Value relevance of integrated reporting in South Africa

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Amsterdam Business School

Faculty of Economics and Business, University of Amsterdam

Value Relevance of Integrated Reporting in South Africa

Candidate: Inge Peterse

Student number: 10249079

Thesis supervisor: dr. G. Georgakopoulos

Date: June 20, 2016

Word count: 12.907

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2 Statement of Originality

This document is written by student Inge Peterse who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

This thesis provides insight in the value relevance of Integrated Reporting in South Africa. Integrated Reporting is a new way of corporate reporting that presents how financial and non-financial information is connected and linked with each other and how they contribute to value creation in the short-, medium and long term. The driving force of Integrated Reporting was the issue of KING III code and report in 2010 in South Africa, which requires JSE-listed companies to publish an Integrated Report. Current evidence of the value relevance of Integrated Reporting is limited, and to date, South Africa is the only country with a mandatory regime for Integrated Reporting. I test the value relevance of Integrated Reporting in South Africa using a sample of non-financial JSE-listed companies from 2008-2014, with 2010, the transition year to mandatory Integrating Reporting excluded from the sample. I find a positive and significant relationship between Integrated Reporting and firm value. This finding supports the value-creation view of Integrated Reporting, which suggests that investors perceive Integrated Reporting as a way to create value over time by better decision making, improved data quality, greater stake-and shareholder engagement and lower reputational risk. I find no evidence that Integrated Reports recognized as leading practice by an award, indicating a high alignment with the Integrated Reporting Framework, are more value relevant than non-Recognized Reports. This may be explained by the novelty of the award granting for Integrated Reports and limited media attention. Overall the findings suggest that the perceived benefits of Integrated Reporting outweigh their costs.

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The past decades the bar has been rising for corporate reporting disclosures due to globalization, increased regulation, accountability, stakeholder demands and growth of intangible assets. Also greater emphasis on non-financial performance and an increasing range of stakeholders led to a change in the drivers of business value. Stakeholder’s expectations of reporting are increasing, in the sense that stakeholders not only expect transparency regarding the economic impact of companies, but they also want to get insights in how companies deal with environmental and societal changes. Solely financial reporting is therefore not sufficient anymore because of the backward-looking nature of the financial reports and its indistinctness about the information of the risks taken, in order to create value for shareholders (Eccles & Saltzman, 2011). ‘The true and fair view’ those reports should present about the company are not accomplished since they do not contain non-financial performance that can determine the long term financial picture (Eccles & Saltzman, 2011). Also according to research of PwC (2014) business leaders now recognize the need to consider and report on wider business issues: 74% of CEOs say that measuring and reporting the total impact of their company’s activities across social, environmental, fiscal and economic dimensions contributes to long term success.

As a result, form the 90’s on, companies voluntarily started to produce environmental reports, followed by sustainability reports, or corporate social responsibility (CSR) reports, next to their financial reporting. These reports typically contain information about a company’s environmental, social and governance performance. Despite there are still not well established frameworks and standards for these reports, the Global Reporting Initiative (GRI) developed some guidelines for companies to start producing non-financial reports. However, an often mentioned weakness of these separate reports is that they are ‘silo-ed’ from the organization as a whole (Adams & Simnett, 2011), there is no clear relation with financial reporting and also the size of the reports results in stakeholders getting an information overload and do not know where to focus on anymore.

In order to link and align “material information about an organization’s strategy, governance systems, performance and future prospects in a way that reflects the economic, environmental and social environment within which it operates” (IIRC, 2011, p. 2), the International Integrated Reporting Council (IIRC) was founded in 2010 and developed a framework for Integrated Reporting. Integrated Reporting (further referred to as <IR>) should provide a holistic picture of an organization to stakeholders, showing how both financial and non-financial aspects are connected and how they contribute to the creation of value over time in one report (Krzus, 2011).

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6 The driving force for the emergence of <IR> was the issuance of the ‘King Code and Report on Governance for South Africa’ (KING III) on September 1, 2009, with an effective date of March 1, 2010. King III aimed to be at the forefront of governance internationally, with a great focus around leadership, sustainability and performance (PwC, 2009b). King III builds on earlier issues raised in King I and King II and introduced some new concepts and recommendations (EY, 2009). King III required companies to prepare an Integrated Report, in order to present firm performance in terms of financial performance and sustainability performance (Barth et al., 2015). As the King Code is a listing requirement for companies at the Johannesburg Stock Exchange, South Africa is the first country in which <IR> is required for listed firms.

In order to produce an Integrated Report, an organization needs to develop a good understanding of how it impacts and is impacted by the economic, social and environmental and governmental context in which it operates. It has to think about how they are going to create value now and in the future, by taking into account multiple financial and non-financial aspects, also known as integrative thinking (Adams, 2015). This will ultimately lead to better decision making, because of the better insight in value creation and efficient capital allocation (Black Sun, 2014). Other perceived benefits of <IR> are a better understanding by managers about how their organization creates- or destroys value, improved data quality, greater stake- and shareholder engagement, increased collaboration between departments, and lower reputational risk (Eccles & Serafeim, 2011; Black Sun, 2014; Eccles & Krzus, 2010, Krzus, 2010). However, some shortcomings of <IR> are the comparability of Integrated Reports and its credibility due to the limited third-party assurance (Eccles & Saltzman, 2010; Kolk, 2004; Deloitte, 2015). Also the high cost if implementation, the difficulties in collecting and measuring non-financial data, and disclosing commercially sensitive information are seen as drawbacks of <IR> (Deloitte, 2015; Adams & Simnett, 2011; Leuz, 2010; Rowbottom & Locke, 2015).

Prior research on <IR> provided empirical evidence that corporate disclosure through an Integrated Report can reduce information asymmetry between investors and managers (Martinez, 2015; Lee & Yeo, 2015) and reduce analysts’ earnings forecast error and dispersion, as the level of alignment with the <IR> framework increases (Zhou et al., 2015). Barth et al. (2015) found evidence that higher levels of <IR> integration are associated with increases in stock liquidity and expected future cash flows. However, empirical evidence of the effects of <IR> on firm value is lacking, which is the primary motivation for this thesis. Also prior research (Jensen & Berg, 2012; Cheng et al., 2014) called for further empirical research on the effects of <IR> on the capital market. Therefore, this thesis aims to provide empirical evidence for the research question: is

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7 Integrated Reporting a value-increasing practice for companies listed on the Johannesburg Stock Exchange? In doing so, I examine whether <IR> is value relevant and if <IR> adds incremental value to investors after it became mandatory for companies listed on the JSE in 2010, using the Ohlson (1995) value relevance model. Initially I wanted test if the mandatory regime for <IR> in South Africa is more value relevant than a voluntary regime for <IR>. However, prior to the mandatory regime for <IR> in South Africa, JSE-listed companies had to comply or explain the King II code, which did not require an Integrated Report. Therefore I examine whether Integrated Reports are value relevant, compared to traditional reporting, which represents the King II code in South Africa.

