Research in International Business and Finance 49 (2019) 13–40

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Research in International Business and Finance

journal homepage: www.elsevier.com/locate/ribaf

Integrated reporting: An accounting disclosure tool for high quality

T
financial reporting
Athanasios Pavlopoulosa, Chris Magnisb, George Emmanuel Iatridisb,c,
⁎

a
Pavlopoulos Accounting Firm, Nea Anchialos, Volos, Greece
b
University of Thessaly, Department of Economics, Volos, Greece
c
Koc University, College of Administrative Sciences and Economics, Istanbul, Turkey

ARTICLE INFO ABSTRACT

JEL classification: This study examines the association between the level of the quality of integrated reporting (IR)
G32 disclosure and a firm’s market valuation. Employing data from IR firms during the years 2011 to
G34 2015, we identify the association between firm performance and IR disclosure quality. Further,
M40 we examine the way in which the quality of IR disclosure improves the value relevance of
M41
summary accounting information (i.e., the market value of equity) and can create value.
M42
Specifically, we show the positive relation between firm performance and the quality of IR dis-
Keywords: closure. Further, an examination shows that the level of the quality of IR disclosure is more
Integrated reporting
significant when firms tend to exhibit a higher value relevance of summary accounting in-
Value relevance
formation (i.e., the book value of equity and earnings). Finally, more effective use of IR has
Accounting disclosure quality
Firms’ performance resulted in abnormal stock returns being positively associated with earnings quality.
Earnings quality

1. Introduction

Markets move on information and develop rapidly. The more forward-looking and detailed information organizations provide, the
better markets operate (Ernst and Young, 2014). Although firms are producing more sustainability reports and corporate social
responsibility reports, they do not provide financial information and non-financial information in an integrated manner that helps
shareholders to become informed (IIRC, 2011a). There is a need for organizations to explain their business models and define the way
that they create value over the short, medium and long term. Parallel to and independent of financial reporting, a new framework
focuses on non-financial information and data, creating a motivation for long-term investments related to environmental, social,
governance (ESG) and financial factors. Moreover, the fact that there is no standard format for IR shifts the responsibility to sta-
keholders to make more secure investment decisions and to determine and link sustainability and economic values by using the
internet (CEccles and Saltzman, 2011).
According to the King III report, IR exhibits “a holistic and integrated representation of the company’s performance in terms of
both its finance and its sustainability” (IRCSA, 2011). The level of quality of IR disclosure better informs investors about the firms’
strategy. IR clarifies a company’s management strategy, which enables management to control various risks and identify investment

⁎
Corresponding author at: 94 Vassani Street, Volos, 38 333, Greece.
E-mail address: [email protected] (G.E. Iatridis).

https://doi.org/10.1016/j.ribaf.2019.02.007
Received 2 May 2018; Received in revised form 4 February 2019; Accepted 11 February 2019
Available online 14 February 2019
0275-5319/ © 2019 Elsevier B.V. All rights reserved.
A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

opportunities more clearly (IIRC, 2015). Firms using IR empower the value of their brand and reputation by providing information
relevant to the working conditions of both employees and workers in their supply chain, to the relationships with the communities in
which plants and other facilities are located and to the structure of compensation plans (Krzus, 2011).
The International Integrated Reporting Council (IIRC) suggests that the short-term structure of the existing financial reporting
framework does not help managers to make long-term predictions and organize their decisions about future strategies. Management
often omits structural data, particularly that related to ESG information (KPMG, 2013). The mission of the IIRC is “to create a globally
accepted IR framework that brings together financial and ESG information in a clear, concise, consistent and comparable format”1 to
“help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is
truly performing.”.2 Both financial and nonfinancial data are included in a single document. This document demonstrates how
effective sustainability reporting contributes to the positive financial performance of a firm and vice versa: it also identifies the
conciliatory decisions that the firm should make to balance its financial and nonfinancial performance. Although all listed firms are
required to provide an annual report on their financial performance, reports related to non-financial information are not obligatory in
the majority of countries. When firms apply IR, they provide both financial and nonfinancial information (Ioannou and Serafeim,
2010).
IR does not place undue emphasis on short-term financial performance. Using IR, the management can supervise business on a
day-to-day basis (Eccles and Krzus, 2010, p.252; IIRC, 2013a; Potter and Soderstrom, 2014) and can inform investors and stake-
holders regarding the firm’s strategies (Abeysekera, 2013). The IIRC notes that IR demonstrates the linkages between an organiza-
tion’s strategy, governance and financial performance and the social, environmental and economic context within which it operates.
IR not only addresses investors but also other stakeholders, such as customers, suppliers and banks (Krzus, 2011). Its main purpose is
not to help business make more sustainable decisions but rather to encourage an alternative way of thinking about profit max-
imization and long-term corporate success. In addition, IR provides ESG information to investors and to other stakeholders to un-
derstand how a firm is actually performing (IIRC, 2011b; Adams, 2015).
Our study aims to enrich the understanding of IR by providing empirical evidence on whether the quality of IR disclosure
positively affects firm performance and encourages firms to exhibit a higher value relevance of summary accounting information. We
test the relation under IR between the abnormal stock returns and earnings quality. Earnings quality is an important indicator of
financial performance and influences the firms’ disclosure decisions (Francis et al., 2008). Further, this study attempts to investigate
whether IR is more effective in creating high earnings quality for firms that use IR on a mandatory basis than it is for firms that use IR
on a voluntary basis. IR can be a useful proxy to control the behaviour of discretionary accruals. It recognizes social trends that are
likely to affect positive business developments, creating appropriate internal incentives that encourage a long term-view (Churet and
Eccles, 2014).
Our sample consists of 82 international firms and investigates the period from 2011 to 2015. Based on the chapters of the King III
report, the King III code (IoD, 2009, 2016) and the content elements in the IR framework, we construct a firm-specific integrated
disclosure score index (DS) that captures a firm’s degree of compliance with IR disclosures. Using our sample of international listed
firms, we find that firm valuation is positively associated with IR disclosures.
This study focuses on the alignment between financial and non-financial information provided by firms and examines the level of
accounting information provided by firms that enrich their annual reports with IR components. We interpret IR disclosure quality by
applying two different estimated indexes based on all the nine content elements in the King III report and the King III code and that
are confirmed by the IR framework. If IR can be used effectively to interpret the advantages of the King III report’s principles and to
explain to investors how an organization creates value over time, we expect the positive association between value creation and IR
disclosure quality (both in DS and Dummy Disclosure Score Index (DDS)) to be stronger in firms with lower market capitalization and
with a differentiation in the positions of CEO and chairman. Consistent with our prediction, we document that firms with a high IR
disclosure quality tend to display high market value per share. Our findings suggest that higher market valuation appears in firms
with high levels of leverage and liquidity.
We document certain results that support IR and our theory that the level of IR disclosures based on the King III report principles
and the IIRC framework is a mediating variable in determining the effectiveness of IR in our capital markets context. Our results also
provide support for the idea that in understanding future performance, specific IR disclosure aspects based on the King III report
principles and the IIRC framework are more important than others for certain sets of firms. Our work joins a growing literature that
uses survey data to explain abnormal stock returns under the IR regime. We show that the high levels of IR disclosure quality have
resulted in abnormal stock returns being positively associated with earnings quality.
Based on an analysis of these results, we find that a motivation for adopting IR is to simplify and integrate the information
regarding the firm’s business to enable it to communicate in a complete and transparent way its capacity to create value in the present
and the future. Therefore, the analysis confirms that a new era of reporting will be characterized by IR adoption, supported and
accompanied by integrated thinking (IIRC, 2015). Further, this analysis also explains how IR implementation is linked and how it
completes stakeholder theory.
The remaining sections of this study are as follows: Section 2 provides a literature review, explains the IR motivation and shows
the research hypotheses. Section 3 describes the design of the sample selection and develops the Models. Section 4 discusses the
empirical results, and Section 5 checks the robustness of our results. Finally, Section 6 presents the study’s conclusions.

1
See http://www.theiirc.org/the-iirc/,accessed February 2018.
2
See http://www.theiirc.org/about/,accessed February 2018.

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

2. Research hypotheses

2.1. Quality of IR disclosure and firm performance

Using a sample of listed firms in South Africa, the existing literature has attempted to highlight the relation between integration
reporting and firm valuation (Lee and Yeo, 2016; Bernardi and Stark, 2018; Zhou et al., 2017). Lee and Yeo (2016) examine the
relation between cross-sectional variation in IR disclosures and firm performance in the period after the implementation of IR. They
conclude that firm valuation is positively associated with IR disclosures. More specifically, they document that there is a positive and
significant association between IR disclosure and firm performance in the firms with higher organizational complexity. They suggest
that IR improves the information environment in complex firms, such as firms with high intangible assets, firms with multiple
business segments and large firms.
To evaluate the users’ perceptions of the usefulness of IR, Bernardi and Stark (2018), for the period 2008–2012, study the impact
in South Africa of the reporting regime change on analyst forecast accuracy. They conclude that linking ESG performance with future
financial performance through an integrated report provides stakeholders with an improved understanding of the firm and its future.
Moreover, they expect analyst forecast accuracy to improve after the implementation of IR. Zhou et al. (2017) test whether the degree
to which South African financial reports are integrated affects analyst forecast accuracy, forecast dispersion, and the cost of capital.
They document that the higher the degree of integration is, the higher the degree of forecast accuracy and the lower the cost of
capital: they found that the latter is especially true for firms with small analyst followings.
Considering the previous literature, we highlight that the use of IR empowers and evolves stakeholder theory. Stakeholder theory
can explain the accountability of the board not only to shareholders but also to other interested parts. The advocates of stakeholder
theory argue that this theory colours the firm’s portrait, providing both social and economic values and a consideration of ethics and
morality, which is important for the estimation of a firm’s value (Freeman, 1983, p. 248). The IIRC Framework states that stake-
holders need to be informed about capital and non-capital investments, for example, expenditures for property, plant, and equipment,
intellectual property, and people. Moreover, highlighting the elasticity of the business model, it explains to stakeholders how in-
vestments create a competitive advantage for the firms and organizations Finally, stakeholders should be provided with an analysis of
the positive and negative impacts of investments on financial capital (funds available through operations, debt or equity financing),
manufactured capital (plant, property, equipment), intellectual capital (patents, copyrights, licenses), human capital (the organi-
zation’s people-their capabilities, experience, drive to innovate), social capital (shared organizational values, relationships with
customers, suppliers, communities), and natural capital (air, water, land), including significant effects on the capital up and down the
value chain (IIRC, 2013a, Framework: 2.14 and 4.31; Krzus, 2017).
We extend the examination of IR implementation by studying firms that apply IR either on a mandatory or a voluntary basis. We
try to enrich the understanding on IR by providing empirical evidence on whether the quality of IR disclosure positively affects firm
performance. Hence, our first hypothesis is the following:
Hypothesis 1. There is a positive association between firm performance and the level of IR disclosure quality.

2.2. Quality of IR disclosure and the value relevance of summary accounting information (i.e., the book value of equity and earnings)

Before the use of IR, accounting mechanisms did not consider non-financial information and failing to consider all the necessary
factors that may have had a significant impact on value creation, corporate financial information faced similar shortfalls (Ernst and
Young, 2014). Researchers have examined value relevance for many years (Beaver, 2002).The fundamental notion suggests that an
accounting value is value-relevant when it is significantly associated with a dependent variable (Carnevale et al., 2012). The fact that
there was no convergence between the market value of the firms’ shares and their book value created the need for researchers to
examine the relevance of non-financial information with regard to value (Lourenco et al., 2014).
Previous studies found a significant relation between the market value of equity and non-financial information. A significant
number of studies applying a value-relevance test for the firms’ environmental information (Al-Tuwaijri et al., 2004; Barth and
McNichols, 1994; Clarkson et al., 2004; Cormier and Magnan, 1997, 2007; Moneva and Cuellar, 2009) found a positive relation
between the firms’ earnings valuation multiples and environmental reporting in firms from Canada, France and Germany. Other
studies have focused on the corporate environmental reputation effects with regard to current annual stock returns and current and
future annual earnings (Hussainey and Salama, 2010). A parallel study of Australian firms indicated a negative relation between a
firm’s value and its carbon intensity profile (Chapple et al., 2013).
Conversely, certain studies have shown an opposite relation between sustainability reporting and value relevance. The results
were derived from a sample of European banks in which the disclosure level of sustainability information exhibited an opposite
impact on the value relevance of net assets. Banks that did not apply sustainability reporting performed better with respect to value
relevance (Carnevale and Mazzuca, 2014).
There are many reasons underlying the belief that firms with high IR disclosure quality will tend to exhibit a higher value
relevance than their counterparts (IIRC, 2013a; Krzus, 2017): IR can benefit firms by attracting socially responsible investors and
consumers who care about sustainable development issues; IR may be popular with activists and prevalent in non-governmental

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

organizations; firms can apply IR in order to attract socially responsible investors, who may be willing to pay a premium for their
securities; IR can lead to material efficiency and energy and waste minimization (IIRC, 2013a; Lourenco et al., 2014).
Following stakeholder theory, firms are expected to provide more ESG principles to inform stakeholders. Hence, firms provide
value-relevant information to investors about the firm’s organizational effectiveness compared to that of competing firms (Hussainey
and Salama, 2010). Nonfinancial information reduces investor uncertainty and influences the firm’s share price (Ramchander et al.,
2012; Lourenco et al., 2014).
In the application of the King III report principles, empirical studies suggest that firms, particularly those from South Africa,
revealed sufficient information about the risks, challenges (Marx and Mohammadali - Haji, 2014) and uncertainties and suggested
ways for improvement (Ernst and Young, 2014; Baboukardos and Rimmel, 2016). De Klerk and De Villiers (2012) examined the value
relevance of ESG disclosures and concluded that the results of their study supported the business case advocating high-quality
integrated reports and advanced by the IRCSA (2011b) and the IIRC (2013b). Moreover, after IR adoption, the valuation coefficients
of earnings remain steadily higher than they were before. The improvement signals in the value relevance of earnings became visible
after the first year of the King III report’s adoption and became visible in the value relevance regarding the book value of equity after
the second year (Baboukardos and Rimmel, 2016).The abovementioned assertions can be formally stated in the following hypothesis.
Hypothesis 2. Firms with high IR disclosure quality tend to exhibit a higher value relevance of summary accounting information (i.e., the
book value of equity and earnings).

