Abstract

The purpose of this research is to examine the effect of voluntary integrated reporting on information asymmetry in European and Asian firms and investigate size as a moderator variable to this relationship. Using a final sample of 94 firms in Europe and Asia that published integrated reports in 2016, the Ordinary Least Square is then performed to analyze the data on quarterly basis. The quarterly analysis is used to look at the relevance of accounting information decline as the time lag increases. The results show that there is an insignificant relationship between integrated reporting quality and information asymmetry which is captured by spread. In addition, the insignificant effect of size to moderate this relationship is also found. These results are supported by additional analysis. This research contributes to the existing debate about whether integrated reporting affects the market, particularly information asymmetry. To the best of the authors’ knowledge, this is the first study to examine the effect of integrated reporting quality on the market on a quarterly basis.

Introduction

Integrated reporting (IR) in recent years has received great public attention particularly after the formation of the International Integrated Reporting Council (IIRC) and the issuance of IR iguidelines (Adams, 2017; Zhou et al., 2017). Despite the critique arising that IR could be yet the tool for corporate impression (Melloni et al., 2017), the IIRC (2013, p. 3) stated that IR can improve “the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital.” Integrated reporting aims to reduce the clutter of sustainability report by disclosing aspects they consider to be material and useful about the value-creating activities in the short, medium, and long-term into a concise and coherent report (Zhou et al., 2017; IIRC, 2013). Integrated reporting offers a broader picture of the new firm by shifting away from standalone sustainability or social responsibility reports towards an integrated report that delivers a comprehensive picture of long-term performance from various perspectives, business model, and value creation (Burke and Clark, 2016). Hence, the voluntary information disclosure is a way to mitigate the information asymmetry problem and lead to better business transparency (Brammer and Pavelin, 2006).

Nevertheless, empirical evidence on the IR benefit is still sparse (De Villiers et al., 2014). Previous studies conducted by Zhou et al. (2017) and Vitolla et al. (2020) found an inverse relationship between alignment of integrated reports and information asymmetry, measured by analysts’ forecast errors, as well as cost of equity capital. Other studies conducted by Maria et al. (2017), Akker (2017), Martinez, 2016a, Martinez, 2016b, Lee and Yeo (2015) found that IR offers more relevant information. Thus the alignment of corporate reporting with the integrated report is negatively associated with the asymmetric information. Barth et al. (2001) also suggested the evidence that IR quality reduces information asymmetry as captured in a lower bid-ask spread. On the contrary, Stubbs and Higgins (2014) found evidence that IR did not affect a decrease of the level of information asymmetry. They argued that the information provided is not required by the capital providers to make the investment decisions. Accordingly, the limited evidence and inconsistent results found about the market responds to the information available in the integrated reports (Mervelskemper and Streit, 2016).

Conclusions

This research examined the existence of a negative relationship between voluntary integrated reporting and information asymmetry for 94 firms in Europe and Asia in 2017 with publishing an integrated report in 2016. The results show that there is an insignificant relationship between the integrated reporting quality and information asymmetry which is captured by the spread. There is no significant effect as well for size effect to moderate the relationship between the integrated reporting quality and information asymmetry. Those results are also supported by additional analyses.

These findings could be relevant for some aspects of the literature especially in the research design where this study used a continuous variable based on detailed content analysis instead of a dummy variable to measure the integrated reporting quality. Other innovations of this study are that it investigated the IR effect on a quarterly instead of an annual basis. From a practical perspective, as the significant effects are not yet observed, this result can provide the companies with insight on whether to implement the integrated reporting immediately or not. Investors who are interested in the integrated reporting also can consider this finding in their decision making. Finally, the IIRC as the regulator body can conduct some improvements to see how the integrated reporting is proceeding, particularly in the voluntary context. As the IR concept is relatively a new area for corporate reporting in the world, the governments are given the consideration and insight as well whether to encourage the companies in their countries to adopt this trend immediately or not.