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The Economic Consequences Associated with Integrated Report Quality: Capital Market and Real Effects

Posted: 6 Dec 2015 Last revised: 25 Aug 2017

Mary E. Barth

Stanford University - Graduate School of Business

Steven F. Cahan

University of Auckland Business School

Lily Chen

University of Auckland Business School

Elmar R. Venter

University of Pretoria

Date Written: August 23, 2017

Abstract

The International Integrated Reporting Council’s Framework identifies two goals for integrated reporting: improved information for outside providers of financial capital and better internal decision making. We extend prior research that finds a positive association between integrated report quality (IRQ) and firm value by examining two channels through which this association may arise — a capital market channel and a real effects channel. To conduct these tests, we disaggregate firm value into three components: liquidity, cost of capital, and expected future cash flows. Using data from South Africa where integrated reporting is mandatory and an IRQ measure based on proprietary EY data, we find a positive association between IRQ and liquidity, which supports the capital market channel. We find no evidence of a relation between IRQ and cost of capital. We also find a positive association between IRQ and expected future cash flows. Because this association could reflect better investor cash flow forecasts — a capital market effect, better internal decisions — a real effect, or both, we attempt to distinguish these explanations. We find higher IRQ is (not) associated with higher realized future operating cash flows (greater analyst target price forecast accuracy), and find higher IRQ is associated with higher investment efficiency. These findings support the real effects channel. Together, our findings are consistent with integrated reporting achieving its dual objective of improved external information and better internal decisions.

Keywords: Integrated reporting, corporate social responsibility, firm value, cost of capital, expected future cash flows, liquidity, investment efficiency, South Africa

JEL Classification: M41, M48

Suggested Citation

Barth, Mary E. and Cahan, Steven F. and Chen, Lily and Venter, Elmar R., The Economic Consequences Associated with Integrated Report Quality: Capital Market and Real Effects (August 23, 2017). Accounting, Organizations and Society, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2699409

Mary E. Barth

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Steven F. Cahan

University of Auckland Business School ( email )

Faculty of Business & Economics
Private Bag 92019
Auckland
New Zealand

Lily Chen

University of Auckland Business School ( email )

Private Bag 92019
Auckland 1001
New Zealand

Elmar R. Venter (Contact Author)

University of Pretoria ( email )

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