Although <IR> is a JSE listing requirement, the level of integration in the Integrated Reports varies widely. However, to date an academically credible framework to measure the level of <IR> integration is lacking. Though, since the implementation of <IR> in South Africa several institutions granted awards to companies that published an Integrated Report that is highly aligned with the <IR> framework according to the IIRC. In order to examine if these recognized reports are more value relevant for investors than non-recognized Integrated Reports, I perform an additional value relevance test using the Ohlson (1995) model.

As South Africa is the first and only country where <IR> is required for companies listed on the Johannesburg Stock Exchange (JSE), it is interesting to examine if this mandatory <IR> regime is value relevant to investors. In addition, in a mandatory regime the potential bias of voluntary disclosure incentives is reduced, and therefore provides a more homogeneous sample. The sample consists of 160 non-financial companies listed on the JSE for the period 2008 to 2014, with the transition year 2010, excluded. This time period covers 2 years before the mandatory adoption of <IR> and 4 years after. The total number of observations in the total sample is 960 and the post-implementation period consists of 640 observations.

Results show a significant positive relation between <IR> and firm value, suggesting that <IR> is value relevant to investors. This finding supports the value-creation view on the relation between firm value and <IR>, rather than the cost-concerned view. The value-creation perspective of <IR> argues that investors perceive <IR> as a way to create value over time by better decision making, improved data quality, greater stake- and shareholder engagement, increased internal engagement and lower reputational risk.

I find no evidence that Integrated Reports that won an award for their leading practice in <IR>, are more value relevant than non-recognized Integrated Reports. This implies that I cannot support the assumption that a higher alignment with the <IR> framework demonstrates transparency, which reduces the information asymmetry between investors and managers. This

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8 finding may be explained by the novelty of the award granting and the limited media attention for awards granted. Overall, the results suggest that the <IR> benefits outweigh their costs. <IR> provides investors more insight in the operations of a company and how the company is going to achieve sustainable value in the short, medium and long term.

This thesis contains several contributions to the academic literature. First I fulfill the gap in the existing literature with empirical evidence of value creation of <IR>. Prior research mainly conducted qualitative research on <IR> (Cheng et al., 2014; Rensurg & Botha, 2014; Eccles & Saltzman, 2010; Eccles & Krzus, 2010; Adams & Simnett, 2011; Eccles & Serafeim, 2011; Black Sun, 2014). Many potential benefits of <IR> are outlined in the qualitative research area, but called for empirical evidence on the value of <IR> to investors (Jensen & Berg, 2012; Cheng et al., 2014). The reason why empirical research on the effects of <IR> is lacking, is probably the lack of data available. The number of companies worldwide that adopt <IR> is relatively small. To my best knowledge, to date only 2 papers examined if <IR> is associated with firm valuation in South Africa. Barth et al. (2015) and Lee & Yeo (2015) both did cross-sectional tests for firm valuation, based on the level of integration of Integrated Reports among firms. They both measured firm value using Tobin’s Q. However, their measures of integration contained researcher judgement subjectivity and were not based on academic credible framework, and also the small sample size was a limitation in the study of Barth et al. (2015). While the sample period of Barth et al. (2015) and Lee & Yeo (2015) only covered the period after mandatory <IR> implementation, this research examines the incremental value of <IR> by including two years before mandatory implementation of <IR>. Second, I examine the value relevance of award winning Integrated Reports. Award winning Integrated Reports are according to the IIRC, highly aligned with the IIRC Framework (2013), and therefore represent high quality Integrated Reports. Third, this research provides evidence of the effect of <IR> implementation in a mandatory regime, in contrast to research of <IR> in a voluntary regime (Oshika & Shaka, 2015; Maniora, 2015; Serafeim, 2015). To date, South Africa is the only country where <IR> is mandatory for listed companies. According to Bernardi & Stark (2015), companies that voluntarily produce Integrated Reports may have specific reasons to produce an Integrated Report such as greenwashing. The value relevance of Integrated Reports in a voluntary regime could therefore be biased.

This research is relevant for various actors. First, it is relevant for investors. With a better understanding and awareness of what the objectives, benefits and drawbacks of <IR> are, investors can determine the value of companies based on the <IR>. Secondly, this research is relevant for practitioners of <IR> in the sense that it provides evidence that publishing an <IR>

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9 is perceived as value relevant by investors. Third, this research is relevant for standard setters and regulators. The evidence that investors value <IR> as relevant in a mandatory regime can be interesting market-based evidence for regulators and standard setters when considering to mandate <IR> in other countries, and contributes to the debate about regulatory practical implications.

The paper proceeds as follows: section 2 provides a theoretical background of <IR> with the emergence of <IR>, the benefits and drawbacks, and a description of the IIRC framework (2013). This is followed by a literature review that describes the need for information disclosure and a description of value relevance with several models to examine firm valuation. Section 2 ends with the development of hypotheses. Section 3 describes the research methodology and sample selection. Section 4 provides the results of the regression analyses. Finally, section 5 provides a conclusion, the limitations of this paper and suggestions for further research.

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10 2 Theoretical Framework & Hypotheses

In this Section I elaborate on the evolution of <IR> in paragraph 2.1. In paragraph 2.2 I explain the definition of <IR>, I explain how <IR> developed in South Africa and I present the <IR> framework, including the guiding principles and content elements developed by the International Integrated Reporting Counsel (IIRC). Also the benefits and drawbacks of <IR> are described, to get a better understanding of what <IR> entails. Paragraph 2.3 provides a literature review about information disclosure and the value relevance of information. In paragraph 2.4 hypotheses are developed.