2.3. IR disclosure, earnings quality and abnormal stock returns

Previous studies in accounting and finance have documented stock return predictability by using variables such as market va-
luation ratios, short- and long-term interest rates and a firm’s financing patterns (Chava et al., 2015). The partial equilibrium lit-
erature focuses on the time variation in future stock returns and asks how it affects the optimal asset allocation decisions (Wachter,
2010). Practitioners focus on future stock returns’ predictability to develop market-timing portfolio strategies to enhance profits
(Koijen and van Nieuwerburgh, 2013). Adrian et al. (2010) check the association between stock return predictability and several
financial balance sheet variables and conclude that the annual growth rate of security broker-dealer leverage predicts future stock
returns.
Barth et al. (2017) test and conclude a positive relation between IR quality and valuation models by examining two channels
through which this association may arise: a capital market channel and a real effects channel. Their empirical models disaggregate
firm value into three components: liquidity, cost of capital, and expected future cash flows. To the extent that IR disclosure increases
the liquidity, stakeholder theory links the quality of IR disclosure with stock liquidity. Fang et al. (2009) find that the relation
between liquidity and performance is stronger for firms with high business uncertainty. Since integrated reports deal with capital,
Barth et al. (2017) document that higher integrated reporting quality may affect stock liquidity by stimulating additional trading by
informed investors. Bernardi and Stark (2018), in a sample of South Africa firms over the period 2008–2012, examine how the
implications of IR affect analyst forecast accuracy. They find a positive relation between the high level of ESG disclosures and the IR
disclosure level, concluding that IR improves the analysts’ estimations about the value and performance of the firm.
When the formation of an integrated report is aligned with stakeholder theory principles, the firm’s performance is improved. This
fact is demonstrated by firms that include IR in their annual reports and that behave differently, delivering more transparent financial
and non-financial information to investors. The latter can help manage various risks and identify investment opportunities more
clearly (De Villiers et al., 2017). In a mixed sample of firms that apply IR either on a mandatory or voluntary basis, we try to enrich
the understanding of IR by providing empirical evidence that since the introduction of IR, firms with high levels of IR disclosure and
earnings quality have had greater abnormal returns. Here, some similarities are found with previous studies because IR is a tool that
empowers the level of accounting (financial and non-financial) information (Lee and Yeo, 2016; Maroun, 2017). Hence, our third
hypothesis is:
Hypothesis 3. Under IR, abnormal stock returns are positively associated with earnings quality.
We continue our analysis to check the relation between earnings management and IR. Management actions that reduce the quality
of the accounting information of the financial statements comprise the notion of earning management (Kinney et al., 2004). Earning
management appears when managers manipulate the accounting numbers (Fields et al., 2001). Managers apply this practice when
they believe that the users of accounting information cannot understand and estimate the effect of earnings management. Earnings
management provides a lower quality of earnings. This results in the lower predictive ability of forecasted earnings and cash flows
(Lev, 2003) and misleads investors into creating unethical practices (Kaplan, 2001).
IR is expected to increase the reports’ decisions usefulness for stakeholders. Some basic principles of management behaviour are
that managers should be ethical, honest and transparent in their financial reporting and should be socially and environmentally
responsible in their decisions. If stakeholders believe that earnings are being managed or that a firm is not being socially responsible,
the firm concerned may lose value in the market. (Jordaan et al., 2018),

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Pududu and De Villiers (2016) study the earnings quality in South Africa firms, which apply IR on a mandatory basis and conclude
that there is no evidence of South African managers’ earning management to avoid small losses or small decreases in earnings. Except
for South Africa, integrated reporting is voluntary on an international level (Velte and Stawinoga, 2017).
In addition, firms can choose whether they prefer to provide IR assurance through external parties, such as professional ac-
countants. Big auditors are associated with high reporting quality, e.g., lower absolute values of discretionary accruals (Becker et al.,
1998) and higher earnings response coefficients (Teoh and Wong, 1993). A high quality of accounting disclosures is verified by good
audit reports, reducing information asymmetry, leading to a lower cost of equity and creating better financing terms (Ashbaugh -
Skaife et al., 2006; Botosan and Plumlee, 2002).
Regardless of the voluntary nature of IR assurance, audit and nomination committees are responsible to the investors for mon-
itoring financial, non-financial and IR information. In line with stakeholder theory, audit and nomination committees have to fulfil
the stakeholders’ interests by providing decision-useful integrated reports that help decrease greenwashing and information overload
(Velte, 2018). We extend our survey to test the following research hypothesis:
Hypothesis 3a. In terms of generating high earnings quality, IR is more effective in firms that use IR on a mandatory basis than in firms that
use IR on a voluntary basis.

3. Research design

3.1. Design of sample selection

Our sample period extends from 2011 to 2015. This period was chosen to reflect the fact that the IIRC was established on August
2, 2010, the same year that a multi-organizational Integrated Reporting Committee (IRC) was established in South Africa to develop
guidelines on IR and a framework for an integrated report for listed companies in the country3 .
This analysis is structured on two levels. At the first level, an analysis of balance sheets and income statements was implemented
to obtain numerical information about financial instruments. These data were downloaded from Datastream. A sample of 173 listed
firms was collected from the official website of IIRC. However, of the 173 firms, a total of 34 firms did not provide adequate data in
Datastream, and 57 firms were from the financial, insurance and real estate sectors and thus were removed from the sample4 . The
final sample consisted of 82 listed firms from 25 countries. As more countries adopt IR and as more companies implement IR on a
voluntary basis, future research should examine the motivation and the effects of IR using larger samples. Due to different institu-
tional characteristics, the level of compliance with IR requirements varies from country to country. Future research should also
investigate the association between institutional background and IR adoption level.
The second level of analysis focuses on annual reports. On this level, the study codified certain quantitative and qualitative
information into predefined categories and answers (Lopes and Rodrigues, 2007). Integrated reports of the firms were used in the
research survey. The reports provided details about independent board members and independent directors on the nomination
committee, non-executive board members on the nomination and audit committees, and whether the posts of CEO and chairman
were separated. From the Thomson Reuters database, we obtained data regarding institutional ownership. The sample selection
distribution development is illustrated in Table 1 below.
In Fig. 1, we present the sample distribution classified by primary industry. From the total sample of 82 firms, 21 firms come from
the manufacturing industry, 15 firms from the mineral industry, 12 firms from the transportation and communication industry, 18
from the retail industry and 16 firms from the services industry. This classification is interpreted with averages in a pie chart. A total
of 25.61% of the IR firms are from the manufacturing industry, 21.95% are from the detail industry, 19.51% are from the services
industry, 18.29% are from the mineral industry and 14.63% of the IR firms are from the transportation and communication industry.
Moreover, from the total sample of 382 observations, 69 observations were conducted in 2011, 74 observations in 2012, 76 ob-
servations in 2013, 81 observations in 2014 and 82 observations in 2015. In Fig. 2, this classification is illustrated in a histogram.
In Table 2, we observe that in the first two years of IR adoption, firms tended to provide basic IR information. In 2011, (2012),
only 25 (27) firms had more than 20 observations in checklist scores. Moreover, in 2015, firms seemed to comply with the IR notion.
A total of 41 firms had checklist scores of more than 20 observations.

3.2. Model specifications

3.2.1. Quality of IR disclosure and firm performance

Studies vary in their assessment of which value driver (cash flows and accruals) performed better. Sloan (1996) suggests that it is
better for financial analyses to be based on the cash flow component of profitability than on accruals. However, Ohlson (1995) and
Felthman and Ohlson (1995) note that current profitability (return on assets) and growth in net operating assets better explain future
profitability and provide a more accurate and less biased estimate of the intrinsic value of a firm. Growth in net operating assets is
split into accruals and growth in long-run net operating assets. Accruals better indicate the quality of earnings because the GAAP
reported that net income ignored information that was provided by accruals (Chan et al., 2006). We use profitability (return on assets

3
See http://www.integratedreportingsa.org/IntegratedReporting/WhatisanIntegratedReport.aspx, 02/08/2018.
4
These firms use accounting methods that are not comparable with those of industrial firms (Iatridis, 2012a).

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 1
Sample Selection.
Selection Criteria Number of Firms

Total number of firms listed in IR database 173

Less:
Firms in financial, insurance and real estate industries (57)
Firms without data available in Datastream (34)
Total Sampled Firms 82

Figs. 1 and 2. Firms distribution by industry classification and by firm – year observations.

Table 2
Integrated Reporting Checklist Distribution per year.
IR Questions’ Classification on the Checklist Years

2011 2012 2013 2014 2015

[12,16) 20 20 14 13 13
[16,20) 37 35 32 27 27
[20,24) 12 14 20 26 26
[24,28] 13 13 16 16 16
Total 82 82 82 82 82

(ROA)) as a control variable because the quality of IR disclosure is expected to increase with firm performance. We examine the
relation between IR disclosure quality and the subsequent profitability of our sample. Specifically, we test whether the quality of IR
disclosure positively affects the ROA. Following Lee and Yeo’s (2016) and Jermias and Gani’s (2014) methodology, we estimate the
following Equation:

ROAi,t = a0 + a1DISCLOSURE_QUALITYi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a6GROWTHi,t

+ a7FIRM_SIZEi,t + a8DEBT_RATIOi,t + {Industry Effects} + {Year Effects} + vi,t
(1)

We create two Sub-Models, Model 1(a) and 1(b), in which we test the IR disclosure quality in two different ways. In Model 1(a),
we use the independent variable DDS, and in Model 1(b), we use the independent variable DS.

ROAi,t = a0 + a1DDSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a6GROWTHi,t + a7FIRM_SIZEi,t +

a8DEBT_RATIOi,t + {Industry Effects} + {Year Effects} + vi,t (1a)

ROAi,t = a0 + a1DSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a6GROWTHi,t + a7FIRM_SIZEi,t +

a8DEBT_RATIOi,t + {Industry Effects} + {Year Effects} + vi,t (1b)

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The variable explanations are provided in the Table below.

Variable Explanations of Equation (1)

Variable Description

ROA is the ret urn on assets in fiscal year t calculated as net income during year t scaled by total assets at the beginning of the year.
DDS Is a dummy variable equal to 1 if a firm has gathered an IR disclosure score which is equal or greater than the median price notifications percentage
of all sampled firms and 0 if otherwise. For more details see Section 3.3.1
DS Is derived from the scale of total received score of each firm to the maximum score (equals to 28 observations based on KING III checklist).
DUALITY Is a dummy variable which takes 1 if a firm’s CEO is also the chairman of the board of directors and 0 if otherwise.
BSIZE is the number of directorsss on the Board.
BOARDIND is the board independence ratio measured as the number of independent directors divided by total board size.
INST is the ratio of number of shares owned by institutional shareholders to total outstanding common shares.
GROWTH is the growth in total assets from the beginning to the end of year t.
TURNOVER is a measure of asset utilization that captures how efficiently the firm’s assets are used and is estimated as the ratio of annual sales to total assets at
the end of fiscal year t.
SIZE is the natural logarithm of total assets at the end of fiscal year t-1.
LEVERAGE is another proxy for firm’s leverage calculated as the ratio of total debt at the end of fiscal year t to total assets at the end of fiscal year t-1
STDEVΔOI is the standard deviation of the annual change in operating income.

A significant and positive coefficient of DS (DDS) would suggest a positive relation between the quality of IR disclosure and the
firm’s performance (ROA). Board size, board independence, and separation of the CEO and chair positions to improve overall
oversight are basic issues that affect the board of directors (Dalton et al., 1998; Coles and Hesterly, 2000; Daily et al., 2003). We
expect all of these three coefficients to be positive. A higher number of non-executive directors on the board can improve firm
performance. A board should consist of a large number of outside independent directors and have a separate position of chairman and
CEO to increase shareholder value (Fama and Jensen, 1983; Jensen and Meckling, 1976; Shleifer and Vishny, 1997). However, a
disproportionately high number of inside directors has a negative association with firm performance (Jermias and Gani, 2014).
As Iatridis (2012c) suggests, the domination of company boards by non-executive and independent directors, the presence of
nomination and internal audit committees, a firm’s size, a firm’s leverage, and its managerial and institutional ownership improve
firm performance (Singh and Davidson, 2003; Weir et al., 2002). Hence, we expect positive coefficients for these variables, except for
leverage. The presence of independent members on boards of directors will enhance the boards' ability to monitor management
(Young et al., 2008). Institutional investors play an active role in controlling managerial discretion and improving the efficiency of
information in capital markets because these investors are sophisticated and have certain advantages in processing information
(Gonzalez and Garcia - Meca, 2014; Balsam et al., 2003; Koh, 2003; Ferreira and Matos, 2008; Ferreira et al., 2010).
The concept of “integrated thinking” has been introduced to explain the relation between IR and firm performance. This concept
attempts to find an optimal balance between managing short-term business imperatives and ongoing value creation (Churet and
Eccles, 2014).It is also important to resolve agency problems by aligning management’s interests with the objectives of shareholders
(Demsetz and Lehn, 1985). Moreover, the opportunistic behaviour of managers can be aligned through the contribution of external
auditing. External auditors can be used as another important monitoring system. Auditors have the responsibility to provide reliable
accounting information and to effectively question management (Cohen et al., 2008). A firm that is audited by independent, high-
quality external auditors exhibits low earnings management, better accounting information and improved performance (Frankel
et al., 2002; Krishnan, 2003).

3.2.2. Quality of IR disclosure and value relevance

Similar to other studies (Baboukardos and Rimmel,2016; Berthelot et al., 2012; Hassel et al., 2005; Johnston, 2005; Lourenco
et al., 2014; Sinkin et al., 2008), a linear price-level Model that associates a firm’s market value of equity (MVPS) with its book value
of equity (BVPS) and earnings (EBITPS) is employed as follows:

MVPSi,t = λ0 + λ1DISCLOSURE _QUALITYi,t + λ2BVPSi,t+ λ3EBITPSi,t + λ4LEVERAGEi,t + λ5ROE,t + λ6CASHi,t +

λ7PPEi, + λ8SIZEi,t + λ9DUALITYi,t + λ10PERIDAUi,t + λ11LN_EMPLOYi,t + {Industry Effects} + {Year Effects} + eit
(2)

Because we use two proxies for the DISCLOSURE_QUALITY, namely, DDS and DS, we estimate the following two Sub-Models:

MVPSi,t = λ0 + λ1DDSi,t + λ2BVPSi,t+ λ3EBITPSi,t + λ4LEVERAGEi,t + λ5ROE,t + λ6CASHi,t + λ7PPEi, + λ8SIZEi,t +

λ9DUALITYi,t + λ10PERIDAUi,t + λ11LN_EMPLOYi,t + {Industry Effects} + {Year Effects} + eit
(2a)

MVPSi,t = λ0 + λ1DSi,t + λ2BVPSi,t+ λ3EBITPSi,t + λ4LEVERAGEi,t + λ5ROE,t + λ6CASHi,t + λ7PPEi, + λ8SIZEi,t +

λ9DUALITYi,t + λ10PERIDAUi,t + λ11LN_EMPLOYi,t + {Industry Effects} + {Year Effects} + eit
(2b)

The three basic variables (MVPS, BVVS and EBITPS) are scaled by the number of common shares at the end of a firm’s fiscal year
(Lourenco et al., 2014). In their study, Barth et al. (2001) mention that, “an accounting amount is defined as value relevant if it has a

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

predicted association with equity market values” (Barth et al., 2001, pg. 79). Hence, BVPS and EBITPS are regarded as value relevant
as long as their respective coefficients λ2 and λ3 are found to be significantly different than zero. We expect positive signs to
coefficients λ2 and λ3 in the period after the adoption of King III. A significant and positive coefficient λ1 for the quality of IR
disclosure index DS (or DDS) would suggest a significant improvement in the value relevance of the accounting information. Hence,
the focus of our test is on coefficient λ1: If this coefficient is found to be positive and significantly different than zero, then it can be
argued that firms with a high level of IR disclosure quality have enhanced the relevance of summary accounting information. Further,
a number of control variables are included in the Model as described in the Table below.

Variable Explanations of Equation (2)

Variable Description

MVPS Market Value of Equity scaled by the number of common shares.

DDS Is a dummy variable equal to 1 if a firm has gathered an IR disclosure score which is equal or greater than the median price notifications percentage
of all sampled firms and 0 if otherwise. For more details see Section 3.3.1
DS Is derived from the scale of total received score of each firm to the maximum score (equals to 28 observations based on KING III checklist).
BVPS Book Value of Equity scaled by the number of common shares.
EBITPS Earnings before interest and taxation scaled by the number of common shares.
LEVERAGE is another proxy for firm’s leverage calculated as the ratio of total debt at the end of fiscal year t to total assets at the end of fiscal year t-1
ROE Return on Equity in fiscal year t, calculated as net income during year t scaled by total equity at the beginning of the year.
CASH Is cash and short – term investment at the end of fiscal year t scaled by total assets at the beginning of the year.
PPE Is net properties, plant and equipment divided by total assets at the end of fiscal year t (Clarkson et al., 2008)
SIZE is the natural logarithm of total assets at the end of fiscal year t-1.
DUALITY Is a dummy variable which takes 1 when firm’s CEO is also the chairman of the board of directors and 0 if otherwise.
PERIDAU Is the percentage of independent auditors on the audit committee.
LN_EMPLOY Is the natural logarithm of the number of the employees.

