The determinants of integrated reporting quality in financial institutions

• Pages: 429-444
• DOI: https://doi.org/10.1108/CG-07-2019-0202
• Date: 27 February 2020
• Published date: 27 February 2020
• Author: Filippo Vitolla,Nicola Raimo,Michele Rubino,Antonello Garzoni
• Subject Matter: Strategy,Corporate governance

The determinants of integrated reporting

quality in financial institutions

Filippo Vitolla, Nicola Raimo, Michele Rubino and Antonello Garzoni

Abstract

Purpose –This study aims to investigate the financial and country-level determinants of integrated

reporting qualityin the financial industry.Specifically, this study analyses the impact of profitability,size,

leverageand civil law system on the integrated reporting quality.

Design/methodology/approach –Hypotheseswere tested using a regression model on a sampleof 87

financialinstitutions. An integrated reporting(IR)-quality scoreboard was used to measure reportquality.

Findings –The results show that IR qualityis significantly and positively influenced by profitability,size,

financialleverage and the civil law system.

Practical implications –The results have particularly important implications for large, profitable

financial institutions that make greater use of financial leverage and that are localized in non-civil law

countries. Managers should increase transparency by expanding the content and quality of the

informationcontained in the integrated reports.

Originality/value –This study contributes to the literature by revealing several financial factors that

influence IRquality. To the best of the authors’ knowledge,this is the first study to investigateIR quality in

the contextof the financial industry.

Keywords Disclosure quality, Integrated reporting, Corporate disclosure, Financial industry

Paper type Research paper

1. Introduction

This study investigates the financial and country-level determinants of integrated reporting

(IR) quality in the financial industry. IR is the last frontier of corporate reporting. It originated

from the need to go beyond the still-essential financial disclosure process. Financial data,

although essential for an assessment of a company’s activities, do not alone provide to

those involved in the company critical information concerning decision-making because

they lack information about the strategy and consequences related to the firm’s guidelines

(Mohd Ghazali, 2007). Moreover, the global financial crisis and the greater attention being

paid to stakeholders have led analysts and the general public to reflect on the need to

revise the current model of corporate information (Cormier and Magnan, 2014;Elmagrhi

et al., 2016;Torchia and Calabro

`,2016). It is clear that monetary quantities often do not fully

reflect a firm’s activitiesor their impacts on communities.

These conditions gave rise to IR, which is intended to balance financial information with non-

financial information (Vitolla et al., 2019a). However, IR is not the mere sum of the traditional

financial report and the social or sustainability report (Nazari et al., 2015) but an innovative way

of communication that integrates information of different kinds. IR aims to allow stakeholders to

more accurately assess the company’s ability to create value in the present and future (Vitolla

et al., 2016,2017). It is a way to improve corporate reputation and image.

IR has been gaining attention from both scholars (Vitolla et al.,2018) and professionals. A

KPMG (2017) survey shows how IR hasevolved since the early stages of the IR framework.

Filippo Vitolla,

Nicola Raimo,

Michele Rubino and

Antonello Garzoni are all

based at University LUM

Jean Monnet,

Casamassima, Italy.

Received 4 July 2019

Revised 1 October 2019

18 December 2019

17 January 2020

Accepted 5 February 2020

DOI 10.1108/CG-07-2019-0202 VOL. 20 NO. 3 2020, pp. 429-444, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 429

However, report quality is a critical aspect of IR (Pistoni et al., 2018). Of the several studies

on IR, only a few examine the quality issue. Thus, additional empirical studies are needed

on IR quality –specifically on its determinants, which have been understudied.

Among the organization-level (Aguinis and Glavas, 2012) determinants of IR quality,

this study focuses on financial ones, for three main reasons. The first is based on the

importance of the financial perspective in the non-financial disclosure context for each

kind of industry and each kind of firm. Financial conditions are prerequisites for

the implementation and management of higher quality disclosure. Larger and

more profitable companies have more resources to devote to the use of advanced

disclosure tools (Andrikopoulos et al., 2014;Sharif and Rashid, 2014). At the same

time, disclosure quality impacts financial performance. One of the main purposes of

corporate disclosure is reducing information asymmetries among stakeholders and,

consequently, reducing perceived uncertainty (Javaid Lone et al.,2016). A lower

uncertainty perceived by the providers of capital leads to lower required rates of return

and thus increases business value (Diamond and Verrecchia, 1991;Francis et al.,

2005). The effects of disclosure on financing costs and firm value do not come solely

from financial performance disclosure (Andrikopoulos et al., 2014). Non-financial

disclosure also affects the cost of capital and company value. Specifically, the extent

and quality of non-financial disclosure are negatively associated with the equity cost of

capital. Thus, the potential for reduced cost of capital can serve as an incentive for

companies to provide higher quality information (Dhaliwal et al., 2011;Orens et al.,

2010;Plumlee et al., 2015).

The second reason is related to the importance of financial variables in the financial

industry. This is illustrated by the strategicimportance of the financial leverage level and the

increasing significance of the dimensional variable for banking management over the past

few years.

Finally, this study focuses on the financial determinants of IR quality because the literature

has demonstrated that other types of non-financial disclosure (e.g. environmental,

sustainability, social and corporate social responsibility [CSR]) are affected by different

financial variables, such as company size (measured financially), the difference between

book value and market value, profitability and leverage. It is worth studying these

relationships in the IR context.

However, focusing on financial determinants is not enough because the quality of the

integrated reports could also be connected to aspects such as the country to which the

company belongs. As Vitolla et al. (2019b) pointed out, the wide geographical spread of

firms that adopt IR makes it necessary to analyse country-level variables that could affect

the quality of the information contained in the reports.Although the globalization of financial

systems and the standardization of disclosure policies are to be considered as relevant

phenomena, the impact of the localizationof companies remains a determining factor in the

reporting activities.

This study examines the financial sector for three reasons. Firstly, financial institutions play

active roles in the sustainable development process through financial intermediation

activities. Secondly, the public and regulatory attention paid to the social impacts,

accountability and legitimacy of the financial industry has grown since the 2007 global

financial crisis. Finally, to the best of the authors’ knowledge, no other study has yet

investigated IR in the financial sector.

The remainder of this paper is organized as follows. Sections 2 and 3 review the literature

and develop the study’s hypotheses, respectively. Then, Section 4 describes the research

methodology of the study. Then, Section 5 presents the results. Finally, Section 6 draws

conclusions.

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