2.1 Evolution of Integrated Reporting

Over the last decades, corporate disclosure has changed significantly. The proportion of intangibles has increased exponentially in relation to physical and financial assets (SAICA, 2013). Expanded disclosure on these factors was required, which resulted in lengthy reports, without many cohesion. Also the effects of globalization, pollution and the liberalization of markets have become under scrutiny of NGO’s and other stakeholders (Kolk, 2005). In other words, the concept of value has changed and organizations are facing different issues in regulations, technology, environments and increasing stakeholder demands. To be in compliance with these issues and to show a company’s commitment with these issues, disclosure of non-financial information in addition to financial performance became more favored. The first separate environmental report dates from 1989 and since then the number of reports about environmental, social and sustainability impacts has increased significantly (Kolk, 2004). In 1999 about 39% of Global Fortune 250 companies reported on their social, ecological and economic activities, whereas this percentage in 2008 increased to 80% (KPMG, 2008). Non-financial reporting has become not only important for valuation by decision makers, it has implications beyond boards, auditors, and investors (Eccles and Krzus, 2010). The number of stakeholders, and their legitimacy is increasing, as well as their interest in the footprint of corporations. They recognize that financial performance is necessary, but not sufficient to meet environmental, social and governmental (ESG) objectives that are important to them (Eccles & Serafeim, 2011). As a result, governments increasingly encouraged voluntary disclosure of environmental reports to enhance corporate accountability.

Another important factor for the growth in non-financial reporting was the foundation of the Global Reporting Initiative (GRI) in 1997, which launched their first version of the global framework for comprehensive sustainability reporting in 2000. The framework entailes guidelines for companies how to report on ESG issues to enable stakeholders to make better decisions with information that matters. As a result, both quality and quantity of sustainability reports increased.

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11 However, these sustainability reports were presented separate from the financial information and therefore resulted in a lack of integration of critical topics such as risk. They were not linked to each other, which made it difficult for users of the reports to understand the company (Eccles & Krzus, 2010). In addition, traditional reporting evolved to be compliance-oriented and the ESG reports became ‘silo-ed’ from the organization as a whole (Adams & Simnett, 2011). In order to enhance transparency and to help organizations communicate their value creation over time, a multi-stakeholder group, called the International Integrated Reporting Council (IIRC) was founded in 2010. The IIRC brings together several representatives from corporate, investment, accounting, security, regulatory, academic and standard-setting sectors (IIRC, 2013). In 2013 they published a framework for <IR>, which according to Eccles & Krzus means a “new way of communicating to all stakeholders that the company is taking a holistic view of their interests, both as they complement each other, and complete each other” (2010). This framework is presented in paragraph 2.3.2.

2.2 What is Integrated Reporting?

The uniqueness of <IR> is that it goes a step further in standard corporate reporting, which provides nonfinancial information next to financial information (Eccles & Krzus, 2010). Instead of providing several disconnected separate reports about organizational factors, <IR> is about one report in which all information about strategy, governance, performance and future prospect is presented in the context of its external environment, and linked with each other. Eccles & Serafeim describe <IR> as:

“Integrated Reporting involves reporting of both financial and non-financial (environmental, social and governmental [ESG]) information in a single document, ideally showing the relationship between the two in terms of how good performance on ESG issues contributes to good financial performance and vice versa, and the potential trade-offs that a company might be facing across financial and non-financial performance” (2011, p. 71).

The International Integrated Reporting Council emphasized in their description of <IR> in their framework (IIRC, 2013) that <IR> is not only a static report. <IR> advocates “a more cohesive and efficient approach to corporate reporting” (IIRC, 2013, p. 2). It communicates how all different factors within the organization together create value over the short, medium and long term. This value creation is not solely done by organizations itself, but is influenced by the external environment, stakeholders and dependent on various resources. <IR> aims to provide insight in this.

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12 According to the IIRC, <IR> was created to enhance accountability, stewardship, trust and bring more transparency to investors by better information flow. Organizations are obliged to their stakeholders and society as a whole to care- and take responsibilities for the capitals they use and where stakeholders and society are affected by. As such, it is felt that <IR> leads to integrative thinking. Integrative thinking encourages managers to gain insight in a broader set of information, compared with traditional financial reporting (Deloitte, 2015). It is essential for managers to have a clear understanding of the business operations and its consequences for society in order to communicate value creation over time in a simple and understandable language. By knowing what their business is about, will resultantly lead to more holistic decisions. Integrative thinking is defined by the IIRC as:

“The active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects. Integrated thinking leads to integrated decision making and actions that consider the creation of value over the short, medium and long term” (2013, p. 2).

The purpose of <IR> – which lead to Integrative thinking is to create more sustainable value. Understanding what value means and to whom, and how to achieve sustainable value requires managers to think (long-term) about their business model, material issues, risk and strategy (Adams, 2015).

2.2.1 KING III report

The driving force for the emergence of <IR> was the issuance of the ‘King Code and Report on Governance for South Africa’ (King III) on September 1, 2009 by the King Committee on Governance, with an effective date of March 1, 2010. King III provides a list of principles in the code and best practice recommendations in the report to assist and guide corporate directors to make the right choices for governance related aspects and act in the best interests of the company (Deloitte, 2009). The objective of King III was to maintain South Africa’s leadership in standards and practices for corporate governance (Eccles & Saltzman, 2011). The King III builds on earlier issues raised in King I and King II and strengthens previous requirements, clarifies certain issues and introduced some new concepts and recommendations (EY, 2009). King I recommended standards of conduct for boards and directors of listed companies, banks and state-owned enterprises. It encouraged companies to embrace both share-and stakeholders (Rensburg & Botha, 2014). King II, which was effective from 2002, was a revised version of King I and required companies to include reporting on social-, environmental-, and sustainability performance, as well as the role of the corporate board and risk management (Rensburg & Botha, 2014). King III went a step further: it requires the statutory financial information and

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13 sustainability information to be integrated in an Integrated Report (PwC, 2009a). King III became necessary because of the new Companies Act no. 71 of 2008, and changes in international governance trends (King III, 2009). One of the key concepts of King III is sustainability. According to King III, the Integrated Report should have sufficient information about how the organization positively and negatively impacted on the community it operated in, and how it will improve those aspects in the coming years (King III, 2009).

The Code and Report are based on an ‘apply or explain’ basis. This means that companies have to explain how the principles and recommendations were applied, or explain the reasons why not applied. The framework recommended by King III is principles-based and ‘no size fits all’. This differs from the King II Report, which was based on a ‘comply or explain’ basis. The shift from a comply to apply basis was due to the danger that the board and management became too focused on compliance, at the expense of the enterprise (King III, 2009). Organizations may tailor the principles of the Code to their organization, appropriate to their nature, size and complexity. Up till now, the Johannesburg Stock Exchange in South Africa is the only stock market that requires listed companies to include in their Integrated Report how they applied-, or explained the King III Code. Initiator of the Code, Mervyn King, hopes it will create a worldwide domino effect, to create a more sustainable economic, social and environmental society (Eccles & Saltzman, 2011).

