Change of value relevance in South African implementation of Integrated Reporting

Amsterdam Business School

Faculty of Economics and Business, University of Amsterdam

Change of value relevance

in South African implementation of Integrated Reporting

Name:

Kainan Wu

Student number:

11376961

Thesis supervisor:

Dr. G. Georgakopoulos

Date:

June the 26th, 2017

Word count:

16,570

MSc Accountancy & Control, track Accountancy

Statement of Originality This document is written by student Kainan Wu 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.

Abstract

Exclusively set in South Africa, this thesis has managed to build a holistic understanding in the value relevance of Integrated Reporting. Integrated Reporting in an emerging and evolving corporate reporting code linking both financial and non-financial information as a whole and putting prior focus on how company could create value with time being. South Africa is the first country across the world implementing this new code of reporting on a mandatory basis. Initiated on the compliance of <IR> on all non-financial companies listed in Johannesburg Stock Exchange, dual investigations on accounting value relevance are carried out on both 2008-2015 (excluding the transition year 2010) and 2011-2015. I have found a positive and significant relationship between implementation of Integrated Reporting and value relevance, supporting the value-creation perspective of <IR>. Specifically, I have also found that <IR> influence positively on the earnings’ value relevance. Among past empirical studies, those findings are in favor of <IR> being a positive experience in creating value over time, lowering the investment risk and enhancing the market efficiency.

Table of Contents

1. Introduction……….5 2. Theoretical Framework…………..……….……….………..10 2.1 IR……….10 2.1.1 Definition of <IR>...10 2.1.2 Evolution of <IR>...11 2.1.3 IIRC Guiding Principles………12 2.2 Practice of Integrated Reporting………...………..15 2.2.1 King III & IV Report………....15 2.2.2 Implementation of Integrated Reporting and Framework………16 2.3 Advantages and Disadvantages of <IR>...16 2.3.1 Advantages………..16 2.3.2 Disadvantages………....18 2.4 Literature Review……….20 2.4.1 Regulation, Disclosure of Information………....20 2.4.2 Institutional Mechanism of Value Relevance………..22 2.4.3 Key Value Relevance Studies………24 3. Hypothesis Development………..………...29 3.1 H1………...29 3.2 H2………...29 3.3 H3………...30 4. Research Method……….. 32 4.1 Methodology………...……….32 4.2 Data & Sample Selection………...35 5. Statistical Outcome………..……...38 5.1 Statistical Description………....38 5.2 Correlations Analysis………..41 5.3 Regression Analysis……….42 6. Conclusion………....48 Reference list………...…………...50 Appendices……….56

1

Introduction

In an international background where non-financial information is becoming more and more dominating in comparison with financial information, there have been increasing amount of discussion and proposals on rising the standard of disclosure code in recent decades. Expectation on corporate disclosure are being brought to a new next level, with rised awareness on the issue of sustainability, accountability when making comparisons among companies nowadays. Apart from the straightforward figures like profitability and earnings per share, shareholders are now taking in equal weight of consideration on the non-financial side, for instance, how sustainable the company is being able to maintain strong performance sustainably in the long-term, or how much compensation should be conducted to the underlying environment on top of daily production. Conventional reporting code of financial reports does give out a concise, yet backward-looking view on the capital side, but not necessarily contain emerging environmental information meeting the stakeholders’ needs. (FRC, 2014) Internally for the management, executives have also recognized the need and emergence of publishing non-financial, operational information besides finance figures, regardless of voluntarily or not. Based on EY (2015) tracking on multiple managerial forces among different countries, more than 70% of those have agreed on a common ground that more disclosure on social, environmental and economical channel would be more likely leading to success and making positive influence, ultimately helping companies achieve their long-term goals. In the past 20 years, Eccles and Saltzman (2011) has observed various kinds of evolving reporting proposals with attentive focus on the non-financial contents, for instance, sustainability reports (SR), or corporate social responsibility reports (CSR). Despite sharing similar initiatives on disclosing side information of relevance on company’s daily operation, there was not any unified codes or standards to regulate or compare between various reports. In this way, these reports were deemed as separate, distinctly related from financial disclosures for the entire corporation. Meyer (2000) has found that shareholders are overly exposed to excess amount of information, whilst the reliability and relevance has both dropped. In other words, the entire efficiency of corporate disclosures has somehow decreased. Designed to match both non-financial information and financial disclosures as one entity, there have been multiple international organizations established to solve the low efficiency issue. In 2010, International Integrated Reporting Council (IIRC) was founded, together with a drafted framework for reporting in an integrated manner. The concept of Integrated Reporting, or <IR>, was mentioned for the first time and aiming at linking the financial and non-financial side

