Does the Level of Alignment with the Integrated Reporting Framework Reduce Information Asymmetry?

Abstract

The purpose of this paper is to investigate the relationship between information asymmetry and the alignment with the Integrated Reporting (IR) framework in South Africa. Panel data regression and Welch’s t-test are used on a dataset of 64 firms listed on the Johannesburg Stock Exchange (JSE) for the period 2013-2015. A statistically significant negative association was found to exist between the bid-ask spread and the level of alignment with the IR. Furthermore, the results suggest that the relationship between the bid-ask spread and institutional ownership is weaker for those firms with a high level of alignment with the IR framework. However, the results do not provide evidence of a reduction of information asymmetry after the adoption of IR. Rather, they suggest that companies with a better information environment are the ones following more closely the IR principles. This paper makes two contributions to the IR literature. Firstly, it refutes an assumption made by previous authors regarding the possible effect of IR on information asymmetry. Secondly, it provides a possible explanation for the differences in the level of alignment with the IR framework. This second contribution could help to explain the heterogeneity in IR quality and the tendency for ceremonial IR practice in South Africa found by previous authors. These results could be relevant for stock exchanges and regulators interested in IR.

Keywords: CSR, ESG, integrated reporting, information asymmetry, cost of capital, non-financial disclosures

JEL Classification: D82, G38, M14, M41