Integrated reporting: economic incentives for disclosure and assurance

Abstract

The International Integrated Reporting Council (IIRC) advocates that integrated reporting (IR) addresses limitations to corporate social responsibility (CSR) reports. However, little is known about the real benefits of the information disclosed through IR because it has been mandated only in South Africa through the King III Report on Governance. In its commitment to promoting accountability, King III also recommends a formal external assurance process for sustainability reporting and the implementation of a combined assurance model (CAM). This thesis uses the best available selection of companies listed on the Johannesburg Stock Exchange in South Africa to examine whether the quality of IR disclosures, the assurance of sustainability performance, the use of assurance standards ISAE3000 and AA1000AS, the level of information audited, and the implementation of a CAM are all associated with market liquidity and lower analyst forecast error. Its results suggest that IR quality is associated with lower analyst error and positively associated with market liquidity. The evidence also indicates that the earnings forecast error is lower for firms in the materials sector of the South African economy. Forecast errors are higher for companies with volatile returns and lower for larger firms, which is consistent with prior research. Contrary to expectations, the assurance of non-financial information in IR does not have a significant effect on analyst forecast accuracy. These results suggest that, in a setting such as South Africa, the assurance of sustainability performance does not provide additional informative value to analysts, irrespective of who provides the assurance and of the level of information. In contrast, the assurance of sustainability disclosures is associated with market liquidity. Similar results are found for those companies that use assurance standards. Results of an in-depth analysis indicate that the level of the audit performed influences a company’s stock liquidity, with a significant association found for those companies that engage in at least some level of reasonable coverage. In contrast, there is no statistical significance between limited audit procedures and market liquidity. Furthermore, this thesis provides evidence that the implementation of a CAM is associated with lower analyst forecast error and market liquidity, suggesting that the use of a homogeneous process and coordination between internal and external assurance seems to provide informative value for investors and financial analysts regarding the credibility and quality of sustainability performance and reporting. Overall, these findings support the virtues of IR, thus providing useful information to capital markets. Additionally, this evidence progresses the discussion on the economic incentives necessary to assure non-financial information.