Integrated reporting, textual risk disclosure and market value

• DOI: https://doi.org/10.1108/CG-01-2021-0002
• Published date: 02 September 2021
• Date: 02 September 2021
• Pages: 173-193
• Subject Matter: Strategy,Corporate governance
• Author: Tamer Elshandidy,Moataz Elmassri,Mohamed Elsayed

Integrated reporting, textual risk disclosure

and market value

Tamer Elshandidy, Moataz Elmassri and Mohamed Elsayed

Abstract

Purpose –Exploiting the mandatory provision of integrated reporting in South Africa, this paper aims to

investigate whether this regulatory switch from the conventional annual report is associated with differences

in the level of textual risk disclosure (TRD). This paper also examines the economic usefulness of this

regulatory change by observing the impact of TRD on the complying firms’ market values.

Design/methodology/approach –Archival data are collected and examined using time-series

differencedesign and difference-in-differencesdesign.

Findings –The authorsfind that the level of TRD within the mandatory integratedreporting is significantly

lower thanthat of annual reports. The authors find that the impactof TRD in integrated reporting on market

value compared to that of annual reports is statistically not different from zero. The authors’ further

analysessuggest that corporate governance effectivenessis not a moderating factor to the study results.

The resultsare robust to comparisons with the voluntary adoptionof integrated reporting in the UK.

Originality/value –Collectively, the studyresults suggest that managers’ adherence to the mandatory

provision of integrated reporting has significantly decreasedthe level of (voluntary) TRD they tended to

convey within the conventional annual reports, resulting in a trivial impact on market value. These

unintended consequences should be of interest to the International Integrated Reporting Council and

other bodiesinterested in integrated reporting.

Keywords Institutional theory, Integrated reporting, Market value, Textual risk disclosure

Paper type Research paper

1. Introduction and research background

Integrated reporting (IR) has beenpresented as one of the main strategic management and

accounting innovations in the past decade (De Villiers et al., 2014;Dumay et al., 2017;

Vitolla et al., 2019;Hosoda, 2021) as a transitional reporting tool to make a leap from a

promising concept to a powerful practise (Busco et al.,2013), and as the rational choice to

face the reporting challenges (Adams, 2015;Serafeim, 2015). However, there is a group of

studies that highlights the challenges and barriers in adopting IR and operationalizing the

IR framework elements, principles and objectives (Dumay et al.,2017). These challenges

lead the production of ineffective IR (McNally et al.,2017). This leads some scholars to

argue that IR is a temporary fad or a fashion(Brown and Dillard, 2014;Flower, 2015).These

inconsistent argumentsmotivate us to investigate the effectiveness of the adoption of IR.

Therefore, our paper investigates whether the adoption of IR enhances corporate

transparency. IR encourages organizations to increase the level of corporate disclosure

through providing “information not currently subject to mandatory disclosure requirements”

(IIRC, 2011, p.21). To achieve the holistic connectivity of IR, companies should release

more information about corporate strategy and sustainability, including information about

existing and potential business risks. “The Integrated Report should identify any real risks

that could have extreme consequences, even though the probability of their occurrence

might be considered quite small” (IIRC, 2011, p.15). As IR enhances transparency,

Tamer Elshandidy is based

at Ajman University, Ajman,

United Arab Emirates.

Moataz Elmassri is based

at Roehampton Business

School, University of

Roehampton, London, UK

and Faculty of Commerce,

Accounting Department,

Zagazig University,

Zagazig, Egypt. Mohamed

Elsayed is based at

Queen’s Management

School, Queen’s University

Belfast, Belfast, UK and

Accounting Department,

Mansoura University,

Mansoura, Egypt.

Received 2 January 2021

Revised 30 April 2021

18 July 2021

3 August 2021

Accepted 15 August 2021

The authors thank Gabriel

Eweje (the editor) and two

anonymous referees for their

constructive comments and

helpful suggestions. This paper

has benefited from comments

and suggestions from

participants at Greenwich

Business School (London,

2018), and the 21

st

and 23

rd

Annual Conferences of the

Financial Reporting and

Business Communication

Research Unit (University of

Durham, 2017 and the

University of Reading, 2019,

respectively). The authors

thank Penny Chaidali and

Lorenzo Neri for their helpful

comments and suggestions.