3.2.3. Quality of IR disclosure, earnings quality and abnormal stock returns

IR accounting information contained in earnings announcements plays an important role in the determination of stock prices.
Despite its importance, there are studies that show that stock prices do not immediately and fully incorporate the information in
earnings announcements and that various accounting-based measures and financial statements components have the ability to predict
future stock returns (Balakrishnan et al., 2010). However, the greater sophisticated shareholder presence creates the ability to share
prices, to quickly absorb the information contained in earnings announcements and to smooth the post-earnings announcement
tendency (Omri, 2017; Bartov et al., 2000; Doyle et al., 2006).
La Porta (1996) checks and verifies that the expectations of stock market analysts regarding the long-term earnings growth of the
firms they cover have strong predictive power for these firm’s abnormal stock returns. Based on his conclusions, we show that the
high levels of IR disclosure quality and earnings quality have predictive power for abnormal stock returns and that this predictive
ability is due to high IR implementation. In a mixed sample of firms that apply IR either on a mandatory or voluntary basis, we try to
enrich the understanding on IR by providing empirical evidence that since the introduction of IR, firms with high levels of IR
disclosure and earnings quality have grater abnormal returns.
Following Burgstahler et al. (2006) and based on prior accounting research (e.g., Healy and Wahlen, 1999; Dechow and Skinner,
2000; Leuz et al., 2003), we compute two different proxies that capture a range of earnings management activities, such as the
magnitude of total accruals, the smoothness of earnings relative to cash flows and the association between accounting accruals and
operating cash flows (e.g., Lang et al., 2003, 2006; Wysocki, 2004). These two proxies are used as important indicators of financial
performance and the influence of the firms’ disclosure decisions (Francis et al., 2008). Recognizing social trends that are likely to
affect positive business developments and creating appropriate internal incentives that encourage a long term-view, IR can be a useful
proxy to control the behaviour of discretionary accruals (Churet and Eccles, 2014). We therefore estimate the following Model:

ARi,t = φ0 + φ1DSi,t+ φ2EPSi,t+ φ3LAGEPSi,t-1 + φ4(DSi,t*EPSi,t)+ φ5(DSi,t*LAGEPSi,t)+ φ6LNMVi,t +

φ7(DSi,t*LNMVi,t)+ φ8(EPSi,t*LNMVi,t)+ φ9(DSi,t*EPSi,t*LNMVi,t)+ φ10BMRi,t+ φ11(DSi,t*BMRi,t)+ φ12PERINBBi,t+
φ13(DSi,t*PERINBBi,t)+ φ14(DSi,t*PERINBBi,t*EPSi,t)+ φ15DEBT_RATIOi,t+ φ16FIRM_SIZEi,t+ φ17EARNI-
NGS_QUALITYi,t+ φ18(DSi,t*EARNINGS_QUALITYi,t)+ φ19 (DSi,t*EARNINGS_QUALITYi,t*LNMVi,t)+ {Industry Effects}
+ {Year Effects}+ vi,t (3)

Because we use two proxies for the EARNINGS_QUALITY, namely, SMOOTHNESS and DAC, we estimate the following two Sub-
Models:

ARi,t = φ0 + φ1DSi,t+ φ2EPSi,t+ φ3LAGEPSi,t-1 + φ4(DSi,t*EPSi,t)+ φ5(DSi,t*LAGEPSi,t)+ φ6LNMVi,t +

φ7(DSi,t*LNMVi,t)+ φ8(EPSi,t*LNMVi,t)+ φ9(DSi,t*EPSi,t*LNMVi,t)+ φ10BMRi,t+ φ11(DSi,t*BMRi,t)+ φ12PERINBBi,t+
φ13(DSi,t*PERINBBi,t)+ φ14(DSi,t*PERINBBi,t*EPSi,t)+ φ15DEBT_RATIOi,t+ φ16FIRM_SIZEi,t+ φ17SMOOTHNESSi,t+
φ18 (DSi,t*SMOOTHNESSi,t)+ φ19 (DSi,t*SMOOTHNESSi,t *LNMVi,t)+ {Industry Effects}+ {Year Effects}+ vi,t
(3a)

ARi,t = φ0 + φ1DSi,t+ φ2EPSi,t+ φ3LAGEPSi,t-1 + φ4(DSi,t*EPSi,t)+ φ5(DSi,t*LAGEPSi,t)+ φ6LNMVi,t+

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

φ7(DSi,t*LNMVi,t)+ φ8(EPSi,t*LNMVi,t)+ φ9(DSi,t*EPSi,t*LNMVi,t)+ φ10BMRi,t+ φ11(DSi,t*BMRi,t)+ φ12PERINBBi,t+

φ13(DSi,t*PERINBBi,t)+ φ14(DSi,t*PERINBBi,t*EPSi,t)+ φ15DEBT_RATIOi,t+ φ16FIRM_SIZEi,t+ φ17DACi,t+ φ18
(DSi,t*DACi,t)+ φ19 (DSi,t*DACi,t *LNMVi,t)+ {Industry Effects}+ {Year Effects}+ vi,t
(3b)

Variable Explanations of Equation (3)

Variable Description

AR Is the abnormal return equals to expected return minus actual return at the end of the year. Expected return estimated according to CAPM
Model.
DS Is derived from the scale of total received score of each firm to the maximum score (equals to 28 observations based on KING III checklist),
EPS Is the earnings per share scaled by the stock price at the beginning of the year,
LAGEPS Is one year lagged earnings per share scaled by the stock price at the beginning of the year,
LNMV Is the natural logarithm of market value of equity,
BMR Is book – to – market ratio in fiscal year t. It is calculated as the book value of equity divided by the market value of equity at the end of the year,
PERINBB Is the percentage of nomination committee members who are independent from the Board,
LEVERAGE Is another proxy for firm’s leverage calculated as the ratio of total debt at the end of fiscal year t to total assets at the end of fiscal year t-1
FIRM_SIZE Is the natural logarithm of total assets at the end of fiscal year t-1
DAC Are the residuals that derived from the estimation of the normal accruals equation {DeFond and Subramanyam, 1998; Bartov et al., 2001;
Kothari et al., 2004; Garza-Gomez et al., 2006}.
SMOOTHNESS Is the standard deviation of the operating income to standard deviation of the operating cash flows. Both measures are standardized with total
assets.

Where scaling by the cash flows is a control for differences in the variability of economic performance (Dechow et al., 2010).
Previous studies used discretionary accruals as a proxy for earnings management (Cohen and Zarowin, 2010; Kim et al., 2012;
Zang, 2012; Jordaan et al., 2018). Similarly, we use discretionary accruals as the first proxy for earnings management, as accruals
may be used by managers to manage earnings either upwards or downwards. Following Ball and Shivakumar (2006, 2008), we
estimate normal accruals by using the Jones Model (1991) and use a piecewise linear variant to capture the role of accruals in noise
reduction and in timely loss recognition:

ACCRUALSi, t SALESi, t PPEi, t CFOi, t CFOi, t DCFO *CFOi, t

= 0 + 1 + 2 + 3 + 4 + 5 + vit
TAi, t 1 TAi, t 1 TAi, t 1 TAi, t 1 TAi, t 1 TAi, t 1
(5)

Here,

Accruals = {Δ(Current Assets) – Δ(Cash)} – {Δ(Current Liabilities) – Δ(Current maturities of long – term debt) – Δ(Income
Taxes Payable)} – {Depreciation and Amortization Expense} (4)

where change (Δ) is computed as the difference in values from year t to year t – 1.
Further,

Variable Explanations of Equation (5)

Variable Description

ΔSALES Is the change in revenues during period t.

PPE Is net properties, plant and equipment divided to total assets at the end of year t.
CFO Is cash flow from operations at the end of year t.
DCFO Is an indicator variable that takes the value one if CFO < 0 and zero otherwise.
DCFO*CFO An interaction term between DCFO and CFO.
TA Is book value of total assets at the beginning of year t.

As the second proxy of earnings management, we use the earnings smoothness. As the earnings smoothness measure, we use the
ratio of the standard deviation of the operating income to the standard deviation of the operating cash flows (Dechow et al., 2010). A
stable earnings stream is capable of supporting a higher level of dividends than a more variable earnings prospect can support.
Earnings variability is interpreted as an important measure of the overall riskiness of the firm and has a direct effect on the investors'
capitalization rates; thus, it has an adverse effect on the value of a firm's shares and the investors’ subjective expectations for possible
outcomes of future earnings and dividends (Burgstahler and Eames, 2003).
A significant and positive coefficient of DS x EPS would suggest a significant improvement in earnings informativeness as a result
of the IR disclosure quality. The coefficient of DS x EPS x LNMV would be significantly positive if the firm’s market value of equity is
positively associated with the informativeness resulting from the IR disclosure quality. A significant and negative coefficient of DS x
DAC (or DS x SMOOTHNESS) would suggest a significant improvement in earnings quality as a result of the IR disclosure quality. The

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

coefficient of DS x DAC x LNMV (or DS x SMOOTHNESS x LNMV) would be significantly negative if the firm’s market value of equity
is positively associated with the earnings quality under IR. A positive coefficient on the association between the increase of the
percentage of nomination committee members who are independent from the board of directors and the informativeness from the IR
disclosure quality, i.e., DS x PERINBB x EPS, would be expected. Moreover, a positive coefficient on the association between the
increase of the percentage of independent directors on the nomination committee and the informativeness from the IR disclosure
quality, i.e., DS x PERIDNC x EPS, would be expected. The coefficients of DS x LAGEDEPS, DS x LNMV and DS x BMR are expected to
be positive (Klein, 2002; Tucker and Zarowin, 2006; Iatridis, 2018).
In addition to the above Eq. (3) and based on Velte (2018); Pududu and De Villiers (2016) and Jordaan et al. (2018) we create the
following Model that tests the direct relation between earnings quality and the IR disclosure quality. Eq. (6) tests whether in terms of
high earnings quality, IR is more effective for firms that use IR on a mandatory basis than for firms that use it on a voluntary basis. Eq.
(6) is employed as follows:

DSi,t = κ0 + κ1MANDATORYi,t+ κ2EARNINGS_QUALITYi,t + κ3(MANDATORYi,t * EARNINGS_QUALITYi,t)+ κ4SIZEi,t-1 +

κ5MBRi,t + κ6BIG_4i,t + κ7ROEi,t+ κ8DUALITYi,t+ κ9INSTi,t+ κ10CGCi,t+ κ11DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t
(6)

Because we use two proxies for the EARNINGS_QUALITY, namely, SMOOTHNESS and DAC, we estimate the following two Sub-
Models:

DSi,t = κ0 + κ1MANDATORYi,t+ κ2DACi,t + κ3SIZEi,t-1 + κ4MBRi,t + κ5BIG_4i,t + κ6ROEi,t+ κ7DUALITYi,t+ κ8INSTi,t+

κ9CGCi,t+ κ10DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t (6a)

DSi,t = κ0 + κ1MANDATORYi,t+ κ2SMOOTHNESS,t + κ3SIZEi,t-1 + κ4MBRi,t + κ5BIG_4i,t + κ6ROEi,t+ κ7DUALITYi,t+

κ8INSTi,t+ κ9CGCi,t+ κ10DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t
(6b)

DSi,t = κ0 + κ1MANDATORYi,t+ κ2DACi,t + κ3(MANDATORYi,t*DAC,t)+ κ4SIZEi,t-1 + κ5MBRi,t + κ6BIG_4i,t +

κ7ROEi,t+ κ8DUALITYi,t+ κ9INSTi,t+ κ10CGCi,t+ κ11DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t
(6c)

DSi,t = κ0 + κ1MANDATORYi,t+ κ2SMOOTHNESS,t + κ3(MANDATORYi,t*SMOOTHNESSi,t)+ κ4SIZEi,t-1 + κ5MBRi,t +

κ6BIG_4i,t + κ7ROEi,t+ κ8DUALITYi,t+ κ9INSTi,t+ κ10CGCi,t+ κ11DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t
(6d)

Variable Explanations of Equation (6)

Variable Description

DS Is derived from the scale of total received score of each firm to the maximum score (equals to 28 observations based on KING III checklist),
MANDATORY Is a dummy variable which takes 1 when a firm mandatorily uses the IR and 0 when a firm voluntarily uses the IR
DAC Are the residuals that derived from the estimation of the normal accruals equation {DeFond and Subramanyam, 1998; Bartov et al., 2001;
Kothari et al., 2004; Garza-Gomez et al., 2006}.
SMOOTHNESS Is the standard deviation of the operating income to standard deviation of the operating cash flows. Both measures are standardized with total
assets,
SIZE Is the natural logarithm of total assets at the end of fiscal year t-1,
MBR Is market – to – book ratio in fiscal year t. It is calculated as the market value of equity divided by the book value of equity at the end of the year,
BIG_4 Is a dummy variable. When a firm is audited by a Big 4 accounting firm the dummy variable equal to 1 and 0 otherwise,
ROE Is the return on equity in fiscal year t calculated as net income during year t scaled by total equity at the beginning of the year,
DUALITY Is a dummy variable which takes 1 when a firm’s CEO is also the chairman of the board of directors and 0 otherwise,
INST Is the ratio of number of shares owned by institutional shareholders to total outstanding common shares,
CGC Is a dummy variable equal to 1 if the firm has a corporate governance committee and 0 otherwise,
DIV Is the dividend payout ratio equal to the cash common dividends to net income at the end of fiscal year t.

Where scaling by the cash flows is a control for differences in the variability of economic performance (Dechow et al., 2010).
The coefficient κ2 is the first coefficient of interest that tests the association between earnings quality (through DAC or SMOO-
THNESS) and the IR disclosure score. This coefficient would be significantly negative if DAC (or SMOOTHNESS) is negatively as-
sociated with the quality of IR disclosure. In Models 6(c) and 6(d), the coefficient κ3 is the second coefficient of interest and checks
the validity of the H3a research hypothesis. A significant and negative coefficient on MANDATORY x DAC (or MANDATORY x
SMOOTHNESS) would suggest that in terms of high earnings quality, IR is more effective for firms that use IR on a mandatory basis
than for firms that use it on a voluntary basis.

3.3. Methodology

3.3.1. Construction of IR score DS and DDS

This section describes the construction of DS, which is a disclosure score index that measures the IR quality of the provided

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information of IR firms. DS consists of all nine content elements in the King III report and the King III code that are confirmed by the
IR framework. As further shown in Table A7, DS covers the following broad categories: 1) ethical leadership & corporate citizenship,
2) boards & directors, 3) audit committees, 4) the governance of risk, 5) governance of information technology, 6) compliance with
laws, codes, rules and standards, 7) internal audit, 8) governing shareholder relationship, and 9) IR and disclosure. DS is derived from
the proportion of the total scores received by each firm to the maximum score. It is implied that the accuracy of the DS would depend
on the credibility of the reported financial information.
Based on Amiraslani et al.’s (2013) methodology, we expect that firms with high IR disclosure quality are firms whose propor-
tional accounting disclosures (related to the level of IR compliance) are greater than or equal to the median value of this percentage.
Therefore, if a firm has gathered an IR disclosure score equal to or greater than the median price notifications percentage of all
sampled firms, the variable DDS, which is an independent variable for all Models of our study, takes a value of 1, indicating high IR
information quality. If the accounting disclosure score is less than the median price, then the value of DDS for this firm is 0.

