Integrated reporting and cost of capital: The moderating role of cultural dimensions

• Author: Alessandro Cortesi,Luigi Vena,Salvatore Sciascia
• DOI: http://doi.org/10.1111/jifm.12113
• Date: 01 June 2020
• Published date: 01 June 2020

J Int Financ Manage Account. 2020;31:191–214.

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191

wileyonlinelibrary.com/journal/jifm

DOI: 10.1111/jifm.12113

ORIGINAL ARTICLE

Integrated reporting and cost of capital: The

moderating role of cultural dimensions

LuigiVena

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SalvatoreSciascia

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AlessandroCortesi

© 2019 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

LIUC – Università Cattaneo, Castellanza,

Italy

Correspondence

Luigi Vena, LIUC – Università Cattaneo,

Castellanza, VA, Italy.

Email: lvena@liuc.it

Abstract

Since its introduction, integrated reporting (IR) has trig-

gered a rich debate covering several aspects, from the

structure and the features of a document to the effects of

its publication. Very recently, scholars have examined the

negative relationship between IR and the cost of capital for

firms, completely missing the opportunity to understand

whether this fact is contingent on the cultural context that

adopting companies operate in. We fill this gap by resorting

to a panel sample of 211 adopters from 31 countries over the

period spanning 2009–2017, counting 1,455 observations.

Our evidence confirms that adopters, on average, benefit

from a 1.4% decrease in the cost of capital. Yet, more im-

portantly, IR effectiveness is exalted in countries with low

power distance, strong collectivism values, and high level

of masculinity, while uncertainty avoidance, long-term ori-

entation, and indulgence do not seem to play any moderat-

ing role.

KEYWORDS

capital allocation, cost of capital, cultural dimensions, disclosure policy,

Hofstede, information asymmetries, integrated reporting

JEL CLASSIFICATION

G14; M14; M41; M48; Q56

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VENA Et Al.

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INTRODUCTION

In response to the information asymmetries that affect and harm capital markets (Akerlof, 1970), com-

panies have constantly increased the amount of information disclosed over time to foster the optimal

funding of investment opportunities (Healy & Palepu, 2001; Lambert, Leuz, & Verrecchia, 2011),

thus reducing the cost of capital (Easley & O'Hara, 2004; Sami & Zhou, 2008). Within this context,

the frontier of firm reporting is represented by integrated reporting (henceforth IR): By merging fi-

nancial performance with the environmental, social, and governance aspects, it aims to coherently,

cohesively, and comprehensively provide information on a firm's ability to create value over time

(Eccles & Krzus, 2010; IIRC, 2011, 2013).

Since its introduction, such a new reporting framework has triggered a rich debate that takes on

several issues (Cheng, Green, Conradie, Konishi, & Romi, 2014). Some scholars have focused on the

ability of IR to promote sustainability accounting (Adams, 2017; Adams, Potter, Singh, & York, 2016;

Brown & Dillard, 2014; Flower, 2015; Mervelskemper & Streit, 2017; Thomson, 2015). Some others

have discussed the framework proposed by the IIRC (2013) in terms of relationship with other reports

(Maas, Schaltegger, & Crutzen, 2016), objectives (Brown & Dillard, 2014; Dumay, Bernardi, Guthrie,

& Demartini, 2016; Stacchezzini, Melloni, & Lai, 2016), content (Haller & van Staden, 2014), and

effects on transparency of tax disclosure (Venter, Stiglingh, & Smit, 2016). A stream of literature

(e.g., Frìas-Aceituno, Rodrìguez-Ariza, & Garcìa-Sànchez, 2013; Frìas-Aceituno, Rodrìguez-Ariza,

& Garcìa-Sànchez, 2014; Garcìa-Sànchez, Rodrìguez-Ariza, & Frìas-Aceituno, 2013) analyzed the

factors that alter the decision of companies to adopt and publish the new reporting scheme, while an-

other one investigates the effects of IR adoption. In this regard, despite the fact that some companies

may focus on appearances rather than content, without increasing the quality of disclosure (Pistoni,

Songini, & Bavagnoli, 2018), the new framework seems to positively affect the market value of adopt-

ing companies, both in a mandatory adoption context (Baboukardos & Rimmel, 2016; Lee & Yeo,

2016) and in a voluntary adoption one (Cortesi & Vena, 2019). These studies offer empirical evidence

that IR enhances the quality of disclosure, providing a more detailed picture of the liabilities and risks

for firms. A very recent strand of literature has analyzed the relationship between IR adoption and

cost of capital (Garcìa-Sànchez & Noguera-Gàmez, 2017; Zhou, Simnett, & Green, 2017), providing

empirical evidence of the benefits of IR in this respect, too.

Yet, within such a recent stream, no one has explored whether the effectiveness of IR is affected

by the national cultural context in which the adopting companies are located. We consequently aim

to investigate whether the effects of IR adoption, measured in terms of cost of capital1

for firms, are

contingent on the countries’ cultural dimensions: power distance, individualism, masculinity, uncer-

tainty avoidance, long-term orientation, and indulgence (Hofstede, 2011). The practical relevance of

filling such a research gap is significant: Understanding the influence exerted by cultural traits on IR

effectiveness is essential for managers in that they can condition their disclosure accordingly (Van

der Laan Smith, Adhikari, & Tondkar, 2005). Specifically, as pointed out by Khlif (2016), managers

may benefit from understanding the effects of national culture on disclosure, shaping their reporting

attitude to limit legitimacy gap and public scrutiny. Furthermore, to the extent that the allocation of

resources is affected by culture (Stulz & Williamson, 2003), research like ours would clarify which

contexts moderate the relationship between cost of capital and disclosure, thus revealing what the

cultural traits that maximize, or limit, the effectiveness of IR are.

Overall, we add to the debate on IR effectiveness by proposing what is synthetized in Figure 1.

IR, under the lens of a risk-based approach (Giner & Reverte, 2006), is expected to mirror the pres-

sure on risk-taking behavior exercised by the different cultural traits. Specifically, since IR discloses

a more detailed picture of business risks (Baboukardos & Rimmel, 2016; Cortesi & Vena, 2019), we