2.2.2 IIRC Guiding Principles and Content Elements

The IIRC framework is built on the resources used- and relationships affected by an organization, which are referred to as capitals: financial, manufactured, human, intellectual, natural and social and relationship, and natural capital (IIRC, 2013). Integrative thinking is necessary to think about how all those capitals and their relationships influence each other. The capitals can be seen as ‘stocks of value’ that are increased, decreased or transformed through the activities of the organization (SAICA, 2013). Integrative thinking however, can be a very complex process. Therefore, the IIRC has developed a framework with 8 Content Elements and 7 Guiding Principles to help companies implement <IR>. The 7 Guiding Principles help organizations with the content of the report and how information should be presented. The 8 Content Elements form the boundary condition to which an <IR> should comply (Deloitte, 2015). A description of the Content Elements and Guiding principles can be found in table 1.

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Table 1: Guiding Principles and Content Elements

The 7 Guiding Principles contain: The 8 Content Elements contain: Strategic focus and future orientation:

Description of the strategy of the company and its relation to value creation and capitals.

Organizational overview and external environment:

Description of organization and the external environment (e.g. competition).

Connectivity of information:

Relates to the interrelatedness of the factors that affect the organization’s ability to create value over time.

Governance:

Description of the governance structure and its relation to value creation.

Stakeholder relationships:

Description of the key stakeholders, including how the stakeholder’s interests are taken into account.

Risks and opportunities:

Description of the risks and opportunities and the risk mitigation system.

Materiality:

Relates to the number of disclosures about matters that affect the organization’s ability to create value.

Strategy and resource allocation:

Description of the concrete strategy of the company, both short-term and long-term focused. Conciseness:

Relates to the concise format of the report.

Performance:

Description of the results, compared with targets, previous years and capitals.

Reliability and completeness:

Relates to the balanced, complete character of the report, which should not include any material errors.

Outlook:

Description of the future challenges in relation to the company.

Consistency and comparability:

Relates to the consistency and comparability of the information within the report

Basis of preparation and presentation: Description of the materiality determination process, reporting boundaries and frameworks used.

Business model:

Description of the business model with input, output and capitals included.

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15 Source: (IIRC, 2013)

Figure 1 illustrates the value creation process. The various capital inputs are exposed to the different Content Elements. For example, the external environment sets the context in which an organization operates, governance entails the organizational structure, and at the core lies the business model, which converts the capital inputs, through the business activities to capital outputs. To ensure international relevance and to allow discretion to individual organizations in implementation, the framework is principles-based (Adams & Simnett, 2011), where materiality is a key concept. Organizations should focus on the factors and issues that are most material for them and within their industry. The framework therefore, does not prescribe specific key performance indicators or measurement techniques. It is up to preparers of the Integrated Report to determine which matters are material and how they are disclosed. By combining the most material matters from the separate reports, and showing the effects and connectivity between them, a more concise and coherent report will result (Zhou, et al, 2015). In addition, the focus on materiality will also lower the risk of information overload for investors. (Velte & Stawinoga, 2016).

2.2.3 Benefits of <IR>

The integrated character of <IR> brings several benefits compared to traditional reporting with its separate financial and non-financial reports. First, as Jensen and Berg (2012) note, traditional separate financial and non-financial reports would make sense if those two aspects occur

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16 independently from each other in a company. However when companies include ESG in their strategy, the non-financial and financial aspects are interrelated. According to Jensen & Berg (2012) separate reporting therefore disentangles interrelated aspects, whereas <IR> entangles them. <IR> requires corporate actors to think about the alignment of profit maximization with the wellbeing of society and the environment (Adams, 2015). Especially in the context of capitals has <IR> advantages over ESG reporting. According to Adams (2015) is ESG reporting less likely to focus on the connectivity between capitals and the potential value those capitals can create, and more likely to disclose immaterial information. <IR> provides a more concise, coherent and balanced picture of organizational performance (Eccles & Krzus, 2010).

Secondly, <IR> brings several internal and external benefits to organizations. Black Sun (2014) performed research in which they looked at 66 organizations that adopted <IR>. They concluded that the most important and common benefit organizations experienced with <IR> was an improved understanding of how they create- or destroy value. Organizations had to gain an understanding of how non-financial performance could be a leading indicator for financial performance (Black Sun, 2014). For many companies, this broader understanding of value creation led to changes in strategy, resource allocation and management systems.

Also improved data quality is an advantage of <IR>. Organizations now need to measure non-financial capitals that they didn’t need to measure for traditional reporting. Especially the relevance and reliability of data of those non-financial capitals are of great importance in <IR>. Respondents in the Black Sun (2014) survey pointed out that they changed the way they measured. They figured they were previously measuring things that didn’t lead to value creation and for some other capitals they realized they didn’t have any performance indicators. Therefore internal measurement and control systems for producing timely and reliable non-financial information improves by implementation of <IR> (Eccles & Serafeim, 2011). A broader understanding of value creation and improved data quality also enhances decision making, because companies have more insight in how they can create value over the short, medium and long term and are able to allocate capitals in a more efficient way.

In addition, greater stakeholder and shareholder engagement is a benefit of <IR>. Organizations create value through relationships and interconnections (Black Sun, 2014). It is therefore advantageous to be transparent to employees, customers, suppliers, local communities and other stakeholders. By doing so, stakeholders become aware of the fact that in order to achieve profits over the long-term, organizations need to make sustainable investments that affect short-term performance (Eccles & Krzus, 2010). <IR> therefore gives more context to financial information and thus can help to attract more long-term investors who value sustainable

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17 strategies (Eccles & Serafeim, 2011).

Internal engagement is also seen as a great benefit of <IR> (Black Sun, 2014). <IR> is capable of breaking down silos within the organization and increases respect and understanding between different departments. It forces for example, the finance department to collaborate with the sustainability and innovation department. In this way, each department or function sees its role in a broader context and gets an understanding of the consequences of their actions on other departments (Eccles and Krzus, 2010).

At last, lower reputational risk can also be seen as a benefit of <IR>. As Corporate Social Responsibility and sustainability is becoming more important nowadays, so is the reputational risk. <IR> has the advantage that it provides better clarity about the cause- and affect relationships, which helps organizations to better understand the risks they are exposed to, and also communicate the risks and opportunities relating to environmental and social aspects. (Eccles & Krzus, 2010). This is done in a holistic way that brings together the financial risks, and non-financial risks. This integrated risk management helps companies more effectively focus on risks (Krzus, 2011).