3.3.2. Methodology of econometric estimations

We applied a univariate analysis and created both Pearson and Spearman correlations matrixes to test hypotheses 1, 2 and 3. In
the subsequent multivariate analysis, we used the fixed-effects OLS method5 . In all the estimations, we implemented the Newey and
West (1987) method that has been modified for use in a panel data set. Through this method, we created robust standard errors
(Liang and Zeger, 1986; Moulton, 1986; Andrews, 1991; Rogers, 1993; Williams, 2000). The Newey-West approach was suitable for
panel data, and the estimation results were consistent regarding heteroskedasticity and autocorrelation (Cecchetti et al., 1997 and
Sun and Cui, 2014). Finally, the independent variables were standardized to mitigate multicollinearity issues (Kim and Park, 2010).

4. Results

4.1. Descriptive statistics

In Table 3, we report the descriptive statistics for all variables used in this research. In Panel A, we present the descriptive
statistics for all the dependent variables of the Eqs. (1)–(9). The average ROA of the firms is 3.8% (st. dev. 6%). On average, the
market value of the assets of the firms in our sample is four times larger than their assets’ replacement cost (st. dev. 11.034).
Furthermore, the average market value per share of our sample is 61.471 million Euros (st. dev. 5.816). The average market-to-book
ratio is 4.349 (st. dev. 1.268), implying that the 82 firms of the sample exhibit high growth opportunities. On average, the abnormal
stock return is 0.035 (st. dev. 0.3%).
In Panel B, we report the descriptive statistics for financial, corporate governance and other control variables. On average,
52.66% of the firms have independent board members on their audit committee (st. dev. 36.635). The average number of board
members is approximately 11 in our sample (st. dev. 3.1). The degree of board independence in the sample firms is approximately
33.6% (st. dev. 20.6%). On average, in 56.5% of the firms, the CEO is also the chairman of the board of directors (st. dev. 49.6%). The
proportion of the firms’ equity held by institutional shareholders is on average 18.4% (st. dev. 14.4%). In our sample, the average
volatility of the annual growth of the firms’ operating income is 1.956 (st. dev. 16.145).
In Panel C, we report the descriptive statistics for the other independent variables of our Models. On average, 78.8% of the sample
firms are audited by Big 4 auditors (40.9%). On average, the natural logarithm of the number of the firms’ employees is 9.439 (st. dev.
1.726). The average beta of our sample firms is 0.778 (st. dev. 48.3%). Finally, the average size of the firms’ annual integrated reports
is approximately 131 pages (st. dev. 73.703).
In Table 4, we present the correlation matrix. Consistent with our first hypothesis that there is a positive association between IR
disclosure quality and firm performance, there is a positive and significant (at the 5% level or better) correlation (by Spearman)
between the variables DS (and DDS) with the ROA (and Tobin’s Q index). Despite the fact that these individual results are interesting,
they do not control for all other factors likely to influence the extent of the firms’ performance variability. Consistent with our second
hypothesis regarding a positive association between the value relevance of summary accounting information and IR disclosure
quality, there is a positive and significant (at the 10% level or better) correlation (by Pearson) between the variables DS and DDS and
the MVPS. Moreover, MVPS is significantly associated at a 10% level with LEVERAGE in the Spearman correlations. Consistent with
our third hypothesis, there is a positive correlation at the 1% level (according to Pearson’s approach) between the abnormal stock
return (AR) and the IR disclosure quality metric (DS). Furthermore, we notice a positive and significant correlation (by Spearman) at
the 5% level or better among the ROA and the DUALITY, GROWTH, INST, BOARDIND and TURNOVER. Despite the fact that these
individual results are interesting, they do not control for all other factors likely to influence the extent of the firms’ performance
variability. Hence, we apply a multivariate analysis for making inferences (Kanagaretnam et al., 2011; Magnis and Iatridis, 2017).

4.2. Quality of IR disclosure and firm performance

Table 5 depicts the results of Eqs. (1a) and (1b). From that Table, we notice that H1 holds. Both DS and DDS are positively and
significantly associated at the 5% level with the ROA, implying that firms that exhibit higher IR disclosure quality are outperforming.
Firms in which the CEO and the chairman are the same person tend to exhibit lower performance than do firms in which the CEO is

5
Fixed-year effects and two-digit SIC industry fixed effects were included.

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

not simultaneously the chairman of the board. This result is based on the fact that DUALITY is associated significantly at the 1% level
with the ROA, confirming the findings of Weisbach (1988) and Jermias and Gani (2014). We find that boards with a high percentage
of independent directors tend to exhibit higher performance since BOARDIND and the ROA are associated positively and significantly
at the 10% level or better. Moreover, similar to what we found from Models 1(a) and 1(b), we observe that institutional ownership
(INST) is positive and significantly associated at the 5% level or better with the ROA, which suggests that our sample firms benefit
from the monitoring activities of institutional shareholders. In Model 1(b), our results predict that firm size is associated positively
and significantly at the 5% level with the ROA. Finally, firms with high growth opportunities and that are highly leveraged tend to
display high performance because GROWTH is positively and significantly associated at the 10% level or better with the ROA and
DEBT_RATIO is negatively and significantly associated at the 10% level with the ROA. Our results are consistent with the findings of
previous studies (e.g., Lee and Yeo, 2016).

4.3. Quality of IR disclosure and value relevance

In Table 6, we illustrate the estimation results of the second research hypothesis. We create two Sub-Models, Model 2(a) and 2(b),
in which we check the IR disclosure quality in two different ways. In Eq. (2a), we use the independent variable DDS, and in Eq. (2b),
we use the independent variable DS. The dependent variable is MVPS. The coefficients of interest are λ1–λ3. Firms with a high IR
disclosure quality tend to display high market value per share because DDS (or DS) and MVPS are associated positively and sig-
nificantly at the 5% level or better. Furthermore, the basic summary information focuses on the accounting variables BVPS and

Table 3
Descriptive Statistics.
Variable Mean Median Std.Dev. Max Min N
Panel A: Depended Variables

ROA 0.038 0.037 0.060 0.486 −0.329 389

TOBIN’S_Q 4.281 1.254 11.034 85.021 0.072 389
MVPS 8.076 3.239 5.816 61.471 0.666 297
MBR 4.349 1.268 11.123 85.021 0.156 382
AR 0.035 0.035 0.003 0.048 0.027 297
Panel B: Control Variables
1. Financial Variables: vvvaVariables:
DS 0.702 0.679 0.151 1.000 0.464 410
DDS 0.598 1.000 0.491 1.000 0.000 410
SIZE 9.711 9.659 2.365 15.963 3.737 297
FIRM_SIZE 9.883 9.660 2.435 1.597 2.397 307
ROE 0.035 0.094 1.152 0.877 −1.956 297
CFO 0.072 0.072 0.060 0.261 −0.288 389
CASH 0.112 0.089 0.109 0.883 0.000 297
TURNOVER 0.927 0.677 0.722 3.811 0.044 389
DEBT_RATIO 0.591 0.598 0.161 0.996 0.069 388
LDEBT_RATIO 1.058 1.040 0.163 1.858 0.414 306
LEVERAGE 0.461 0.465 0.211 1.130 0.000 297
BVPS 2.538 1.682 5.426 3.197 0.066 297
EBTPS 2.807 2.283 7.326 4.593 −2.246 297
PPE 0.313 0.260 0.224 0.890 0.005 297
GROWTH 0.025 0.028 0.486 1.000 −7.636 410
EPS 1.797 1.415 5.213 3.100 −2.170 384
LAGEPS 1.652 1.345 5.153 3.100 −2.170 302
LNMV 9.404 9.032 1.686 16.663 6.637 403
BMR 0.983 0.788 0.817 6.399 0.011 382
STDEVΔOI 1.956 2.024 16.145 76.364 0.082 379
DIV 0.631 0.422 1.317 12.500 −1.524 332
DAC 0.031 0.023 0.039 0.451 5.42E-05 388
SMOOTHNESS 1.877 0.787 6,025 79.262 0.015 365
2. Corporate Governance Variables:
PERIDAU 52.663 50.750 36.635 100.000 0.000 410
PERINBB 24.485 17.245 9.721 100.000 0.000 410
PERIDNC 47.994 45.500 30.763 100.000 0.000 410
CGC 0.538 1.000 0.499 1.000 0.000 409
BSIZE 11.156 11.000 3.100 20.000 5.000 410
BOARDIND 0.336 0.286 0.206 0.889 0.000 410
DUALITY 0.565 1.000 0.496 1.000 0.000 297
INST 0.184 0.171 0.144 0.632 0.000 410
3. Other Control Variables:
BIG_4 0.788 1.000 0.409 1.000 0.000 405
MANDATORY 0.268 0.000 0.444 1.000 0.000 410
LN_EMPLOY 9.439 9.602 1.726 12.427 4.094 410
(continued on next page)

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 3 (continued)

Variable Mean Median Std.Dev. Max Min N

Panel A: Depended Variables

BETA 0.778 0.697 0.483 2.739 −0.397 410

PAR (in pages) 130.681 127.000 73.703 346.000 14.000 410

This table presents descriptive statistics for our sample of firms. The period of interest is 2011–2015 and our sample consists of 82 international
firms from around the world listed in the IR database (http://examples.integratedreporting.org/reporters?start=A). ROA is the ret urn on assets in
fiscal year t calculated as net income during year t scaled by total assets at the beginning of the year. TOBIN’S_Q The ratio of the market value of
assets to the replacement costs of assets. Market value of assets = the sum of the market value of equity + (book value of assets – book value of
equity). Replacement cost of assets = book value of assets (Cheng, 2008; Jermias and Gani, 2014). MVPS is the market value of equity scaled by the
number of common shares MBR is market – to – book ratio in fiscal year t. It is calculated as the market value of equity divided by the book value of
equity at the end of the year. AR is the abnormal return equals to expected return minus actual return at the end of the year. Expected return
estimated according to CAPM Model. DDS is a dummy variable equal to 1 if a firm has gathered an IR disclosure score which is equal or greater than
the median price notifications percentage of all sampled firms and 0 if otherwise. For more details see Section 3.3.1. SIZE is the natural logarithm of
total assets at the end of fiscal year t-1. FIRM_SIZE is the natural logarithm of total revenue at the end of fiscal year t-1. ROE is the return on equity
in fiscal year t calculated as net income during year t scaled by total equity at the beginning of the year. CFO is the Operating cash flow in fiscal year
t scaled by total assets at the beginning of the year. CASH are the cash and short – term investment at the end of fiscal year t scaled by total assets at
the beginning of the year. TURNOVER is a measure of asset utilization that captures how efficiently the firm’s assets are used and is estimated as the
ratio of annual sales to total assets at the end of fiscal year t. DEBT_RATIO is a proxy of leverage equals to total liabilities to total assets at the end of
fiscal year t. LDEBT_RATIO is a proxy of leverage equals to total liabilities at the end of fiscal year t to total assets at the end of fiscal year t-1. BVPS
is the book value of equity scaled by the number of common shares. EBTPS is earnings before interest and taxation scaled by the number of common
shares. LEVERAGE is another proxy for firm’s leverage calculated as the ratio of total debt at the end of fiscal year t to total assets at the end of fiscal
year t-1. BVPS is the book value of equity scaled by the number of common shares. EBTPS is earnings before interest and taxation scaled by the
number of common shares. PPE is net properties, plant and equipment divided to total assets at the end of fiscal year t (Clarkson et al., 2008).
GROWTH is the growth in total assets from the beginning to the end of year t.). EPS is the earnings per share scaled by the stock price at the
beginning of the year. LAGEPS is one year lagged earnings per share scaled by the stock price at the beginning of the year. LNMV is the natural
logarithm of market value of equity. BMR Is book – to – market ratio in fiscal year t. It is calculated as the book value of equity divided by the market
value of equity at the end of the year. STDEVΔOI is the standard deviation of the annual change in the operating income. DIV is the dividend payout
ratio equal to the cash common dividends to net income at the end of fiscal year t. DAC are the discretionary accruals. The normal proportion of
accruals estimated by the Jones (1991) Model. DAC are the residuals that derived from the estimation of the normal accruals equation {DeFond and
Subramanyam, 1998; Bartov et al., 2001; Kothari et al., 2004; Garza-Gomez et al., 2006}. SMOOTHNESS is the ratio of the standard deviation of
operating income divided by the standard deviation of cash flow from operations. PERIDAU is the percentage of independent board members on the
audit committee. PERINBB is the percentage of nomination committee members who are independent from the Board. PERIDNC is the percentage
of independent directors on the nomination committee. CGC is a dummy variable equal to 1 if the firm has a corporate governance committee and 0
otherwise. BSIZE is the number of directors on the Board. BOARDIND is the board independence ratio measured as the number of independent
directors divided by total board size. DUALITY is a dummy variable which takes 1 when a firm’s CEO is also the chairman of the board of directors
and 0 otherwise. INST is the ratio of number of shares owned by institutional shareholders to total outstanding common shares. BIG_4 is a dummy
variable. When a firm is audited by a Big 4 accounting firm the dummy variable equal to 1 and 0 otherwise. MANDATORY is a dummy variable
which takes 1 when a firm mandatorily uses the IR and 0 when a firm voluntarily uses the IR. LN_EMPLOY is the natural logarithm of the number of
the employees. BETA is the market beta coefficient obtained from Datastream for each firm and for each year. PAR is the natural logarithm of the
pages’ number of the annual reports.

EBTPS, which are positive and highly significant at the 10% level or better. This finding can be interpreted as an increase in the book
value of equity and earnings before taxes that positively affected the market valuation of our firms during the five-year period
(2011–2015). Additionally, we observe that the variables LEVERAGE, PPE and CASH are positively and significantly associated at the
5% level or better with the dependent variable MVPS, implying that firms with high levels of leverage, operating performance and
liquidity display higher market valuation and confirming the findings of Iatridis (2012b) and Lourenco et al. (2014).
In comparison with firms with smaller numbers of employees, firms with a large number of employees tend to exhibit higher
market valuation levels. Firms in which an audit committee is considered as a corporate governance mechanism tend to realize a
higher valuation from the markets because the variable PERIDAU is associated positively and significantly at the 5% level or better
with MVPS. Stakeholders can more effectively evaluate large firms with a high proportion of fixed assets to total assets than they can
evaluate firms without these characteristics. Finally, firms in which the CEO is also chairman of the board tend to display lower
market valuation than do firms in which the CEO and the chairman of the board are different persons.