DOI 10.1108/CG-01-2021-0002 VOL. 22 NO. 1 2022, pp. 173-193, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 173

investors can obtain more information in less time and at a lower cost while being able to

allocate their capital in a more efficient manner (Lee and Yeo, 2016).

We observe whether the level of corporate transparency is significantly changed when

companies switch from the conventional form of annual reports (ARs) to IR. Especially, the

principle-based IR framework gives a space of flexibility to companies to adopt IR, asthere

are many challenges to achieve a consistent adoption of IR disclosure(Morgan et al., 2009;

Dumay et al.,2017). Arguably, we should not consider adoption of IR as a “taken for

granted” practise. However, the IR principles, elements and objectives should be

empirically examined to evaluatethe effectiveness of the IR adoption.

The existing evidence (Kothari et al.,2009;Cormier and Magnan, 2014;Leuz and Wysocki,

2016;Dyer et al.,2017;El-Diftar et al., 2017;Naheed et al.,2021) suggests that corporate

disclosure, which covers several topics, including, e.g. forward-looking, corporate social

responsibility and risk, benefits companies as it improves corporate transparency and thus

reduces information asymmetries. Based on prior literature (Linsley and Shrives, 2005), risk

disclosure practises should resultin improving corporate transparency. Furthermore, Kravet

and Muslu (2013),Abraham and Shrives(2014),Campbell et al. (2014) and Elshandidy and

Shrives (2016) find that to enhance corporate transparency, companies should disclose

information about firm-specific risks. Therefore, we use textual risk disclosure (TRD) as a

proxy for corporate transparency. Unlike previous studies, we compare the level of TRD of

IR in mandatory and voluntary settings.We choose South Africa, where IR is mandated and

the UK where applying IR is voluntary. The rational of choosing those contexts is that as of

today, IR is South Africa has taken the leading role in promoting IR. In 2009, the IR

Committee of South Africa (IRCSA) released the King III report, which introduced a holistic

communication tool that “evolves around leadership, sustainability, and corporate

citizenship [...] ethical values of responsibility, accountability, fairness, and transparency”

(Institute of Directors Southern Africa, 2009, p.10). Because the King Code is a

Johannesburg Stock Exchange (JSE) listing requirement, listed firms were required to

produce IRs for annual periodsas a mandatory practise (Masegare and Ngoepe, 2018).

In addition, the UK has a significant contribution regarding IR practise. In 2009, Prince’s

Accounting for Sustainability (A4S) created a new connected and IR model to provide a

coherent and complete picture of the organization. Then, in 2010, the A4S project and the

Global Reporting Initiative (GRI) announced the formation of an IIRC to provide a

comprehensive, concise, complete,clear and comparable format for corporate reporting. In

2013, the IIRC issued an international framework of IR, which contributes towards setting a

globally accepted IR framework that brings together financial, environmental, social and

governance information in a clear, concise, consistent and comparable format(IIRC, 2013).

The underlying concepts and values of IR are the same in the South African and UK

contexts. Both emphasize the connectivity between the corporate risks, strategy and

sustainability to create value (IIRC,2013).

Moreover, we examine the significance of IR in creating value. One of the main foundation

objectives of IR is to create a short-, medium- and long-term value for various stakeholders

(IIRC, 2013). There is an ambiguity about the meaningof the value-creation concept, as the

definition is quite vague (Dumay et al., 2017). The IIRC (2013, p. 33) defines value creation

as “the process that results in increases, decreases or transformations of the capitals

caused by the organisation’s businessactivities and outputs”. There are six capitals defined

by the IR framework; financial, manufactured, intellectual, natural, human, social and

relationship. This study focuses onthe financial capital and examines the value relevance of

TRD on the firm value as one of the key business outputs. There is a stream of research

(Lee and Yeo, 2016;Barth et al., 2017;Vitolla et al.,2019;Wahl et al., 2020) that examines

the effect of IR on firm value. Lee and Yeo (2016), using a sample of firms listed in the JSE,

found a positive relationship between firm value and IR quality. Similarly, Barth et al. (2017)

examine a sample of a listed companies in the JSE and find a positive association between

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