2.2.3 Drawbacks of <IR>

Although <IR> has many benefits, it also has some constraints that may limit the value of <IR> today (Eccles & Saltzman, 2011). Because of the limited amount of companies that implemented <IR> due to its voluntary nature – except for South Africa – and the lack of globally accepted standards and frameworks for <IR>, it makes it difficult to compare the performance between different companies. Companies that do implement <IR> vary widely in the level of integration, which makes comparability also more difficult.

Reliability and credibility of the information in the Integrated Reports is often questionable because of the limited assurance given on these reports. For many companies third-party assurance does not go beyond financial statements, and if it does, it is often not performed with the same degree of rigor (Eccles & Saltzman, 2011). According to Kolk (2004) the audit assignments varied widely content and scope. An audited report does therefore not imply that all the information data has been thoroughly checked and fully reliable. This limited assurance is probably due to a lack of an internationally accepted assurance methodology for <IR> (Deloitte, 2015).

In addition, it can be a challenge for many companies to collect, measure and value non-financial data that is required to produce an Integrated Report. According to Deloitte (2015), processes are not always designed such that information is available at the time an Integrated

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18 Report needs to be prepared. Such information can include for example societal impact, employee engagement and customer satisfaction. Also the way financial and non-financial data is connected is seen as a challenge. As a respondent in the Deloitte survey pointed out: “historically employees have been reported as a financial cost to an organization, but employees contribute to many benefits. How to quantify these benefits is now the question” (2015, p. 25).

The large costs companies face by implementing <IR> is another obstacle organizations have to overcome. Direct costs for organizations include the costs of producing, disseminating, and verifying the information. Companies might fear that short-term oriented investors do not see through the initial costs for <IR>.

Adams and Simnett (2011) argue that organizations might be hesitant to disclose too much information about their strategy and value drivers since this can be commercially sensitive information. According to Deloitte (2015) being more transparent about the business model and long-term strategy could also make a company more vulnerable to liability issues or greenwashing. This can result in increased indirect costs because information disclosed to capital market participants can be used by other parties, for example competitors, authorities, labor unions, NGO’s etc. (Leuz, 2010).

At last, the aim of <IR> is to link and align material information of all capitals within an organization. However, Rowbottom and Locke (2015) argued that a key issue in preparing an Integrated Report is that many companies fail to determine who their target audience is, and therefore have problems to set a threshold for materiality. The definition of materiality differs for various users of the report. In the context of financial reporting, information is material if its omission or misstatement influences the decisions of users of the financial statements, while in the context of CSR reporting, an organization’s effect on the social, environmental, legal, political environment is regarded as relevant. Users of the financial statements can be shareholders (investors), who are interested in their own profit and returns, while stakeholders rather see information about the net gains for all parties affected by the entity. Therefore shareholders and stakeholders differ in their perspectives on what they see as valuable. Traditionally, the financial statements were mainly addressed to the shareholders, and the separate CSR reports focused on the stakeholder as primary audience. By combining those two reports in one report, it is likely that all users of the financial statements will find information that is not useful to them. In addition, the intended users for <IR> also differ among standard setters and regulators. IIRC states that <IR> is principally aimed at providers of financial capital, to support the capital allocation decisions. Especially long term- oriented investors would benefit from <IR> (AICPA, 2013). However, KING III states that <IR> is subject to a stakeholder-oriented approach:

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19 “stakeholder relationships provide a platform for the board to take into account the concerns and objectives of the company’s stakeholders in its decision making, which is fundamental to the process of integrated reporting” (PwC, 2009b, p. 55). Different approaches towards intended users of an Integrated Report, can therefore lead to different interpretations of materiality among preparers of an Integrated Report. However, as Eccles and Saltzman (2011) note, <IR> still needs to grow into a strong and robust management practice. The challenges of <IR> are significant, but are mainly the cause of its newness.

2.3 Literature review

In this paragraph I explain why corporate disclosure plays a vital role by providing investors information about the company and why the view and expectations of investors are an important driving force for corporate performance. As <IR> is a form of corporate disclosure, in subparagraph 2.3.1 I discuss the relevant literature on the reasons why organizations disclose information, and why investors use information. In subparagraph 2.3.2 I explain what value relevance means, what investors perceive as value relevant information and I discuss previous value relevance studies. Next, various value relevance valuation models are discussed, followed by an detailed description of the Ohlson (1995) model, the model that I use to test the value relevance of <IR> in South Africa.

2.3.1 Information disclosure

Accounting information exists for two reasons. First, it allows capital providers to evaluate what return on their investment they can expect. Secondly, it allows capital providers to monitor how the organization uses their capital (Beyer et al., 2010).

However, according to Healy & Palepu (1993) there are three potential threats to corporate disclosure. First, managers have superior information on their firms’ current performance compared to outside investors, also known as information asymmetry. This problem can make it hard for investors to assess the profitability on investments in the company. As a result, investors may undervalue profitable firms, and overvalue unprofitable firms, known as the ‘lemons problem’ (Akerlof, 1970). Secondly, an agency problem can arise because manager’s incentives are not perfectly aligned with those of share-and stakeholders, which can result in financial reporting decisions in their own interest. Different investment time horizons often play part here. Managers, as well as investors may either have a short- or long term investment horizon, which result in different incentives to manage earnings. Third, accounting rules and standards are imperfect, which makes it for example possible for managers to manage earnings (Healy & Palepu, 1993).

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20 problems. Regulation of disclosure and optimal contracts such as compensation agreements and debt contracts between managers and investors will provide incentives for managers to fully disclose private information. In addition, auditors can help add credibility to the financial statements and information intermediaries such as financial analysts and rating agencies can help uncover private management information (Healy & Palepu, 2001).

Several studies have examined the economic effects of corporate disclosure and the quality of disclosure. First, empirical evidence suggests that disclosure of information and high quality information improves a firm’s stock liquidity in the capital market analyst following (Healy & Palepu, 2001; Beyer et al., 2010; Lang & Lundholm, 1996). In the specific stream of <IR>, Zhou et al. (2015) found evidence that corporate disclosure through <IR> in South Africa reduces analysts’ earnings forecast error and analysts’ earnings forecast dispersion, as the level of alignment with the <IR> framework increases. Barth et al. (2015) found that higher level of <IR> integration is positively associated with stock liquidity and expected future cash flows. Bernardi & Stark (2015) found an increased analyst forecast accuracy once the Johannesburg Stock Exchange required companies to disclose their information in an Integrated Report.