4.4. Quality of IR disclosure and abnormal stock returns

Eq. (3) tests the association between the predictive power of abnormal stock returns and the level of earnings quality from IR
disclosure. Table 7 provides evidence in favour of H3. Abnormal stock returns are proved to be positively associated with the level of
earnings quality under IR. The dependent variable is AR. The coefficient EPS is associated positively and significantly at the 1% level
with the abnormal stock returns. The coefficient DS x DAC (or DS x SMOOTHNESS) is negatively and significantly associated at the

25
 A. Pavlopoulos, et al.

Table 4
Correlation Matrix.
Correlation Matrix (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

*** ** * *** *** ** ***

(1)ROA 1.00 −0.03 −0.06 −0.04 0.27 0.04 0.05 0.08 0.02 0.21 0.17 0.12 0.16 −0.06 −0.05
(2)TOBIN’S_Q −0.05 1.00 0.05 0.99*** 0.10* 0.14** 0.06 −0.08 −0.03 −0.13** 0.16*** −0.14** −0.06 −0.44*** 0.04
(3)MVPS −0.07 0.50*** 1.00 0.06 0.09 0.09* 0.19*** −0.13*** 0.14** −0.26*** −0.05 0.03 0.12** 0.21*** 0.05
(4) MBR −0.17*** 0.87*** 0.36*** 1.00 0.11** 0.16*** 0.07 −0.07 −0.01 −0.14*** 0.16*** −0.14** −0.06 −0.43*** 0.08
(5)AR 0.18*** 0.15*** 0.11* 0.13** 1.00 0.21*** 0.26*** 0.06 0.08 0.40*** 0.22*** 0.06 0.03 0.27*** −0.05*
(6) DDS 0.02*** 0.15** −0.01 0.12** 0.19*** 1.00 0.73*** 0.18*** 0.14* 0.14** 0.24*** −0.05 0.10* −0.10* −0.10*
(7) DS 0.03*** 0.19*** 0.04** 0.14** 0.22*** 0.82*** 1.00 0.17*** 0.14** 0.05 0.33*** −0.01 0.25*** −0.08 −0.12*
(8) DUALITY 0.16*** 0.06 0.07 0.11** 0.02 0.18*** 0.20*** 1.00 0.20*** −0.04 −0.19*** −0.00 −0.14** 0.00 0.21***
(9) BSIZE 0.01 −0.19*** −0.08 −0.08 0.08 0.14** 0.17*** 0.19*** 1.00 −0.04 −0.23*** 0.03 −0.27*** 0.34*** 0.07
(10) BOARDIND 0.13** −0.03 −0.35*** 0.17*** 0.33*** 0.13** 0.06 −0.09 0.03 1.00 −0.21*** 0.00 −0.02 −0.30*** −0.01
(11) INST 0.21*** 0.13** −0.03 0.04 0.19*** 0.23*** 0.29*** −0.18*** −0.21*** 0.19*** 1.00 0.01 0.35*** −0.21*** −0.15***
(12) GROWTH 0.19*** 0.10* 0.12 0.08 0.08 −0.04 0.01 0.03 −0.09 −0.15*** 0.16*** 1.00 0.12** −0.11** −0.03

26
(13) TURNOVER 0.19** 0.08 0.24*** −0.04 0.11** 0.07 0.14** −0.02 −0.27*** −0.14** 0.26*** 0.18*** 1.00 −0.17*** 0.44***
(14) SIZE −0.10* −0.64*** −0.23*** −0.40*** 0.31*** −0.13** −0.15*** 0.02 0.37*** −0.19*** −0.25*** −0.13** −0.16*** 1.00 0.00
(15) LEVERAGE −0.09 0.17*** −0.10* 0.29*** 0.01 −0.14** −0.14** 0.19*** 0.08 0.00 −0.12** 0.03 −0.42*** −0.00 1.00

Spearman and Pearson correlations among performance and control variables are illustrated in the Table below. Below the diagonal the Spearman correlations are reported while Pearson correlations are
reported above the diagonal. ROA is the ret urn on assets in fiscal year t calculated as net income during year t scaled by total assets at the beginning of the year. TOBIN’S_Q is the ratio of the market value
of assets to the replacement costs of assets (Cheng, 2008; Jermias and Gani, 2014). MVPS is the market value of equity scaled by the number of common shares MBR is market – to – book ratio in fiscal
year t. It is calculated as the market value of equity divided by the book value of equity at the end of the year. AR is the abnormal return equals to expected return minus actual return at the end of the
year. Expected return estimated according to CAPM Model. DDS is a dummy variable equal to 1 if a firm has gathered an IR disclosure score which is equal or greater than the median price notifications
percentage of all sampled firms and 0 if otherwise. For more details see Section 3.3.1. DS is derived from the scale of total received score of each firm to the maximum score (equals to 28 observations
based on KING III checklist). DUALITY is a dummy variable which takes 1 when a firm’s CEO is also the chairman of the board of directors and 0 otherwise. BSIZE is the number of directors on the Board.
BOARDIND is the board independence ratio measured as the number of independent directors divided by total board size. INST is the ratio of number of shares owned by institutional shareholders to total
outstanding common shares. GROWTH is the growth in total assets from the beginning to the end of year t. TURNOVER is a measure of asset utilization that captures how efficiently the firm’s assets are
used and is estimated as the ratio of annual sales to total assets at the end of fiscal year t. SIZE is the natural logarithm of total assets at the end of fiscal year t-1. LEVERAGE is another proxy for firm’s
leverage calculated as the ratio of total debt at the end of fiscal year t to total assets at the end of fiscal year t−1. T – statistic and p – values (in the parentheses) for each estimated variable are provided in
columns right to these outputs. The superscripts ***, ** and * denote significance at 1%, 5% and 10% respectively.
Research in International Business and Finance 49 (2019) 13–40
A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 5
Quality of IR Disclosure and Firm’s Performance.
Dependent Variable: ROA

Model 1(a) Model 1(b)

Variable Predicted Sign Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values)

Intercept ? −0.1336* −1.83 (0.07) −0.1206*** −10.10 (0.00)
DDS + 0.0313** 2.02 (0.05)
DS + 0.0232** 2.17 (0.03)
DUALITY ? −0.0145** −2.09 (0.04) −0.0156** −2.41(0.01)
BSIZE + 0.0012 1.33 (0.18) 0.0005 0.79 (0.43)
BOARDIND + 0.0750*** 3.43 (0.00) 0.0714* 10.25 (0.08)
INST + 0.0793*** 3.27 (0.00) 0.0869** 10.42 (0.03)
GROWTH + 0.0138* 1.66 (0.09) 0.0121** 1.78 (0.05)
FIRM_SIZE + 0.0019 1.12 (0.26) 0.0017** 2.18(0.04)
DEBT_RATIO – −0.0519* −1.90 (0.06) −0.0114 −0.35 (0.72)
Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
Adj. R2 19.774% 18.312%
N 307 306

ROAi,t = a0 + a1DSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a5GROWTHi,t + a6FIRM_SIZEi,t + a7DEBT_RATIOi,t +

{Industry Effects} + {Year Effects} + vi,t 1(a).
ROAi,t = a0 + a1DDSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a5GROWTHi,t + a6FIRM_SIZEi,t + a7DEBT_RATIOi,t +
{Industry Effects} + {Year Effects} + vi,t 1(b).
The period of interest is 2011–2015. Our sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/
reporters?start=A). ROA is the ret urn on assets in fiscal year t calculated as net income during year t scaled by total assets at the beginning of the
year. DDS is a dummy variable equal to 1 if a firm has gathered an IR disclosure score which is equal or greater than the median price notifications
percentage of all sampled firms and 0 if otherwise. For more details see Section 3.3.1. DS is derived from the scale of total received score of each firm
to the maximum score (equals to 28 observations based on KING III checklist). DUALITY is a dummy variable which takes 1 when a firm’s CEO is
also the chairman of the board of directors and 0 otherwise. BSIZE is the number of directors on the Board. BOARDIND is the board independence
ratio measured as the number of independent directors divided by total board size. INST is the ratio of number of shares owned by institutional
shareholders to total outstanding common shares. GROWTH is the growth in total assets from the beginning to the end of year t. FIRM_SIZE is the
natural logarithm of total revenue at the end of fiscal year t-1. DEBT_RATIO is a proxy of leverage equals to total liabilities at the end of fiscal year t
to total assets at the end of fiscal year t−1. T – statistic and p – values (in the parentheses) for each estimated variable are provided in the columns
right to each estimated coefficient. The superscripts *, ** and *** denote significance at 10%, 5% and 1% respectively.

5% level with the dependent variable, indicating a significant improvement in the level of earnings quality from IR disclosure for
firms with high levels of earnings quality. The coefficient of interest is φ19. The AR and the DS x DAC x LNMV (or DS x SMOOTHNESS
x LNMV) are associated negatively and significantly at the 1% level (or 5% level), reflecting the positive relation between the firm’s
market value and the level of earnings quality under IR.
The coefficient DS x LNMV is positively and significantly associated at 1% level with the dependent variable, indicating a sig-
nificant improvement in the informativeness resulting from the IR disclosure quality in firms with high market value. The AR and the
DS x EPS x LNMV are associated positively and significantly at the 1% level, reflecting the positive relation between the firm’s market
value and the informativeness from IR disclosures.
Moreover, this implies that IR disclosure quality enhances earnings informativeness more for firms with a high market value.
Hence, firms with high market value may provide high-quality IR disclosure accounting information to shareholders. As shown by the
positive coefficient on DS x PERINBB x EPS, the percentage of nomination committee members who are independent from the board
is related positively and significantly at the 5% level to the earnings informativeness from the IR disclosure quality. Finally, the AR
and the DEBT_RATIO are associated negatively and significantly at 5% level, indicating the liquidity is positively related to firm
value. Our results confirm the findings of Barth et al. (2017).
Table 8 provides the results of the multivariate regression analyses for the four Models (6(a), 6(b), 6(c) and 6(d)). In Models 6(c)
and 6(d), we notice that H3a holds and is in line with the stakeholder theoretical framework. Both MANDATORY x DAC and
MANDATORY x SMOOTHNESS are negatively and significantly associated at the 5% level of better with DS, implying that in terms of
high earnings quality, IR is more effective for firms that use IR on a mandatory basis than for firms that use IR on a voluntary basis. A
possible interpretation of this finding is that the mandatory implementation of IR in the South African legislative framework has led
these firms to a more sophisticated implementation of the framework and to providing better quality accounting information. The
earnings quality of South African firms has a greater impact on the quality of IR disclosure than that of firms that have voluntarily
established IR disclosure. Our results support the findings of Velte (2018); Pududu and De Villiers (2016) and Jordaan et al. (2018).
With regard to our corporate governance variables as controls, BIG 4, DUALITY, INST, and CGC are positively and significantly
associated at the 1% level with DS in both regression Models. We found evidence to support the assumption that a better readability
of integrated reports can be enhanced when the following conditions exist: the firms are audited by a Big 4 accounting firm; the CEO
is also the chairman of the board of directors; the firms have a high percentage of institutional shareholders; and the firm has a
corporate governance committee. Furthermore, the variables of firm SIZE and MBR are positively related to DS, which is also in line

27
A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 6
Quality of IR Disclosure and Value Relevance.
Dependent Variable: MVPS Model 2(a) Model 2(b)

Variable Predicted Sign Coefficients T –Statistic (P-values) Coefficients T –Statistic (P-values)

Intercept ? −290.3655 −1.50 (0.13) −849.7267* −2.37 (0.02)

0
DDS + 168.9737** 2.84 (0.01)
DS + 788.2193*** 2.73 (0.01)
BVPS + 0.2460* 1.78 (0.08) 0.2390* 1.84 (0.07)
EBTPS + 2.9434** 2.15 (0.03) 2.9392** 2.23 (0.03)
LEVERAGE – 548.5296** 2.56 (0.01) 549.3768*** 2.62 (0.01)
ROE + −2.6200 −0.46 (0.65) 3.0648 0.53 (0.60)
CASH + 391.8818** 2.13 (0.03) 472.0811** 2.27 (0.02)
PPE – −262.6333** −1.96 (0.05) −185.3458 −1.61 (0.11)
SIZE + −36.7952** −2.12 (0.03) −32.7255** −2.03 (0.04)
DUALITY – −183.4787*** −2.64 (0.00) −201.14584*** −2.73 (0.01)
PERIDAU + 2.8582*** 2.65 (0.00) 2.4641** 2.61 (0.02)
LN_EMPLOY + 49.0839** 2.27 (0.02) 49.3140** 2.29 (0.03)
Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
Adj. R2 36.652% 38.098%
N 297 297

MVPSi,t = λ0 + λ1DDSi,t + λ2BVSi,t+ λ3EBITPSi,t + λ4LEVERAGEi,t + λ5ROE,t + λ6CASHi,t + λ7PPEi, + λ8SIZEi,t + λ9DUALITYi,t +
λ10PERIDAUi,t + λ11LN_EMPLOYi,t + {Industry Effects} + {Year Effects} + eit 2(a).
MVPSi,t = λ0 + λ1DSi,t + λ2BVSi,t+ λ3EBITPSi,t + λ4LEVERAGEi,t + λ5ROE,t + λ6CASHi,t + λ7PPEi, + λ8SIZEi,t + λ9DUALITYi,t +
λ10PERIDAUi,t + λ11LN_EMPLOYi,t + {Industry Effects} + {Year Effects} + eit 2(b).
The period of interest is 2011–2015. Our sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/
reporters?start=A). MVPS is the market value of equity scaled by the number of common shares. The (independent) variables of interest are the
DDS and the DS. DDS is a dummy variable equal to 1 if a firm has gathered an IR disclosure score which is equal or greater than the median price
notifications percentage of all sampled firms and 0 if otherwise. For more details see Section 3.3.1. DS is derived from the scale of total received
score of each firm to the maximum score (equals to 28 observations based on KING III checklist). All other variables are defined in the footnotes of
the Table 4.1. T – statistic and p – values (in the parentheses) for each estimated variable are provided in columns (4) and (6). The superscripts *, **
and *** denote significance at 10%, 5% and 1% respectively.

with our initial suggestions. Finally, the dividend payout ratio’s influence on DS is positive and significant at the 1% level.

5. Robustness checks

5.1. Quality of IR disclosure and firm’s performance

Following Lee and Yeo’s (2016) and Jermias and Gani’s (2014) methodology of sensitivity analysis, we use Tobin’s Q index
instead of operating profitability as a measure of market value. Based on Cheng (2008), we measure the Tobin’s Q ratio as the market
value of assets divided by the replacement cost of assets. The market value of assets equals the market value of equity plus the
difference between the book value of assets and the book value of equity. We use the book value of assets as a proxy for the
replacement cost of assets (Jermias and Gani, 2014). Using Tobin’s Q as a measure of firm value, Lee and Yeo (2016) find evidence of
a relationship between the degree of integration and market value and, further, that the relationship is stronger for firms with higher
degrees of organizational complexity and with higher external financing needs. Hence, we estimate the following Equation:

TOBIN’S_Qi,t = a0 + a1 λ1DISCLOSURE_QUALITYi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t +

a6GROWTHi,t + a7TURNOVERi,t + a8SIZEi,t + a9LEVERAGEi,t + a10STDEVΔOIi,t + {Industry Effects} + {Year Effects}
+ vi,t (7)

We create two Sub-Models, Model 7(a) and 7(b), in which we test the IR disclosure quality in two different ways. In Model 7(a),
we use the independent variable DDS, and in Model 7(b), the independent variable DS.

