Towards a theoretical framework for the innovation in sustainability reporting: An integrated reporting perspective

Abstract

Integrated Reporting (IR), as a novel sustainability-oriented organizational reporting approach, is expected to produce better corporate reporting for stakeholders and promote greater transparency and accountability in the capital market. This paper offers a theoretical framework that integrates five mainstream IR theories: stakeholder theory, agency theory, signalling theory, legitimacy theory, and institutional theory. Based on the theoretical framework, there are three drivers for companies to improve their IR disclosure practices: to mitigate information asymmetry between the organisation and all stakeholders; to signal superior quality, legitimacy, and conformity to all stakeholders; and to discharge accountability to all stakeholders. Direct and indirect costs are the main factors that lead to poor IR disclosure practices. This study is the first attempt to construct an integrated theoretical framework for IR. The constructed framework can be adopted as a theoretical foundation for future empirical studies with regard to IR.

Can the innovation in sustainability disclosures reflect organisational sustainable development? An integrated reporting perspective from China

“…Theoretically speaking, when decision‐makers lack knowledge about a signaller (an organisation, an individual or a product), the signals sent by the signaller including any observable action, artefact or structure that is applied to reflect its hidden attributes, can impress decision‐makers and thus affect their decision‐making. It can be said that signals mitigate the information asymmetry between signallers and decision‐makers and avoid decision‐makers' adverse selection (An et al, 2011; Sun, Davey, et al, 2022). In the capital market, the management of a firm naturally can access more complete and better information than its external stakeholders, resulting in information asymmetry between the two parties.…”

“…If the stakeholders cannot efficiently capture and effectively understand non‐financial disclosures, they hardly recognise and appreciate the value of a firm's good non‐financial performance. For now, IR is considered to be one of the most effective approaches to reporting non‐financial information (Silvestri et al, 2017; Sun, Davey, et al, 2022). Due to that few attempts have been made to systematically theorise the IR practices and sustainability performance relationship, in this study we use signalling theory to understand their nexus.…”

“…If the stakeholders cannot efficiently capture and effectively understand non-financial disclosures, they hardly recognise and appreciate the value of a firm's good non-financial performance. For now, IR is considered to be one of the most effective approaches to reporting nonfinancial information (Silvestri et al, 2017;Sun, Davey, et al, 2022).…”

“…When exploring how institutional pressures exerted by the financial, educational and labour, cultural, and economic systems of a country affect IR practices, an institutional theory is commonly applied as a theoretical framework. Legitimacy theory is often used when an organisation's legitimacy is threatened (Sun, Davey, et al, 2022). Thus, legitimacy theory is generally used in examining the relationship between poor financial performance and high IR practices.…”

Corporate Social Responsibility Practices during COVID-19 Crisis: a Critical Review

“…he signal is "the publication of a device which acts as a prediction of superior quality" (Sun et al, 2022). The signaling theory was developed to mitigate information asymmetry in labor markets (Spence, 1973).…”