Integrated Reporting and Earnings Management
Posted: 2 Aug 2019
Date Written: July 28, 2019
This study examines whether the introduction of integrated reporting affects earnings management. According to the International Integrated Reporting Framework, published by the International Integrated Reporting Council in 2013, integrated reporting is intended not only to improve the quality of information available to external parties, but also to improve internal decision making. Introducing integrated reporting is expected to correct companies’ short-term orientation and promote long-term value creation. Using data from Japan, where a large number of companies are voluntarily practicing integrated reporting, we find that firms are more likely to report conservative earnings after the introduction of integrated reporting, in terms of both accrual-based earnings management and real earnings management. We also find that the effect of integrated reporting on earnings management appears approximately two years or more after the introduction of integrated reporting. This evidence is consistent with practitioners’ point that integrated reporting is a continuous improvement process, and so takes several years to improve internal decision making. Finally, our findings provide evidence for standard setters and regulators who are interested in the merits of integrated reporting that integrated reporting promotes decision making with a long-term focus, resulting in more conservative earnings management.
Keywords: integrated reporting, sustainability, corporate social responsibility, earnings management, long-term value creation
JEL Classification: M14, M41, G30
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