TOBIN’S_Qi,t = a0 + a1DDSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a6GROWTHi,t + a7TUR-

NOVERi,t + a8SIZEi,t + a9LEVERAGEi,t + a10STDEVΔOIi,t + {Industry Effects} + {Year Effects} + vi,t
(7a)

TOBIN’S_Qi,t = a0 + a1DSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a6GROWTHi,t + a7TURN-

OVERi,t + a8SIZEi,t + a9LEVERAGEi,t + a10STDEVΔOIi,t + {Industry Effects} + {Year Effects} + vi,t
(7b)

The coefficient of interest is α1. The independent variables DDS and DS are associated positively and significantly at the 1% level

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 7
IR Disclosure, Earnings Quality and Abnormal Stock Returns.
Dependent Variable: AR Model 3(a) Model 3(b)

Variable Predicted Sign Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values)

Intercept ? 0.0463*** 9.38 (0.00) 0.0465*** 9.66 (0.00)

DS + −0.0203*** −3.72 (0.00) −0.0198*** −3.76 (0.00)
EPS + 0.0001*** 5.30 (0.00) 0.0001*** 5.17 (0.00)
LAGEPS + 1.02E-05 0.37 (0.71) 5.54E-06 0.19 (0.84)
DS*EPS + 2.81E-06 0.69 (0.49) 2.35E-06 0.54 (0.59)
DS*LAGEPS + −1.47E-05 −0.39 (0.69) −6.56E-06 −0.16 (0.87)
LNMV + −0.0005 −0.94 (0.35) −0.0004 −0.82 (0.41)
DS*LNMV + 0.0007 1.39 (0.16) 0.0007 1.17 (0.24)
LNMV*EPS + −2.70E-05*** −4.45 (0.00) −2.73E-05*** −4.26 (0.00)
DS*EPS*LNMV + 0.0001*** 3.71(0.00) 0.0001*** 3.52 (0.00)
BMR + −0.0005** −2.08 (0.04) −0.0005** −2.52 (0.02)
DS*BMR + −4.38E-06 −1.14 (0.25) −2.92E-06 −0.71 (0.48)
PERINBB ? −0.0002*** −4.07 (0.00) −0.0002*** −3.86 (0.00)
DS*PERINBB + 0.0003*** 4.23 (0.00) 0.0003*** 4.01 (0.00)
DS*PERINBB*EPS + −1.24E-06** −2.20 (0.03) −1.35E-06** −2.42 (0.02)
DEBT_RATIO – −0.0026** −2.21 (0.03) −0.0027** −2.34 (0.02)
FIRM_SIZE + 0.0004*** 4.49 (0.00) 0.0004*** 4.60 (0.00)
SMOOTHNESS – −2.5263** −2.18 (0.03)
DS* SMOOTHNESS – −5.8777** −2.54 (0.01)
DS* SMOOTHNESS*LNMV – −0.2779** −2.10 (0.03)
DAC – 0.0007 0.06 (0.95)
DS*DAC – −0.0458** −2.08 (0.04)
DS*DAC*LNMV – −0.0005*** −2.63 (0.00)
Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
Adj. R2 34.7492% 34.1618%
N 293 293

This Table presents the estimations from the Equations below:

ARi,t = φ0 + φ1DSi,t+ φ2EPSi,t+ φ3LAGEPSi,t-1 + φ4(DSi,t*EPSi,t)+ φ5(DSi,t*LAGEPSi,t)+ φ6LNMVi,t + φ7(DSi,t*LNMVi,t)+ φ8(EPSi,t*LNMVi,t)+
φ9(DSi,t*EPSi,t*LNMVi,t)+ φ10BMRi,t+ φ11(DSi,t*MRBi,t)+ φ12PERINBBi,t+ φ13(DSi,t*PERINBBi,t)+ φ14(DSi,t*PERINBBi,t*EPSi,t)+
φ15DEBT_RATIOi,t+ φ16FIRM_SIZEi,t+ φ17SMOOTHNESSi,t+ φ18 (DSi,t*SMOOTHNESSi,t)+ φ19 (DSi,t*SMOOTHNESSi,t *LNMVi,t)+ {Industry
Effects}+ {Year Effects}+ vi,t (3a).
ARi,t = φ0 + φ1DSi,t+ φ2EPSi,t+ φ3LAGEPSi,t-1 + φ4(DSi,t*EPSi,t)+ φ5(DSi,t*LAGEPSi,t)+ φ6LNMVi,t+ φ7(DSi,t*LNMVi,t)+ φ8(EPSi,t*LNMVi,t)+
φ9(DSi,t*EPSi,t*LNMVi,t)+ φ10BMRi,t+ φ11(DSi,t*BMRi,t)+ φ12PERINBBi,t+ φ13(DSi,t*PERINBBi,t)+ φ14(DSi,t*PERINBBi,t*EPSi,t)+
φ15DEBT_RATIOi,t+ φ16FIRM_SIZEi,t+ φ17DACi,t+ φ18 (DSi,t*DACi,t)+ φ19 (DSi,t*DACi,t *LNMVi,t)+ {Industry Effects}+ {Year Effects}+ vi,t
(3b).
The period of interest is 2011–2015. The sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/
reporters?start=A). AR is the abnormal return equals to expected return minus actual return at the end of the year. Expected return estimated
according to CAPM model. DS is derived from the scale of total received score of each firm to the maximum score (equals to 28 observations based
on KING III checklist). EPS is the earnings per share scaled by the stock price at the beginning of the year. LAGEPS is one year lagged earnings per
share scaled by the stock price at the beginning of the year. LNMV is the natural logarithm of market value of equity. BMR Is book – to – market
ratio in fiscal year t. It is calculated as the book value of equity divided by the market value of equity at the end of the year. PERINBB is the
percentage of nomination committee members who are independent from the Board. DEBT_RATIO is a proxy of leverage equals to total liabilities at
the end of fiscal year t to total assets at the end of fiscal year t-1. FIRM_SIZE is the natural logarithm of total revenue at the end of fiscal year t-1.
SMOOTHNESS is the ratio of the standard deviation of operating income divided by the standard deviation of cash flow from operations. DAC are
the residuals that derived from the estimation of the normal accruals equation {DeFond and Subramanyam, 1998; Bartov et al., 2001; Kothari et al.,
2004; Garza-Gomez et al., 2006}. T – statistic and p – values (in the parentheses) for each estimated variable are provided in columns right to these
outputs The superscripts *, ** and *** denote significance at 10%, 5% and 1% respectively.

with Tobin’s Q, implying that compared to those that display a lower quality of IR disclosure, firms with a higher IR disclosure quality
tend to exhibit higher performance. Furthermore, as we expected, stronger corporate governance mechanisms lead to higher per-
formance. Specifically, from Table 9, our results align with the results of Table 5.
We observe that compared to firms in which the CEO and the chairman of the board are independent persons, firms in which the
CEO is simultaneously the chairman of the board of directors present lower performance. Additionally, compared to firms with a
smaller board size, firms with a high number of board members tend to display a lower performance, confirming the findings of
Weisbach (1988) and Jermias and Gani (2014).The negative association between board size and performance is also consistent with
the argument that a larger board takes more time and effort to reach consensus and encounters more free-riding problems among
directors (Cheng, 2008).
Additionally, our results indicate that institutional ownership (INST) is positive and significant at the 1% level, suggesting that
firms benefit from the monitoring activities of institutional shareholders and confirming the findings of Bushee (1998) and Cyert et al.
(2002). Furthermore, in both Models 7(a) and 7(b), our findings suggest that firm size is negatively and significantly associated with

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Table 8
IR Disclosure and Earnings Quality.
Dependent Variable: DS Model 6(a) Model 6(b) Model 6(c) Model 6(d)

Variable Predicted Sign Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values)

Intercept ? 0.2067*** 3.38 (0.00) 0.2232*** 3.33 (0.00) 0.5142*** 12.91 (0.00) 0.4899*** 14.81 (0.00)
MANDATORY ? 0.1219*** 14.49 (0.00) 0.1241*** 14.12 (0.00) 0.1204*** 7.03 (0.00) 0.1357*** 8.25 (0.00)
DAC – −0.1622* −1.76 (0.07) −0.2663* −1.78 (0.07)
MANDATORY*DAC ? 0.5323** 2.08 (0.04)
SMOOTHNESS + −0.1701* −1.76 (0.07) −0.2257** −2.18 (0.03)
MANDATORY*SMOOTHNESS ? 3.1618*** 3.05 (0.00)
SIZE + 0.0172*** 4.39 (0.00) 0.0169*** 4.26 (0.00) 0.0074*** 2.95 (0.00) 0.0083*** 2.65 (0.00)
MBR + 0.1380*** 6.04 (0.00) 0.1310*** 4.74 (0.00) 0.0012** 2.30 (0.02) 0.0014*** 4.44 (0.00)
BIG_4 + 0.0374*** 6.36 (0.00) 0.0378*** 6.97 (0.00) 0.0414*** 3.08 (0.00) 0.0405*** 8.34 (0.00)
ROE + −0.0069*** −4.23 (0.00) −0.0081*** −3.45 (0.00) −0.0160*** −3.36 (0.00) −0.0162*** −16.43 (0.00)
DUALITY + 0.0410*** 3.73 (0.00) 0.0371*** 3.27 (0.00) 0.0484*** 4.45 (0.00) 0.0427*** 3.82 (0.00)
INST + 0.1421*** 8.78 (0.00) 0.1390*** 6.90 (0.00) 0.1305*** 2.92 (0.00) 0.1122*** 4.89 (0.00)
CGC + 0.1153*** 8.68 (0.00) 0.1155*** 7.83 (0.00) 0.1155*** 9.46 (0.00) 0.1151*** 7.05 (0.00)

30
DIV + 0.1551*** 5.3 (0.00) 0.1029*** 3.82 (0.00) 0.1639*** 1.91 (0.00) 0.0639*** 3.56 (0.00)
Industry Fixed Effects Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes
Adj. R2 59.0756% 58.8605% 55.3164% 59.1523%
N 323 314 323 314

This Table presents the estimations from the Equations below:

DSi,t = κ0 + κ1MANDATORYi,t+ κ2DACi,t + κ3SIZEi,t-1 + κ4MBRi,t + κ5BIG_4i,t + κ6ROEi,t+ κ7DUALITYi,t+ κ8INSTi,t+ κ9CGCi,t+ κ10DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t (6a).
DSi,t = κ0 + κ1MANDATORYi,t+ κ2SMOOTHNESS,t + κ3SIZEi,t-1 + κ4MBRi,t + κ5BIG_4i,t + κ6ROEi,t+ κ7DUALITYi,t+ κ8INSTi,t+ κ9CGCi,t+ κ10DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t (6b).
DSi,t = κ0 + κ1MANDATORYi,t+ κ2DACi,t + κ3(MANDATORYi,t*DAC,t)+ κ4SIZEi,t-1 + κ5MBRi,t + κ6BIG_4i,t + κ7ROEi,t+ κ8DUALITYi,t+ κ9INSTi,t+ κ10CGCi,t+ κ11DIVi,t+ {Industry Effects}+ {Year
Effects}+ vi,t (6c).
DSi,t = κ0 + κ1MANDATORYi,t+ κ2SMOOTHNESS,t + κ3(MANDATORYi,t*SMOOTHNESSi,t)+ κ4SIZEi,t-1 + κ5MBRi,t + κ6BIG_4i,t + κ7ROEi,t+ κ8DUALITYi,t+ κ9INSTi,t+ κ10CGCi,t+ κ11DIVi,t+
{Industry Effects}+ {Year Effects}+ vi,t (6d).
The period of interest is 2011–2015. The sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/reporters?start=A). DS is derived from the scale of total
received score of each firm to the maximum score (equals to 28 observations based on KING III checklist). MANDATORY is a dummy variable which takes 1 when a firm mandatorily uses the IR and 0
when a firm voluntarily uses the IR. DAC are the residuals that derived from the estimation of the normal accruals equation {DeFond and Subramanyam, 1998; Bartov et al., 2001; Kothari et al., 2004;
Garza-Gomez et al., 2006}. SMOOTHNESS is the ratio of the standard deviation of operating income divided by the standard deviation of cash flow from operations. The rest variables are analyzed in
Table 4.1. T – statistic and p – values (in the parentheses) for each estimated variable are provided in columns right to these outputs The superscripts *, ** and *** denote significance at 10%, 5% and 1%
respectively.
Research in International Business and Finance 49 (2019) 13–40
A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 9
Quality of IR Disclosure and Firm’s Performance.
Dependent Variable: TOBIN’S_Q Model 7(a) Model 7(b)

Variable Predicted Sign Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values)

Intercept ? 36.3514*** 10.58 (0.00) 34.7441*** 12.19 (0.00)

DDS + 2.4997*** 10.99 (0.00)
DS + 5.0057*** 2.81 (0.00)
DUALITY – −3.0373*** −9.23 (0.00) −2.8466*** −12.72 (0.00)
BSIZE – −0.7281*** −23.76 (0.00) −0.7306*** −18.87 (0.00)
BOARDIND + −13.8845*** −12.74 (0.00) −13.3270*** −14.94 (0.00)
INST + 7.5070*** 7.72 (0.00) 8.0268*** 8.58 (0.00)
GROWTH + −1.6747*** −4.36 (0.00) −1.6766*** −3.92 (0.00)
TURNOVER + −2.6177*** −6.15 (0.00) −2.8789*** −5.75 (0.00)
SIZE + −2.8109*** −16.32 (0.00) −2.8516*** −17.57 (0.00)
LEVERAGE – −0.9419 −0.91 (0.37) −1.5931 −1.47 (0.14)
STDEVΔOI ? 1.646E-05*** 12.66 (0.00) 1.80E-05*** 10.90 (0.00)
Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
Adj. R2 34.129% 33.407%
N 306 306

This Table presents the estimations from the Equations below:

TOBIN’S_Qi,t = a0 + a1DDSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a6GROWTHi,t + a7TURNOVERi,t + a8SIZEi,t +
a9LEVERAGEi,t + a10STDEVΔOIi,t + {Industry Effects} + {Year Effects} + vi,t 7(a).
TOBIN’S_Qi,t = a0 + a1DSi,t + a2DUALITYi,t + α3BSIZEi,t + α4BOARDINDi,t + a5INSTi,t + a6GROWTHi,t + a7TURNOVERi,t + a8SIZEi,t +
a9LEVERAGEi,t + a10STDEVΔOIi,t + {Industry Effects} + {Year Effects} + vi,t 7(b).
The period of interest is 2011–2015. Our sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/
reporters?start=A). We use the TOBIN’S_Q ratio as a proxy for the firm’s performance. Specifically, TOBIN’S_Q is the ratio of the market value of
assets to the replacement costs of assets (Cheng, 2008; Jermias and Gani, 2014). The (independent) variables of interest are the DDS and the DS.
DDS is a dummy variable equal to 1 if a firm has gathered an IR disclosure score which is equal or greater than the median price notifications
percentage of all sampled firms and 0 if otherwise. For more details see Section 3.3.1. DS is derived from the scale of total received score of each firm
to the maximum score (equals to 28 observations based on KING III checklist). All other variables are defined in the footnotes of the Table 3. T –
statistic and p – values (in the parentheses) for each estimated variable are provided in columns right to these outputs The superscripts *, ** and ***
denote significance at 10%, 5% and 1% respectively.

performance. This result is consistent with the findings of previous studies (e.g., Jermias, 2007; Westphal, 1999).

5.2. Quality of IR disclosure and value relevance

To test the robustness of the value relevance of the summary accounting information, we introduce a different dependent variable
to capture the market predictions of a firm’s growth opportunities. Hence, the market-to-book ratio (MBR) is used as a value-
relevance indicator of the summary accounting information metric and is calculated by dividing the market capitalization to the net
book value. We test whether firms with high IR disclosure quality are positively related with the MBR. We estimate the following
Equation (8) based on Cormier and Magnan’s (2007) approach:

MBRi,t = λ0 + λ1DISCLOSURE_QUALITYi,t + λ2(1/BV)i,t+ λ3(EBIT/BV)i,t + λ4DEBT_RATIOi,t + λ5CFOi,t + λ6TUR-

NOVER i,t + λ7SIZEi,t + λ8DUALITYi,t + λ9BIG4i,t + λ10PARi,t + λ11LN(EMPLOYEES)i,t + {Industry Effects} + {Year
Effects} + eit (8)

We create two Sub-Models, Model 8(a) and 8(b), in which we test the IR disclosure quality in two different ways. In Equation (8a),
we use the independent variable DDS, and in Equation (8b), the independent variable DS.