Second, Brown & Hillegeist (2007) found that overall quality of a firms’ disclosure is negatively associated with information asymmetry, and according to Leuz & Verecchia (2000), economic theory suggests that increased levels of disclosures lowers information asymmetry. Martinez (2015) examined the relationship between information asymmetry and <IR> for non-financial firms and found a statistical negative relationship between information asymmetry and the level of alignment with <IR>. Lee and Yeo (2015) found that the positive relation between <IR> and firm valuation is stronger for firms with complex organizational structures and information environments, for example firms with high levels of intangibles, large firms and firms with a lot of business segments. This implies that <IR> reduces the information processing costs arising from information asymmetry. In addition, they found that highly leveraged firms with high levels of <IR> integration, have a higher market valuation, suggesting that <IR> lowers the information asymmetry between managers and outside investors.

The third effect of corporate disclosure is a potential reduction in the cost of capital. Zhou et al. (2015) showed that the cost of equity capital reduces as the level of alignment with the <IR> framework increases. An improved information environment prompts investors to accept a lower rate of return because information risk has decreased (Zhou et al, 2015). According to Botosan (1997) the negative relation between disclosure level and the cost of equity capital twofold. First, greater disclosure enhances stock market liquidity and thereby reducing cost of equity through decreased transaction costs or increased demand for a firm’s securities.

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21 Secondly, greater disclosure reduces estimation risk about an asset’s return or payoff distribution. In addition, higher quality disclosures of more firm-specific disclosures decrease the covariance of a firm’s cash flow with the cash flow of other firms (Hughes et al, 2007; Lambert et al, 2007), which eventually reduces the betas of individual firms and hence, the cost of equity capital (Dhaliwal et al, 2011). Numerous research has been performed on the relation between disclosure level and quality and cost of capital and overall a negative relation has been found (Botosan, 1997; Botosan & Plumee, 2002; Botosan & Plumee, 2005; Diamond & Verecchia, 1991).

Disclosure of accounting information can thus be an important way to communicate firm performance and governance to investors. Whether the disclosed information is used in firm valuation by investors is discussed in the next subparagraph.

2.3.2 Value Relevance

Value relevance is defined as: “the ability of accounting or non-accounting measures to capture or summarize information that affects equity value” (Hassel et al., 2005, p. 45). Value relevance in this study is determined by analyzing how <IR> is reflected in the current expectations of future earnings that determine market values (Hassel et al., 2005).

Research related to value relevance is performed in different contexts which can be divided in three categories (Holthausen & Watts, 2001). The first category contains the relative

association studies which examine the value relevance of bottom-line accounting measures, such as

the difference between earnings under US GAAP or IFRS. The second category includes the

incremental association studies, which examine if accounting numbers are value relevant, given other

specified variables. They test the usefulness of individual financial statement components or disclosures (Holthausen & Watts, 2001). The third category contains the marginal information content studies, which examine if a particular accounting number is value relevant. These studies are mainly based on event studies and are relatively scarce. Depending on the research model, association studies investigate whether particular accounting amounts are associated with share prices, or contribute to the explanation of share prices (Glaum, 2009). Varies studies have been performed on the value relevance of financial information (Harris et al, 1994; Hung, 2000; Collins et al., 1997; Goodwin & Ahmed, 2006; Banker et al. 2009; Shamki & Rahman, 2012; Hail 2013), while other studies focused on the value relevance of non-financial information. To my best knowledge, to date only two archival studies focused on the market reactions of <IR> in South Africa. Lee & Yeo (2015) and Barth et al. (2015) found that firm valuation is positively associated with <IR> disclosures.

Amir and Lev (1996) performed research in the value relevance of non-financial information of independent cellular phone companies, and found that non-financial indicators

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22 such as customer penetration are highly value relevant. The characteristic of this industry, fast changing and technology based, makes the non-financial information probably more relevant than financial information. Riley et al. (2003) performed research on the value relevance of non-financial performance variables in the airline industry and found that non-non-financial performance metrics provide value relevant information that is incremental to the financial information.

In the context of CSR reporting, various studies showed that CSR is value relevant, but differs in outcome of positive or negative reflections in market values. Hassel et al. (2005) examined how environmental information is reflected in the market value of Swedish companies and found that environmental performance has a negative effect on firms’ market value. The decrease in market value is caused by a cost-concerned perspective, which means that investors see environmental reports a cost increasing feature. This is also argued by Palmer et al. (1995). Barth & McNichols (1994) and Blacconiere & Northcuth (1997) found that in a regulatory CSR reporting regime, stock markets initially negatively assessed the CSR information disclosed, but after technological investments have been consolidated and when a lower environmental risk is presented, the market value increases. Carnevale et al. (2012) examined the value relevance of CSR reporting of European listed banks and found no significant increase in market value for firm publishing a CSR report. However, these finding could be interpreted in a way that investors don’t think that the economic performance of banks is affected by its CSR behavior. Moneva and Cuellar (2009) examined the value relevance of environmental information of Spanish listed companies and distinguished between financial environmental information and non-financial environmental information. They found that non-financial environmental information is not value relevant, but financial environmental disclosures are. They also found that the value relevance of environmental information has increased after the introduction of obligatory

environmental disclosure standards.

Research that found positive value relevant information referred to the value creating characteristic of CSR. CSR is meant to create value over time, a way to increase competitive advantage, and an innovation opportunity, which may ultimately enhance financial performance and thereby improve investor’s financial returns (Hassel et al., 2005; Porter and van der Linde, 1995). Klerk and Villiers (2012) examined if Corporate Responsibility Reporting (CRR) is value relevant in South Africa and found that the share prices of companies with higher levels of CRR are likely to be higher. Sinkin et al. (2008) provided evidence that companies implementing eco-efficient business strategies have significantly higher market values than companies that are not eco-efficient. Schadewitz and Niskala (2010) found evidence that CSR reporting of Finnish firms according to GRI is an explanatory factor for a firm’s market value. Berthelot et al (2012) found

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23 the same results for Canadian companies listed on the Toronta Stock Exchange. Schadewitz and Niskala (2010) argue that their results indicated that CSR reporting is a tool to decrease information asymmetry between investors and managers. Lo and Sheu (2007) also found a significant positive relation between corporate sustainability and market value of large US-listed non-financial firms. Their results indicate that investors value companies with sustainability development strategies higher than companies that are less sustainable.

