Integrated reporting, financial reporting quality and cost of debt

Abstract

Purpose Although proponents of integrated reporting (IR) advocate that this emerging practice has the potential to transform corporate reporting, the eventuation of this expectation would depend on the incentive IR provides to firms. This study aims to examine whether IR is associated with cost of debt and whether IR moderates the relationship between financial reporting quality and cost of debt. Design/methodology/approach Based on insights drawn from information asymmetry and agency theories, the authors develop models that link IR and financial reporting quality with a firm’s cost of debt. The authors analyze 847 firm-year observations drawn from non-financial firms traded on the Johannesburg Stock Exchange, for the period between 2009 and 2015. Findings The authors find that firms that provide integrated reports tend to have a lower cost of debt than those do not provide IR. The authors also find an inverse association between financial reporting quality and cost of debt, and that integrated reports accentuate this association. The findings suggest that the debt market perceives value in the information presented in integrated reports beyond what is furnished in financial reports. Originality/value To the best of the authors’ knowledge, this study is the first to document evidence suggesting that the debt market perceives value in the information presented in integrated reports, beyond what is furnished in financial reports.

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

“…Based on the South African IR regime, Muttakin et al (2020) included IR adoption as a moderator on the negative link between earnings quality and cost of debt and found supportive results. According to Caglio et al (2020), IR assurance compensates for poor IR readability (IR tone bias) and may be linked with increased firm reputation in South Africa.…”

“…One of most intensive research topics in our literature review deals with the consequences of IR adoption (quality) on firm value. Researchers assume that both IR adoption and IR quality have a positive impact on firm valuation in the long run (Muttakin et al, 2020). There is much heterogeneity in prior studies, when it comes to approximate 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).…”

Corporate governance, ownership structure and capital structure: evidence from Chinese real estate listed companies

“…(ELdaly, 2012;Eldaly and Abdel-Kader, 2018). Moreover, it helps the creation of particular skill required in strategic decisions (incentive to firm-specific investment) and limit problems of asymmetric information (Hassan et al, 2019(Hassan et al, , 2020Muttakin et al, 2020;Yu and Wang, 2018).…”

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.…”