MBRi,t = λ0 + λ1DDSi,t + λ2(1/BV)i,t+ λ3(EBIT/BV)i,t + λ4DEBT_RATIOi,t + λ5CFOi,t + λ6TURNOVER i,t + λ7SIZEi,t

+ λ8DUALITYi,t + λ9BIG4i,t + λ10PARi,t + λ11LN(EMPLOYEES)i,t + {Industry Effects} + {Year Effects} + eit
(8a)

MBRi,t = λ0 + λ1DSi,t + λ2(1/BV)i,t+ λ3(EBIT/BV)i,t + λ4DEBT_RATIOi,t + λ5CFOi,t + λ6TURNOVER i,t + λ7SIZEi,t +

λ8DUALITYi,t + λ9BIG4i,t + λ10PARi,t + λ11LN(EMPLOYEES)i,t + {Industry Effects} + {Year Effects} + eit
(8b)

In Table 10, we illustrate the sensitivity analysis results based on the second research hypothesis: we observe that firms that
disclose higher-quality IR accounting information are linked with increased value relevance, shown by the fact that both DDS and DS
are positively and significantly associated at the 5% level with the MBR. The remainder of the results are similar to those of Table 6.
Furthermore, the basic summary information focuses on the accounting variables 1/BV and EBIT/BV, which are positive and sig-
nificant at the 1% level. This finding can be interpreted as an increase in the book value of equity scaled by the number of common

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 10
Quality of IR Disclosure and Value Relevance.
Dependent Variable: MBR Model 8(a) Model 8(b)

Variable Predicted Sign Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values)

Intercept ? −0.4355 −0.61 (0.54) −0.8485 −1.04 (0.30)

DDS + 0.3048** 2.44 (0.01)
DS + 1.0311** 2.23 (0.03)
1/BV + 625.3700*** 5.58 (0.00) 630.1521*** 5.59 (0.00)
EBIT/BV + 0.4952*** 5.39 (0.00) 0.5045*** 5.44 (0.00)
DEBT_RATIO – 0.7462*** 2.82 (0.01) 0.6920*** 2.75 (0.01)
CFO + 1.15E-06* 1.71 (0.09) 1.08E-06* 1.68 (0.09)
TURNOVER + −0.0761 −1.15 (0.25) −0.1137 −1.55 (0.12)
SIZE + −0.0207 −0.55(0.57) −0.0193 −0.53 (0.59)
DUALITY – −0.3544** −2.57 (0.01) −0.3560** −2.56 (0.01)
BIG_4 ? −0.5297*** −2.64 (0.00) −0.5472*** −2.60 (0.01)
PAR + 0.1860** 2.15 (0.04) 0.1636** 2.06 (0.04)
LN_EMPLOY ? 0.0331 1.32 (0.18) 0.0322 1.28 (0.20)
Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
Adj. R2 61.009% 60.873%
N 298 298

MBRi,t = λ0 + λ1DDSi,t + + λ2(1/BV)i,t+ λ3(EBIT/BV)i,t + λ4DEBT_RATIOi,t + λ5CFOi,t + λ6TURNOVERi,t + λ7SIZEi,t + λ8DUALITYi,t +

λ9BIG4i,t + λ10PARi,t + λ11LN_EMPLOYi,t + {Industry Effects} + {Year Effects} + eit 8(a).
MBRi,t = λ0 + λ1DSi,t + + λ2(1/BV)i,t+ λ3(EBIT/BV)i,t + λ4DEBT_RATIOi,t + λ5CFOi,t + λ6TURNOVERi,t + λ7SIZEi,t + λ8DUALITYi,t +
λ9BIG4i,t + λ10PARi,t + λ11LN_EMPLOYi,t + {Industry Effects} + {Year Effects} + eit 8(b).
The period of interest is 2011–2015. Our sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/
reporters?start=A). MBR i is the market capitalization to the net book value. DDS is a dummy variable equal to 1 if a firm has gathered an IR
disclosure score which is equal or greater than the median price notifications percentage of all sampled firms and 0 if otherwise. For more details see
Section 3.3.1. DS is derived from the scale of total received score of each firm to the maximum score (equals to 28 observations based on KING III
checklist). 1/BV is the book value of equity scaled by the number of common shares. EBIT/BV is earnings before interest and taxation scaled by the
number of common shares. DEBT_RATIO is a proxy of leverage equals to total liabilities at the end of fiscal year t to total assets at the end of fiscal
year t-1. CFO is the Operating cash flow in fiscal year t scaled by total assets at the beginning of the year. TURNOVER is a measure of asset
utilization that captures how efficiently the firm’s assets are used and is estimated as the ratio of annual sales to total assets at the end of fiscal year t.
SIZE is the natural logarithm of total assets at the end of fiscal year t-1. DUALITY is a dummy variable which takes 1 when a firm’s CEO is also the
chairman of the board of directors and 0 otherwise. BIG_4 is a dummy variable equal to 1 if a firm is audited by a Big 4 accounting firm and 0 if
otherwise. PAR is the natural logarithm of the pages’ number of the annual reports. LN_EMPLOY is the natural logarithm of the number of the
employees. The superscripts *, ** and *** denote significance at 10%, 5% and 1% respectively.

shares and the earnings before interest and an increase in taxation scaled by the number of common shares that positively affect the
market valuation of our firms during the five-year period (2011–2015).
Additionally, we observe that the variables DEBT_RATIO and CFO are positively and significantly associated at the 10% level or
better with high levels of leverage and that the operating cash flows display a higher market valuation, confirming the findings of
Iatridis (2012b) and Lourenco et al. (2014). Stakeholders can better evaluate firms whose integrated reports contain a large number
of pages. Finally, compared to firms in which the CEO and the chairman are different persons, the firms in which the CEO is also the
chairman of the board tend to display lower market valuation.

5.3. IR disclosure, earnings quality and abnormal stock returns

Similar to Eq. (3) and (9) tests the association between the predictive power of abnormal stock returns and the level of earnings
quality of IR disclosures.

ARi,t = π0 + π1LNDSi,t+ π2EPSi,t+ π3LAGEPSi,t-1 + π4(LNDSi,t*EPSi,t)+ π5(LNDSi,t*LAGEPSi,t)+ π6LNMVi,t +

π7(LNDSi,t*LNMVi,t)+ π8(EPSi,t*LNMVi,t)+ π9(LNDSi,t*EPSi,t*LNMVi,t)+ π10MBRi,t+ π11(LNDSi,t*MRBi,t)+
π12PERINBBi,t+ π13(LNDSi,t*PERINBBi,t)+ π14(LNDSi,t*PERINBBi,t*EPSi,t)+ π15FIRM_SIZEi,t+ π16 EARNI-
NGS_QUALITYi,t+ π17 (LNDSi,t*EARNINGS_QUALITYi,t)+ π18 (LNDSi,t* EARNINGS_QUALITYi,t *LNMVi,t)+ {Industry
Effects}+ {Year Effects}+ vi,t (9)

For EARNINGS_QUALITY, because we use two proxies, SMOOTHNESS and DAC, we estimate the following two Sub-Models:

ARi,t = π0 + π1LNDSi,t+ π2EPSi,t+ π3LAGEPSi,t-1 + π4(LNDSi,t*EPSi,t)+ π5(LNDSi,t*LAGEPSi,t)+ π6LNMVi,t +

π7(LNDSi,t*LNMVi,t)+ π8(EPSi,t*LNMVi,t)+ π9(LNDSi,t*EPSi,t*LNMVi,t)+ π10MBRi,t+ π11(LNDSi,t*MRBi,t)+
π12PERINBBi,t+ π13(LNDSi,t*PERINBBi,t)+ π14(LNDSi,t*PERINBBi,t*EPSi,t)+ π15FIRM_SIZEi,t+ π16SMOOTHNESSi,t+
π17 (LNDSi,t*SMOOTHNESSi,t)+ π18 (LNDSi,t*SMOOTHNESSi,t *LNMVi,t)+ {Industry Effects}+ {Year Effects}+ vi,t
(9a)

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table 11
IR Disclosure, Earnings Quality and Abnormal Stock Returns.
Dependent Variable: AR Model 9(a) Model 9(b)

Variable Predicted Sign Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values)

Intercept ? −0.0387*** −5.82 (0.00) −0.0343*** −3.89 (0.00)

LNDS + 0.0031 0.13 (0.89) 0.0098 0.38 (0.70)
EPS + 3.29E-05 0.21 (0.84) −2.51E-05 −0.14 (0.88)
LAGEPS + 0.0001** 2.26 (0.02) 0.0002** 2.16 (0.03)
LNDS*EPS + −0.0018* −1.90 (0.06) −0.0018 −2.33 (0.02)
LNDS*LAGEPS + 0.0002 0.93 (0.35) 0.0002 1.26 (0.21)
LNMV + 0.0070 8.84 (0.00) 0.0067 7.18 (0.00)
LNDS*LNMV + 9.96E-07 0.01 (0.99) −0.0006 −0.23 (0.81)
LNMV*EPS + 1.63E-07 0.02 (0.98) 2.56E-06 0.25 (0.80)
LNDS*EPS*LNMV + 0.0002** 1.95(0.05) 0.0001** 2.20 (0.03)
MRB + −0.0046*** −3.46 (0.00) −0.0045*** −3.17 (0.00)
LNDS*MRB + −0.0001 −1.43 (0.15) −0.0003** −2.35 (0.02)
PERINBB ? −1.38E-05 −0.16 (0.87) −2.26E-05 −0.25 (0.79)
LNDS*PERINBB + 8.15E-05 0.30 (0.76) 1.12E-05 0.04 (0.96)
LNDS*PERINBB*EPS + 9.62E-06 1.45 (0.15) 9.52E-06* 1.70 (0.09)
FIRM_SIZE + −0.0026*** 4.01 (0.00) −0.0027*** −5.27 (0.00)
SMOOTHNESS – −0.9155* −1.64 (0.10)
LNDS*SMOOTHNESS – −2.5263** −2.17 (0.03)
LNDS*SMOOTHNESS*LNMV – −3.5909*** −3.18 (0.00)
DAC – 0.0208 1.01 (0.31)
LNDS*DAC – −0.8265** −2.35 (0.02)
LNDS*DAC*LNMV – −0.0985*** −2.70 (0.00)
Industry Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
Adj. R2 63.9074% 55.1866%
N 293 293

This Table presents the estimations from the Equations below:

ARi,t = π0 + π1LNDSi,t+ π2EPSi,t+ π3LAGEPSi,t-1 + π4(LNDSi,t*EPSi,t)+ π5(LNDSi,t*LAGEPSi,t)+ π6LNMVi,t + π7(LNDSi,t*LNMVi,t)+
π8(EPSi,t*LNMVi,t)+ π9(LNDSi,t*EPSi,t*LNMVi,t)+ π10MBRi,t+ π11(LNDSi,t*MRBi,t)+ π12PERINBBi,t+ π13(LNDSi,t*PERINBBi,t)+
π14(LNDSi,t*PERINBBi,t*EPSi,t)+ π15FIRM_SIZEi,t+ π16SMOOTHNESSi,t+ π17 (LNDSi,t*SMOOTHNESSi,t)+ π18 (LNDSi,t*SMOOTHNESSi,t *LNMVi,t)
+ {Industry Effects}+ {Year Effects}+ vi,t (9a).
ARi,t = π0 + π1LNDSi,t+ π2EPSi,t+ π3LAGEPSi,t-1 + π4(LNDSi,t*EPSi,t)+ π5(LNDSi,t*LAGEPSi,t)+ π6LNMVi,t+ π7(LNDSi,t*LNMVi,t)+
π8(EPSi,t*LNMVi,t)+ π9(LNDSi,t*EPSi,t*LNMVi,t)+ π10MBRi,t+ π11(LNDSi,t*MRBi,t)+ π12PERINBBi,t+ π13(LNDSi,t*PERINBBi,t)+
π14(LNDSi,t*PERINBBi,t*EPSi,t)+ π15FIRM_SIZEi,t+ π16DACi,t+ π17 (LNDSi,t*DACi,t)+ π18 (LNDSi,t*DACi,t *LNMVi,t)+ {Industry Effects}+ {Year
Effects}+ vi,t (9b).
The period of interest is 2011–2015. The sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/
reporters?start=A). AR is the abnormal return equals to expected return minus actual return at the end of the year. Expected return estimated
according to CAPM model. LNDS is the natural logarithm of DS. EPS is the earnings per share scaled by the stock price at the beginning of the year.
LAGEPS is one year lagged earnings per share scaled by the stock price at the beginning of the year. LNMV is the natural logarithm of market value
of equity. MBR Is market – to – book ratio in fiscal year t. It is calculated as the market value of equity divided by the book value of equity at the end
of the year. PERINBB is the percentage of nomination committee members who are independent from the Board. FIRM_SIZE is the natural loga-
rithm of total revenue at the end of fiscal year t-1. SMOOTHNESS is the ratio of the standard deviation of operating income divided by the standard
deviation of cash flow from operations. DAC are the residuals that derived from the estimation of the normal accruals equation {DeFond and
Subramanyam, 1998; Bartov et al., 2001; Kothari et al., 2004; Garza-Gomez et al., 2006}. T – statistic and p – values (in the parentheses) for each
estimated variable are provided in columns right to these outputs The superscripts *, ** and *** denote significance at 10%, 5% and 1% respectively.

ARi,t = π0 + π1LNDSi,t+ π2EPSi,t+ π3LAGEPSi,t-1 + π4(LNDSi,t*EPSi,t)+ π5(LNDSi,t*LAGEPSi,t)+ π6LNMVi,t+

π7(LNDSi,t*LNMVi,t)+ π8(EPSi,t*LNMVi,t)+ π9(LNDSi,t*EPSi,t*LNMVi,t)+ π10MBRi,t+ π11(LNDSi,t*MRBi,t)+
π12PERINBBi,t+ π13(LNDSi,t*PERINBBi,t)+ π14(LNDSi,t*PERINBBi,t*EPSi,t)+ π15FIRM_SIZEi,t+ π16DACi,t+ π17
(LNDSi,t*DACi,t)+ π18 (LNDSi,t*DACi,t *LNMVi,t)+ {Industry Effects}+ {Year Effects}+ vi,t
(9b)

The robustness of Eq. (9) is checked in Table 11. We verify the estimation results of Eq. (9) by using the natural logarithm of
the checklist score (LNDS) to estimate the IR disclosure quality for each firm. The results are reported in Table 11 and are
similar to those reported in Table 7. Specifically, the coefficient of LAGEPS is associated positively and significantly at the 1%
level with the abnormal stock returns, indicating the positive association between the lagged earnings per share and the
abnormal stock returns. The coefficient LNDS x MRB is positively and significantly associated at a 5% level with the dependent
variable, indicating a significant improvement in the informativeness from the IR disclosures of firms with high growth op-
portunities.
The coefficient LNDS x DAC (or LNDS x SMOOTHNESS) is negatively and significantly associated with the dependent variable at a

33
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Table 12
IR Disclosure and Earnings Quality.
Dependent Variable: LNDS Model 10(a) Model 10(b) Model 10(c) Model 10(d)

Variable Predicted Sign Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values) Coefficient T –Statistic (P-values)

Intercept ? 1.069*** 15.17 (0.00) 1.0789*** 7.90 (0.00) 0.6491*** 11.56 (0.00) 0.6752*** 15.77 (0.00)
MANDATORY ? 0.1558*** 16.33 (0.00) 0.1647*** 4.04 (0.00) 0.1541*** 6.39 (0.00) 0.1715*** 8.84 (0.00)
DAC – −0.2253* −1.64 (0.06) −0.3485* −1.64 (0.09)
MANDATORY*DAC ? 0.7180** 1.99 (0.05)
SMOOTHNESS + −0.0016* −1.91(0.06) −0.5340*** −3.39 (0.00)
MANDATORY*SMOOTHNESS ? 3.4123** 2.38 (0.02)
SIZE + 0.0228*** 4.79 (0.00) 0.0236*** 3.00 (0.00) 0.0096*** 2.69 (0.00) 0.0105*** 2.61 (0.00)
MBR + 0.1948*** 7.46 (0.00) 0.2013*** 3.51 (0.00) 0.0018** 2.55 (0.01) 0.0020*** 4.99 (0.00)
BIG_4 + 0.0550*** 5.29 (0.00) 0.0562* 1.91 (0.05) 0.0061*** 3.20 (0.00) 0.0587*** 6.32 (0.00)
ROE + −0.0081*** −4.23 (0.00) −0.0088* −1.79 (0.07) −0.0211*** −3.14 (0.00) −0.0213*** −15.55 (0.00)
DUALITY + 0.0748*** 5.08(0.00) 0.0673** 2.30 (0.02) 0.0838*** 5.47 (0.00) 0.0754*** 4.86 (0.00)
INST + 0.1861*** 8.08 (0.00) 0.1708* 1.67 (0.09) 0.1667*** 2.65 (0.00) 0.1434*** 4.53 (0.00)