together. With full adoption of this prospective, the capital markets are expected to operate with better efficiency, and stakeholders would be able to understand how incremental capital value could be created in the long-term timeframe. In the regional setting of South Africa, it has become the de facto first country to implement this evolving code of <Integrated Reporting> on a mandatory basis among the world, inherited in the national governance code of South Africa’s KING III from September 1st, 2009. South Africa has taken radical steps in embracing sustainable development compared to a huge quantity of other countries, with references to the preceding KING I & II code in governing its corporate disclosures. As indicated also by EY (2014), companies who are willing to conduct their initial public offering in its Johannesburg Stock Exchange need to comply with KING III code, using <Integrated Reporting> as their disclosure code. In the actual practice, an organization is recommended to form a holistic view on all the capitals the company employed and how it shapes and responds towards its surrounding business environment. With equal weight on economic, environmental and social aspects, corporations are now being forced to review the relationship between different capitals and hereby how to efficiently create value over time. The rationale behind is that investment decision-makers would be able to better process information and hereafter enhance the market efficiency with time being. Academic wise, there have been two dominating views in implementing <IR>, namely, value-adding view and cost-concerning view. In other words, researchers have managed to gather evidence in supporting <IR> as adding net value to operation, however a number of those also argued that complexity of actual operation would incur high costs, by which can’t be compensated by its benefits. To list a few core academic findings, Barth et al. (2015) has founded out that higher level of <Integrated Reporting> would reduce the information asymmetry existed. Bray (2013) has argued that financial performance would get enhanced after integration on reports under the concept of integrated thinking. However how integrated reporting bring effects on firm value and accounting information quality are relatively scarce. Based on prior researches, my thesis aims to fill in this empirical gap in the South African setting: whether Integrated Reporting has brought positive/negative effects on JSE-listed companies? And if so, how is the effect being achieved? To specify my research direction, I have chosen value relevance since they are some reliable and frequently-used models among prior researches, as is a key component of accounting information quality. I haven’t found much studies up-to-date with high emphasis on the extent of value-relevance and implementation of <IR>, either with pervasive time length

across the transit period. Nor there were any researches on <IR> affecting the rest of value relevance factors. The first stage of my research is to examine how the value relevance level is affected by the implementation of <IR>. Given the lack of specified framework on ranking the participation of <IR> and sustainability reports before implementation, I have focused on comparing between full timescale and post-implementation timescale to wipe out possible inaccuracies. Ohlson (1995) model was used to examine if reports produced are more value relevant than how it used to be, which is both a testing and a comparable benchmark. Despite South African stock exchange not being perfectly value relevant in the start, results here do support the view that the implementation of <IR> is adding value relevance to JSE-listed companies, in the alignment of value-creation perspective aforementioned. Instead of cost-concerning perspective, <IR> has then actually incurred more positives outweigh the costs, such as intensified level of stakeholder engagement and reduced information asymmetry. As the second stage, I manage to dig in the <IR> issue with an in-depth focus on the earnings’ value relevance. As an important component used before, I have stepped one extra mile from empirical studies with regards to earnings and consequent value relevance. However, there are no research at all in linking the implementation of <IR> and earnings’ value relevance, nor in either scale of full time length and post-implementation phase. My research has targeted this particular research gap, with adoption of Basu (1997) earnings’ model to ensure the reliability and credibility of the outcome. I have found significant and positive relations between the implementation of <IR> and improvement of earnings’ value relevance, as a key representative of earnings’ quality. My statistical results have then supported numerous academic researches which indicates financial figures carrying important and positive features of accounting quality, which also could be comprehended as an indirect channel on the increase of overall accounting quality. Overall <IR> is now demonstrated to enhance the value relevance since implementation, with proven positive influence especially on earnings’ quality. It has also matched perfectly with a number of practitioner reports that investors do have better knowledge on the corporate competency of creating value with time being and forming a more sustainable business environment, throughout organizing and linking different capitals. In other words, <IR> is a value-adding experience throughout the implementation process, bringing observable benefits towards the market, investors and companies per se.

The thesis has made quite a few important contributions towards current academic findings. Firstly, I have added reliable sources to support value-creation role of <IR> in a statistical setting, with extensive coverage on dual timescales 2008 – 2015 and 2011 - 2015. With full respect of empirical studies, prior researches on <Integrated Reporting> have rarely adopted quantitative form but in qualitative, especially in the field of beneficial outcome and internal advantages. (Eccles & Saltzman, 2011; Graham et al., 2002) It may due to an absence of data covering a credible length of time scale to carry out statistical analysis and the limitation of countries - South Africa are the first and only country to mandate this new evolving code of corporate report to date. Very few researchers have actually examined the firm value creation role in the South Africa across both pre-implementation and post-implementation, with a full range of qualified companies and a long-recognized time length engaged. Moreover, I have found the only academic paper with similar direction and outcome as the Barth et al. (2015), which have been explicitly exposed to the restriction of post-implementation period instead of making a comparison with before. With trustworthy models commissioned in an unbiased perspective, I have also filled in the credibility gap in a qualitative manner. Secondly, I have also examined how <IR> shaped to other value-relevance factors already recognized, namely, earnings’ quality, in the background of <IR> implementation. Despite being naturally intrigued by the cause-effect chain of integrated reporting, I have not managed to find any researches in this exact direction on exploring how <IR> works towards current market coordinators. Apart from filling current research gaps, I have also conducted verification of earnings quality in an emerging country during the transit period of governance reporting code, with full potentials and flexibility of use in other relevant fields. Thirdly, this research is conducted in the mandatory implementation scheme rather than voluntary participation, it removed the difference between voluntary and nonvoluntary firms, without sacrifice in individuality and credibility. In terms of research relevance, not only investors, but also all investment decision-makers should find this research of much use. I have provided a strategic academic framework on listing on the advantages, disadvantages workflow intensively sourced from <IR> and its application. They would benefit in better valuing the participating firms, with eased access and holistic viewpoints. My research would also be of great relevance towards accounting practitioners of <IR> as a solid evidence where <IR> is definitely value-adding experience, with proven enhancement on earnings’ quality. Last but not the least, regulators and standard setters would find a naturally established relevance since they could use the findings to fence advocating <IR>, in an international setting.