From prior literature we can conclude that financial and non-financial information can be value relevant, but differs in the way it impacts the market value of the firm. Research has found evidence for the cost-concerned view, but also for the value creation view.

2.3.2.1 Value Relevance valuation models

It is important to have an appropriate valuation model to test whether accounting or non-accounting measures are associated with stock prices. Consequences of an incorrect valuation model in incremental association studies can be incorrect predictions for the signs and magnitudes of coefficients of accounting numbers, or exacerbated correlated omitted variables problems (Holthausen & Watts, 2001).

In most value-relevant studies, market value of equity is used as benchmark to assess how well a particular accounting number is reflected in information used by investors (Barth et al., 2001). Holthausen and Watt (2001) distinguish three types of valuation models. The first is the

balance sheet model which assumes that the market value of equity is equal to the market value of

assets minus the market value of liabilities. This model only holds if there exists a market for each balance sheet component, if the markets are competitive and assumes no corporate control frictions. The second model is the earnings discount model, which assumes that earnings reflect the future cash flows. In this model stock markets rates of return are regressed on components of earnings, or earnings changes. The third model is the Ohlson (1995) model. In this model, market value of equity is considered to be a function of book value, accounting earnings and other non-financial information.

The advantage of the Ohlson (1995) model over the balance sheet model and earnings model is that it not depends on a concept of permanent earnings (earnings model), nor on only asset and liability values (balance sheet model). It does not take one extreme or the other, but it is expressed in terms of accounting earnings and book value of equity (Barth et al., 2001). Collins et al (1999) also found evidence that the earnings model is miss specified due to the exclusion of book value of equity. This induces a negative bias in the coefficient on earnings for loss making firms, and a positive bias for profit making firms. In addition, Glaum (2009) also stated that the Ohlson (1995) model is better specified than pure balance sheet or earnings models, by

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24 considering the two simultaneously. The Ohlson (1995) model also admits information beyond earnings, dividends and book value (Ohlson, 1995). The idea behind this is that according to Ohlson (1995) “some value relevant events may affect future expected earnings as opposed to current earnings, that is, accounting measurements incorporate some value-relevant events only after time delay” (Ohlson, 1995 p. 663). Prior research (Klerk & Villiers, 2012, Hassel et al, 2005, Moneva & Cuellar, 2009; Schadewitz and Niskala, 2010) used the Ohlson (1995) model to evaluate incremental value relevance of CSR reporting to shareholders and to test whether the combined effect of financial information and CSR information explains market attributes better than only financial information. Therefore I assume this is an appropriate model to test the value relevance of <IR>. In paragraph 3.1 I explain the Ohlson (1995) model in more depth.

2.4 Hypothesis development

In this section hypotheses are developed in order to answer the research question: is Integrated Reporting a value-increasing practice for companies listed on the Johannesburg Stock Exchange? The first hypothesis is the main hypothesis and is followed by two more detailed hypotheses.

2.4.1 Hypothesis 1

Corporate reporting is an ever –evolving field as companies continuously try to meet the increasing stake-and shareholder expectations. <IR> is a new way of corporate reporting, which aims to give an holistic view of an companies’ strategy, performance and business model in relation with the environmental, governmental and social aspects. <IR> is a relatively new phenomenon. To date, limited research has been performed yet on the value relevance of this new form of corporate reporting. Prior empirical research has found that financial information disclosure is value relevant, as well as non-financial information disclosure. As <IR> brings the financial and non-financial information together in one interrelated report, the first hypothesis is stated as follows:

H1: Integrated Reporting for companies listed on the JSE is value relevant

Prior research on the value relevance of CSR differs in its outcome of the effect of CSR on market values. The cost-concerned view argues that CSR reporting is mainly increasing costs, which results in decreased earnings. The value creation view argues that CSR reporting can induce competitive advantage, increase innovation and create value over time. Literature on the benefits and drawbacks of <IR> are quite similar to that of CSR reporting. Benefits of <IR> are inter alia, an improved information environment, greater insight in value creation over the short-medium and long term, data quality improvement, stake-and shareholder engagement, and

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25 improved risk management. Drawbacks are increased costs, risk of greenwashing and liability issues and the skepticism towards the credibility, reliability and comparability of the reports. However, <IR> in South Africa is mandatory for all listed companies on the JSE. According to Berthelot et al. (2003) and Moneva and Cuellar (2009), an introduction of mandatory reporting requirement may provide more uniformity in reporting practices which can improve comparability among firms. In addition, a mandatory regime requires more specific disclosures, which lack in a voluntary regime. Likewise, mandatory disclosure of information can possibly also help reduce information asymmetry between managers and investors and reduce social costs generated by investors to search for certain information (Moneva & Cuellar, 2009). In addition, according to Deegan and Rankin (1997), standards can improve the relevance of environmental valuation purposes. Given the benefits of <IR> and the mandatory regime for implementation of <IR> in South Africa, that might mitigate some of the drawbacks of <IR>, the following hypothesis is developed:

H2: Integrated Reporting for companies listed on the JSE is positively value relevant

The International Integrated Reporting Council (IIRC), that developed the framework for <IR>, released an IR-example-database which contains examples of emerging practice in <IR>. The website includes examples of Integrated Reports that refer to the IIRC framework and has extracts of reports that clearly illustrate the Guiding Principles and Content Elements. It also includes a section with ‘recognized reports’. These are reports that have been recognized as leading practice by a reputable award, or through benchmarking. The leading practice Integrated Reports show a high alignment of integration and satisfy a high level of the criteria in the IIRC framework. Assuming that a higher level of alignment with the IIRC framework gives more insight in the value creation process and improves transparency, a higher alignment with the framework is perceived more positive by investors than a lower alignment. Consequently, the following hypothesis is developed:

H3: Recognized Integrated Reports of companies listed on the JSE are more value relevant than non-recognized Integrated Reports of companies listed on the JSE.

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26 3 Research Method

The objective of this study is to examine if <IR> in South Africa is value relevant. I do this by testing if <IR> adds incremental useful information to traditional reporting information. Initially, I wanted to test if value relevance of <IR> increased after mandatory implementation of <IR>, compared to a voluntary regime for <IR>. However, I found out that prior to mandatory implementation of <IR>, no single company voluntarily published an Integrated Report, because companies listed on the JSE had to comply or explain the KING II code, which did not require an Integrated Report. This means I cannot compare the value relevance of mandatory and voluntary Integrated Reports. Therefore I compare whether Integrated Reports are value relevant, compared to a traditional reporting, which represents the KING II code regime. In addition, I test whether the value relevance has increased if an Integrated Report has been recognized as leading practice. The model used for these value relevance tests is the Ohlson (1995) model, which is explained in paragraph 3.1.