34
CGC + 0.1711*** 9.10 (0.00) 0.1704*** 6.72 (0.00) 0.1731*** 10.06 (0.00) 0.1732*** 7.65 (0.00)
DIV + 0.2523*** 6.51 (0.00) 0.1726 1.39 (0.16) 0.2521** 1.91 (0.03) 0.1230*** 4.08 (0.00)
Industry/ Year Fixed Effects Yes/Yes Yes/Yes Yes/Yes Yes/Yes
Adj. R2 59.2163% 60.0611% 59.8875% 59.1523%
N 323 306 323 314

This Table presents the estimations from the Equations below:

LNDSi,t = γ0 + γ1MANDATORYi,t+ γ2DACi,t + γ3SIZEi,t-1 + γ4MBRi,t + γ5BIG_4i,t + γ6ROEi,t+ γ7DUALITYi,t+ γ8INSTi,t+ κ9CGCi,t+ κ10DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t (10a).
LNDSi,t = γ0 + γ1MANDATORYi,t+ γ2SMOOTHNESS,t + γ3SIZEi,t-1 + γ4MBRi,t + γ5BIG_4i,t + γ6ROEi,t+ γ7DUALITYi,t+ γ8INSTi,t+ γ9CGCi,t+ γ10DIVi,t+ {Industry Effects}+ {Year Effects}+ vi,t
(10b).
LNDSi,t = γ0 + γ1MANDATORYi,t+ γ2DACi,t + γ3(MANDATORYi,t*DAC,t)+ γ4SIZEi,t-1 + γ5MBRi,t + γ6BIG_4i,t + γ7ROEi,t+ γ8DUALITYi,t+ γ9INSTi,t+ κ10CGCi,t+ κ11DIVi,t+ {Industry Effects}+
{Year Effects}+ vi,t (10c).
LNDSi,t = γ0 + γ1MANDATORYi,t+ γ2SMOOTHNESS,t + γ3(MANDATORYi,t*SMOOTHNESSi,t)+ γ4SIZEi,t-1 + γ5MBRi,t + γ6BIG_4i,t + γ7ROEi,t+ γ8DUALITYi,t+ γ9INSTi,t+ γ10CGCi,t+ γ11DIVi,t+
{Industry Effects}+ {Year Effects}+ vi,t (10d).
The period of interest is 2011–2015. The sample consists of 82 international firms listed in IR database (http://examples.integratedreporting.org/reporters?start=A). LNDS is the natural logarithm of DS.
MANDATORY is a dummy variable which takes 1 when a firm mandatorily uses the IR and 0 when a firm voluntarily uses the IR. DAC are the residuals that derived from the estimation of the normal
accruals equation {DeFond and Subramanyam, 1998; Bartov et al., 2001; Kothari et al., 2004; Garza-Gomez et al., 2006}. SMOOTHNESS is the ratio of the standard deviation of operating income divided
by the standard deviation of cash flow from operations. The rest variables are analyzed in Table 3. The superscripts *, ** and *** denote significance at 10%, 5% and 1% respectively.
Research in International Business and Finance 49 (2019) 13–40
A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

5% level, indicating a significant improvement in the level of earnings quality from IR disclosures of firms with high levels of earnings
quality. The coefficient of interest is π18. The AR and the LNDS x DAC x LNMV (or LNDS x SMOOTHNESS x LNMV) are associated
negatively and significantly at the 1% level, reflecting the positive relation between the firm’s market value and the level of earnings
quality of IR disclosures. Moreover, the AR and LNDS x EPS x LNMV are associated positively and significantly at the 5% level,
reflecting the positive relation between the firm’s market value and the informativeness resulting from the IR disclosure quality. This
confirms the H3, where the predictive power of future stock returns is positively related to the informativeness from the IR disclosure
quality. Our results confirm the findings of Barth et al. (2017).
Next, we perform additional analyses to check the robustness of our results reported in the Section 4.4. Initially, we verify the
estimation results of Eq. (6) by using the natural logarithm of the checklist score (LNDS) to estimate the IR disclosure quality for each
firm. The results are reported in Table 8 and are similar to those reported in Table 12. Specifically, both MANDATORY x DAC and
MANDATORY x SMOOTHNESS are negatively and significantly associated at the 1% level or better with DS, implying that firms that
in terms of high earnings quality, IR is more effective for firms that use IR on a mandatory basis than for firms that use IR on a
voluntary basis. Furthermore, the statistical significance and signs of the other control variables remain the same with Table 8.

6. Conclusions

This study examines the relation between IR and firm market valuation. We exploit the IR disclosure level in an international
sample of 82 nonfinancial firms that complied with IR in the period of the application year (2011) and four years after (until 2015).
We interpret the IR disclosure quality by applying two different estimated indexes, which are symbolized as DS and DDS, consistent
with the King III report and the IIRC framework. Our results align with Lee and Yeo (2016), a PRI (2013) survey, and a study
conducted by Nanyang Business School (2014)6 . Similarly, we find a positive and statistically significant association between the IR
disclosure quality index (DS and DDS) and ROA after controlling for various firm characteristics, such as firm size, sales growth, and
leverage, and for corporate governance mechanisms, such as the number of directorss on the board, the ratio of number of shares
owned by institutional shareholders to total outstanding common shares, and the board independence ratio, which is measured as the
number of independent directors divided by total board size. This study highlights IR as a corporate disclosure philosophy whose goal
is to provide information about a firm’s future value creation, which is related to the firm’s long-term strategy (De Villiers et al.,
2017).
We find that firms with a high IR disclosure quality tend to display high market value per share. Our findings suggest that higher
market valuation appears in firms with high levels of leverage, profitability and liquidity. More valid and effective valuation occurs in
large firms with a high proportion of fixed assets to total assets, in firms with a large number of employees, and in firms that establish
audit committees. Our findings also suggest the value relevance of permanent changes, which support the long-term goal of the IRCC
by clarifying a company’s approach to its long-term strategic opportunities and risks, to securing long-term funding and to developing
long-term endorsements from supra-national bodies. These integrated approaches not only enable a complete estimation of fair value
but also improve valuation models.
Finally, we investigate the impact of IR implementation on the predictive value of abnormal stock returns. We highlight that the
use of IR empowers stakeholder theory. Stakeholder theory can explain the accountability of the board not only to shareholders but
also to other interested parts (Freeman, 1983, p. 248). Confirming the findings of Barth et al. (2017), in a mixed sample of firms that
apply IR either on a mandatory or a voluntary basis, we enrich the understanding on IR by providing empirical evidence that since the
introduction of IR, firms with high levels of IR disclosure and earnings quality have grater abnormal returns. We continue our analysis
to check the relation between earnings management and the quality of IR disclosure, comparing firms that mandatorily apply IR with
those that voluntarily apply it. Based on the methodology of Velte (2018); Pududu and De Villiers (2016) and Jordaan et al. (2018),
we conclude that IR is more effective in terms of high earnings quality for firms that use IR on a mandatory basis than for firms that
use it on a voluntary basis.

6.1. Implications

Previous literature argued that regulators and standard setters do not fully understand the reasons for and consequences of IR
adoption (i.e., De Villiers et al., 2017; Chaidali and Jones, 2017). Hence, this research has implications for regulators and accounting
standards setters when they are faced with firms applying IR. The findings of this research give insights to policy-makers and
accounting regulators in aiding their understanding of the effects of IR on a firm’s performance, value relevance, and on the pre-
dictive power of stock returns. The results will be useful for European and international accounting standard setters and other
authorities and provide insight into how a satisfactory level of economic integration can be achieved through the better use of IR
disclosures. These interdependent changes will reflect the trends of globalization and higher expectations for corporate transparency
and accountability, as defined by the IR concepts.
At the theoretical level, this research adds to the new and limited body of interpretive research, which illustrates the assurance
implications of an emerging reporting practice (see De Villiers et al., 2014; Simnett and Huggins, 2015; Maroun, 2017). IR is a new
reporting method that proposes the integration of financial and non-financial information in a single report (De Villiers et al., 2017).
As mentioned in the previous sections, it was established in 2011, and has provided a first step for researchers and investors to

6
See http://integratedreporting.org/wp-content/uploads/2014/04/Integrated-Reporting-and-corporate-valuation-Media-28-April-2014_NTU.pdf.

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

acquire an idea about the association between IR disclosure quality (based on King III report) and a firm’s valuation.
In addition to making more accurate non-financial information available for data vendors, IR facilitates a higher level of sta-
keholder trust, a better identification of opportunities and better resource allocation decisions, including decisions on cost reductions
(Dixon et al., 2004; Moroney et al., 2012). IR creates closer engagement with investors and other stakeholders and includes the
employees’ current and prospective progress information, which can help the employees to upgrade their skills (Simnett and Huggins,
2015). IR is in its early stages and, in practice, is still under development. Nevertheless, this type of reporting can be used in all
industries, in private and public firms and in all types of organizations. Its application is intended to improve communication between
companies and capital markets. Combining financial and non-financial information highlights a firm’s strategy performance, un-
derscores the interdependency of information (KPMG, 2011) and can be a useful mechanism for firms (Adams and Frost, 2008). The
use of IR by both firms and organizations will enhance their ability to raise capital by attracting new long-time investors with ESG
consciousness. This should improve their capital adequacy and financial and non-financial profile.
IR implementation will create expectations regarding a higher degree of economic integration. In the future, IR could eventually
replace existing corporate reports. Organizations should be able to decide the way in which information will be presented; for
instance, information could include an overarching document with various other reports or a single stand-alone document covering
all material aspects (Ernst and Young, 2014). Other groups that benefit from this research are professional accountants and aca-
demics.

6.2. Contribution

This study includes several contributions and contributes to the global literature because it provides evidence for a higher degree
of economic integration through IR implementation. It contributes to the growing evidence that IR is an effective accounting tool and
that its use is likely to be rewarded by capital markets because it helps firms to rethink and integrate their strategies and business
models in line with stakeholder expectations. Through communication and transparency, IR can be used effectively to interpret the
advantages of using the King III report principles and to explain to investors how an organization creates value over time (IIRC,
2015). IR is aligned with stakeholder theory. The findings of this study suggest that stronger corporate governance mechanisms lead
to higher performance. It is observed that compared to firms in which the CEO and the chairman of the board are independent
persons, firms in which the CEO is simultaneously chairman of the board of directors present higher performance. Firms with a high
proportion of independent and non-executive board members on nomination and audit committees tend to display higher IR dis-
closure quality (Zahra and Stanton 1988; Core et al., 1999; Haniffa and Cooke, 2005; Huafang and Jianguo, 2007; Donnelly and
Mulcahy, 2008)
We examine how the level of IR disclosure quality improves the view of the value relevance of summary accounting information
(i.e., the market value of equity). The study explored how the use of an integrated analysis can create value by testing the behaviour
of a multiple-based valuation model and by focusing on the predictive value of future stock returns. In addition to contributing to the
academic debate on the market valuation implications of IR performance, our findings support the calls for more IR, showing that the
interaction of financial and non-financial information has market valuation implications (Baboukardos and Rimmel, 2016).
We find that the more effective use of IR has resulted in abnormal stock returns being positively associated with earnings quality.
This survey is accepted as valid, and the results suggest that IR provides useful accounting information, reflecting the links between
King III report principles and financial performance. In addition, the results support the theory that the value of these links will
improve the level of IR disclosure and encourage the introduction of integrated reports. The results complement the findings of
Bernardi and Stark (2018), who found a positive relation between the high level of ESG disclosures and the IR disclosure level,
concluding that IR improves the analysts’ estimations regarding the value and performance of a firm. In essence, keeping other factors
constant, it is concluded that high IR disclosure quality is not only linked to an increase in market valuation in firms that use IR on a
mandatory basis (see Bernardi and Stark, 2018; Lee and Yeo, 2016; Atkins and Maroun, 2015) but also in firms that voluntarily decide
to implement IR.

Appendix

A Checklist
The checklist below assigns weightings to the respective chapters of King III with criteria for awarding the grades selected. Each
firm was evaluated independently. The detailed grade sheets are not reproduced here but are included in the full recommendations

Table A1
XXX.
Categories of checklist

Category Observations Percentage

A 24-28 86%- 100%

B 20-24 72%- 85%
C 16-20 58%- 71%
D 12-16 42%- 57%

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A. Pavlopoulos, et al. Research in International Business and Finance 49 (2019) 13–40

Table A2
XXX.
KING III – Reference

Chapter Title Summary

I. Ethical leadership & corporate This chapter focuses on the corporate governance information. There are three questions that analyze
citizenship the ethical leadership policy and firms' management.
II. Boards & directors This chapter provides information relevant to boards and directors. Specifically, it is given information
about strategy, risk, performance and who is chairman. Six questions are answered in this chapter.
III. Audit committees This chapter collects information about audit committees. It checks if the Board has ensured that the
Company has an effective and independent audit committee. Six questions are answered in this chapter.
IV. The governance of risk This chapter is checked the governance of risk. The board should take the necessary steps to ensure that
there are processes in place to ensure complete, timely, relevant accurate. Three questions are
answered in this chapter.
V. Governance of information technology The board should take the necessary steps to ensure that there are processes in place to accessible IT
reporting by the board in the integrated report. One question is answered in this chapter.
VI. Compliance with laws, codes, rules and The board should disclose in the integrated report the applicable non-binding rules, codes and
standards standards to which the company adheres to on a voluntary basis. One question is answered in this
chapter.
VII. Internal audit If the board in its discretion decides not to establish an internal audit function, full reasons should be
disclosed in the company’s integrated report, with an explanation of how adequate assurance of an
effective governance, risk management and internal control environment has been maintained. One
question is answered in this chapter.
VIII. Governing shareholder relationship The board should disclose in its integrated report the nature of its dealings with its stakeholders and the
outcomes of these dealings. One question is answered in this chapter.
IX. IR and Disclosure This chapter checks the financial and the sustainability disclosure. Nine questions are answered in this
chapter.

regarding disclosure from both the King III Report and the King III Code (IoD, 2009; 2016). All the checklist results were collected in
one worksheet.
In Table A1, a checklist was created to record the quality of accounting information of companies in their financial reports,
reflecting the quality of accounting information of firms that use Integrated Reporting. Firms are then ranked in four different
categories and are classified from A to D. The checklist included twenty-eight questions-observations. For example, as shown in Table
A1, the top category was named A and contained firms that showed scores between 86% and 100%.
Our assessment emphasizes both overall compliance and disclosure quality in nine areas. As shown in Table A2, these include: 1)
ethical leadership and corporate citizenship, 2) boards and directors, 3) audit committees, 4) governance of risk, 5) governance of
information technology, 6) compliance with laws, codes, rules and standards, 7) internal audit, 8) governing shareholder relation-
ships, and 9) IR and disclosure.
The IR is expected to be focused on substance over form and should disclose information that is complete, timely, relevant,
accurate, honest, accessible and comparable with the past performance of the company and should also contain forward-looking
information.

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