Integrated Reporting and Agency Costs: International Evidence from Voluntary Adopters

Abstract

We examine whether the practice of integrated reporting (IR) can reduce agency problems between managers and investors, resulting in lower agency costs. We construct a sample of firms that voluntarily use IR in practice, drawn from 35 countries, and find that firms that apply IR practice more extensively (high IR firms) are associated with lower levels of agency costs and more negative year-to-year changes in agency costs compared to other IR firms (low IR firms). We also find that the relation between the level of IR practice and agency costs is more negative in countries with a stakeholder orientation than in countries with a shareholder orientation. Additionally, the effectiveness of IR is more pronounced in diversified firms that face greater agency problems. Our results are robust in a series of additional tests that address endogeneity. Overall, our evidence is consistent with IR having a disciplining role for managers.

Keywords:

• Integrated reporting
• Agency costs
• Corporate governance
• Voluntary adoption

Acknowledgements

We thank Hervé Stolowy (editor) and two anonymous reviewers for their valuable comments and guidance. We thank Lily Chen and seminar participants at Australian National University, La Trobe University, and delegates at the British Accounting and Finance Association Conference, 2018 for their helpful comments and suggestions. We also thank Elmar Venter for providing the Integrated Reporting quality ratings from EY South Africa for our subsample of South African firms. This research was supported by research funding from La Trobe University and the University of Auckland.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental Data and Research Materials

Supplemental data for this article can be accessed on the Taylor & Francis website, doi:10.1080/09638180.2020.1805342

Table A1. Results of principal component analysis

Table A2. Correlation matrix for main variables

Notes

1 IIRC is responsible for the development of IR framework and the promotion of IR. In 2011, a draft version of the IR Framework was released by the IIRC with a final version being released in December 2013. Prior to these developments, South Africa released its IR Framework in 2011 but adopted that of the IIRC in March 2014.

2 The Prince's Accounting for Sustainability Project was established by HRH The Prince of Wales in 2004 ‘to help ensure that we are not battling to meet 21st-century challenges with, at best, 20th-century decision making and reporting systems’ (https://www.accountingforsustainability.org/en/about-us/overview.html).

3 We do not include firms without an IR score because this group can include firms that did not prepare an integrated report and firms that did provide an integrated report that was not scored by ASSET4.

4 We estimate our models using South African data as an additional test.

5 Results of the principal component analysis are available in the on-line appendix.

6 The full correlation matrix is available in the on-line appendix.

7 We perform a similar difference-in-difference test with a control group of firms with high IR score for the entire period. We find a higher reduction in agency cost for the switched firms compared to this alternative control group (results untabulated).

Additional information

Funding

This research was supported by research funding from La Trobe University and the University of Auckland.