3.1 Methodology

The Ohlson (1995) model is a frequently used model for value relevance studies. It presents the firm value as a linear function of the book value of equity, net income, dividends and other information (Barth et al., 2001). Book value of equity and market value of equity would be equal if a companies’ assets and liabilities were completely valued at their ‘true economic value’ (Glaum, 2009). However, standard setters do not allow companies to capitalize all intangible assets and present all assets at current market values, but instead on book values. The Ohlson (1995) model predicts that under certain conditions the additional value that is not captured in the book value of equity, is reflected in the expected future abnormal earnings. (Glaum, 2009).

The Ohlson (1995) model is based on 3 assumptions (Ohlson, 1995). The first assumption is that the present value of expected dividends determines the market value. The second assumption is that a clean surplus holds, which means that all changes in book value are reported either as income or dividends, but dividends do not influence the income earned during the period (Feltham & Ohlson, 1995). That means that the equity statement has no income other than net income from the income statement (Schadewitz & Niskala, 2010). Third, the model assumes a linear progress of abnormal earnings and non-accounting information. Abnormal earnings are defined as current earnings minus the risk-free rate times the beginning of period book value. These assumptions lead to the following model:

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27 Where MVEjt is the market value of equity at time t, BVEjt book value of equity at time t, NIjt the net income at time t, vjt is other non-accounting value relevant information and εjt is a mean zero disturbance term. Various researchers have adjusted the basic model (equation 1) with specific elements in order to be relevant for their research question. In my research, I will follow the empirical model used by Moneva & Cuellar (2009) for hypotheses 1 & 2:

MVEjt TAjt−1= β0 + β1* BVEjt TAjt−1+ β2* Ejt TAjt−1+ β3*IR + ε (2)

𝑀𝑉𝐸𝑗𝑡 means the market value of equity of firm j at the close of the last day 3 months after the financial year end. It is calculated as the number of shares in issue at the last day of the three months after the financial year end for company j, multiplied by the share price of company j at the last day of the three months after financial year end. This three month period is used to allow time for the publication and analysis of the financial statements (Klerk & Villiers, 2012).

𝐵𝑉𝐸𝑗𝑡 means the book value of equity of firm j at the end of the financial year calculated as the difference between total assets minus total liabilities.

E𝑗𝑡 is income minus extraordinary items of firm j at the end of the financial year. This represents income of a company after all expenses, including special items, income taxes, and minority interest, but before provisions for common or preferred dividends.

These variables are deflated by total assets at the end of the previous financial year (𝑇𝐴𝑗𝑡−1) to control for size. According to Moneva & Cuellar (2009), larger companies generally receive more media coverage and have a higher analyst following than smaller companies. Thus, company size can be a proxy for outsider’s knowledge of the value creation <IR> aims to achieve.

<IR> is a dummy variable, which equals 0 before mandatory <IR> implementation and 1 after mandatory <IR> implementation. To my best knowledge, no database contains information regarding <IR>. The level of integration can vary among firms, since the King III is principle-based with an ‘apply or explain’ option. However, to date there is no certified theoretical model developed to rank the level of integration if <IR>. Therefore, <IR> can also not be measured reliably on the basis of level of integration.

However, the IIRC examples database website

(http://examples.integratedreporting.org/home) recognized several Integrated Reports as leading practice by a reputable awards process, or by benchmarking1_{from 2011 to 2014. Several South} African companies have been recognized as leading practice. The criteria used in the assessments of the Integrated Reports in the award granting, is according to the IIRC reasonably aligned with

1_{PwC Towards Integrated Reporting: 10 year anniversary, EY Excellence in Integrated Reporting Awards, PwC’s}

Building Public Trust ‘Excellence in reporting’ awards, Chartered Secretaries South Africa (CSSA) Integrated reporting Awards, Nkonki Top 100 JSE listed Companies Integrated Reporting Awards

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28 the IIRC framework (IIRC, 2013). Therefore, the awards granted can be seen as appropriate measures of level of integration of <IR>. To test if these recognized Integrated Reports are more value relevant than non-recognized Integrated reports, the following model is developed to test hypothesis H3. MVEjt TAjt−1= β0 + β1* BVEjt TAjt−1+ β2* Ejt TAjt−1+ β3*RR + ε (3)

RR represents a dummy variable for the recognized reports as leading practice through a reputable awards process or trough benchmarking1_{. The dummy equals 0 for a non-recognized} report and 1 for a recognized report. All other variables have been defined above. Note that the <IR> dummy from equation 2 is excluded, since all reports in the period from 2011-2014 are Integrated Reports. Therefore, the dummy value would equal 1 for every observation in the sample.

3.2 Data and sample selection

The sample consists of companies listed on the Johannesburg Stock Exchange (JSE) in the period 2008-2009 and 2011-2014. These two periods represent the pre-and post-implementation periods of <IR>. 2010 represents the transition year, which is excluded from the sample. Data is retrieved from the WRDS Compustat Global database. The specific data that is retrieved from the Compustat Global - Fundamentals Annual are company name, industry format, data year-fiscal, period duration, data date, total assets, total liabilities, income before extraordinary items, active/inactive status and ISO country code. From Compustat Global Securities Daily are the currency code-daily, shares outstanding (CSHOC) and daily close price (PRCCD) retrieved. Share price and shares outstanding are retrieved 3 months after the data date (the end of the financial year closing date). If there was no share price and shares outstanding available on the data date, for example because data 3 months later is a weekend day, then the data is used from the trading day closest to the 3 months after data date. For example, if data date +3 months is 2009-05-31, but no data for share price and shares outstanding was found on that date because it is a Sunday, then the available data on 2009-05-29 is used. This 3 month period is used to allow time for publishing and analyzing of the annual report.

The initial sample consisted of 291 companies. From this initial sample 84 companies were removed which were classified as financial service firms. It is assumed that financial service firms have a limited effect on social and environmental aspects. Hereby it is expected that shareholders and stakeholders will value those Integrated Reports less relevant than Integrated Reports from companies with a greater social and environmental footprint. Following Klerk &

Value relevance of integrated reporting in South Africa

Value Relevance of Integrated Reporting in South Africa

Abstract

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