Integrated Reporting, Disclosure Processing Costs Frictions and Capital Market Effects
49 Pages Posted: 28 Sep 2020
Date Written: August 11, 2020
Barth et al. (2017) (BCCV) show that firms with higher levels of compliance with Integrated Reporting (<IR>) principles are associated with higher levels of firm value. However, according to disclosure processing costs theory, the positive association may not hold for high levels of <IR> disclosures. We use observations from large Australian firms to show that at low to moderate levels of <IR> there is a positive relationship between <IR> scores and (1) firm values, and (2) liquidity (a proxy for the capital market channel), but at progressively higher levels, the relationships become negative mainly because investors face frictions induced by disclosure processing costs. In additional tests, we show a similar non-linear relationship between <IR> and earnings response coefficients (ERCs), and <IR> and earnings management. The higher earnings management for high <IR> is consistent with the idea that managers may use high <IR> as an obfuscation tool.
Keywords: Financial Reporting, Integrated Reporting, Firm Value, Australia, Liquidity, Information Processing Costs
JEL Classification: M41, M48, G12, G14
Suggested Citation: Suggested Citation