The Effect of Integrated Reporting Assurance and Combined Assurance Model on Market Liquidity and Analyst Forecast Accuracy

Abstract

This paper uses the best available selection of companies listed on the Johannesburg Stock Exchange to examine whether the Integrated Reporting Assurance (IRA), the use of assurance standards, the level of information audited, and the implementation of a Combined Assurance Model (CAM) are all associated with market liquidity and lower analyst forecast error. The results indicate that IRA is associated with market liquidity. Similar results are found for those companies using assurance standards. 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 paper 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. In contrast, IRA 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. Overall, these findings partly support the virtues of IRA. Additionally, this evidence progresses the discussion on the economic incentives necessary to assure non-financial information.