample, consisting of 2,196 firm‐year observations between 2015 and 2017, we find that IR significantly decreases a firm's cost of debt. In subsequent moderation analyses, the results reveal that this effect (a) is stronger for firms with lower ESG performance and (b) holds only for firms operating in environmentally sensitive industries. The results are robust to a battery of statistical models. We expand on earlier empirical literature on IR and provide valuable implications for research, practice, and standard setting.

The impact of audit committee attributes on the quality and quantity of environmental, social and governance (ESG) disclosures

“…Conversely, Cheng et al (2014) state that superior performance on the environmental and social dimensions of ESG issues is related to reduced agency costs that, in return lower the finance costs for reporting organisations. In a similar vein, Gerwanski (2020) reports that voluntary preparation of integrated reports lowers the information asymmetry, which simplifies lenders’ assessment of default risk and results in a lower cost of debt. Moreover, studies also show that female representation in ACs is positively related to ESG disclosure quality, which, in return, reduces the agency problem for an organisation.…”

Extending the benefits of ESG disclosure: The effect on the cost of debt financing

“…According to the agency theory (Jensen & Meckling, 1976), lenders (principal) entrust their money to a company (agent) with the expectation of receiving this money back together with an amount of interest that compensates for the risk of providing capital. According to this theory, the agent has an information advantage over the principal which results in an information asymmetry (Gerwanski, 2020). In fact, the managers of the company have access to more information about firm's past and future performance respect to outsiders.…”

Archival research on integrated reporting: a systematic review of main drivers and the impact of integrated reporting on firm value

“…Cost of capital (cost of equity and debt) represents an inverse component of firm value. There are indications that IR adoption reduces the total cost of capital (Vena et al, 2020), cost of equity (Garcia-Sanchez & Noguera-Gamez, 2017b) and cost of debt (Muttakin et al, 2020;South Africa;Gerwanski, 2020; international setting). IR quality is also connected with lower costs of equity in voluntary (Vitolla et al, 2019, b, c) and mandatory IR regimes (Zhou et al, 2017).…”

“…According to Garcia-Sanchez and Noguera-Gamez (2017a), earnings quality and investor protection moderate the negative link between IR adoption and analyst forecast error. Gerwanski (2020) stressed that lower CSR performance and environmentally sensitive industries moderate the negative link between IR adoption and cost of debt.…”