This research is structured as below: Section 2 is a full yet concise description on the theoretical framework, with statements of <IR> features and models adopted. Section 3 & 4 elaborates on the development of three hypotheses and research methods. Section 5 display the findings,

2

Theoretical Framework

Starting from paragraph 2.1, a full elaboration on the how <IR> developed and evolved would be made, with a further expansion on the initial guiding principles. Paragraph 2.2, based on the King III Report in 2010, illustrates on the practice of Integrated Reporting and the reasoning behind the debut of revised <IR> Framework in 2014. Paragraph 2.3 moves onto the advantages and disadvantages of <IR>, while paragraph 2.4 a concise literature review is introduced. 2.1 Integrated Reporting 2.1.1 Definition of <IR> Integrated Reporting, or <IR>, is an evolved norm of corporate reporting, focusing on conciseness, strategic relevance and the value-creating process. (IIRC, 2016) Throughout integrating multiple reports into one, <IR> is deemed to significantly improve the quality of annual reports, it is widely accepted that <IR> has not only managed to provide insights of organizations’ ability of creating value in the long term, but also enables a new process of communication with stakeholders on creating value. (IIRC, 2014; Eccles et al., 2011) It is worth noticing that <IR> is the next accounting trend across the globe and there has been a wide range of countries planning to switch to this new innovative mindset. Followed by a mandated switch onto Integrated Reporting for all JSE-listed companies from 2010, South Africa has become the first country fully embraced with this next generation of reporting code. Within its KING III Code on Governance implemented at 2009, <IR> has been recognized for the first time in the South African official channel, marking a milestone of global acceptance of this next generation of framework (SAICA, 2010) In the foreseeable future, as indicated by IIRC (2015), the concept of <IR> would be continuously empowered by a global alliance of investors, shareholders, governmental bodies and regulators, contributing to the ultimate of achieving report reliability and capital efficiency. The idea of <IR> generated from the uprising significance of non-accounting information involved in the modern-day business. The influence of globalization, developments of emerging markets and frequent movements of capital have complicated a huge quantity of businesses and therefore called for heavier regulations and more disclosure on non-accounting information involved. In other words, complex business operations in the modern era are in a great yet actual demand to deal with different issues in technology, environments and sustainability.

(Kolk, 2005) On the shareholders perspective, they have also urged to center more information to get disclosed appropriately and complied with the latest possible regulatory requirements, eventually receiving reasonable level of assurance from the company. On the company side, management is willing to demonstrate their commitments on complying with the latest regulatory policies and concerns, disclosure onto particular issues are deemed widely accepted and encouraged. (Eccles and Krzus, 2009) For instance, the first individual environmental report could be dated back to the end of 1980s. Thereafter a large quantity of social, accountability and environment reports, on top of regular accounting and finance reports were produced and published. Based on a survey produced by EY on 2014, 95% of Global Fortune 500 companies have produced reports on sustainability, social or environmental effects in 2013 where as only 39% of companies were doing so one decade ago. Non-financial reports are becoming more and more crucial nowadays - one corporation may meet the analyst short-term expectations in its financial performance but fail to comply with the legal, environmental or governmental objectives which may sacrifice its long-term value-creating process. Over the past 10 years, the practice of disclosure has changed dramatically due to a considerable involvement of non-financial matter- for the first time ever, firms are willing to disclose details on how the generate revenues in an eco-friendly way, or whatever responsibility they have taken for our next generation. (Mingyi, 2001) More and more intangible assets, information on the sustainability of corporate information are now becoming more and more visible to stakeholders hence prolonged disclosure codes were required, partially voluntary from the management themselves, but more from the pressure externally from the capital market. (IIRC, 2010) 2.1.2 Evolution Along with more disclosure on accompanied non-financial information, there wasn’t much choice available yet to monitor, regulate and supervise disclosure on these fields from the first sustainability report issued in the late 1980s. (Zickliene, 2013) Dated back to 1997, Global Reporting Initiative (GRI) were founded and the first guideline were debuted on non-financial reporting three years after, with an initial focus on full range of sustainability. According the viewpoint of Jean-Francois (2015), the issue of reporting guideline has increased quantity and comparability of sustainability reports. Throughout linking the financial information and the non-financial information together, stakeholders could benefit in improved efficiency within decision-making and a better understanding their environmental impacts. (IIRC, 2014a)

To unify both financial reports and non-financial reports into one, <IR> has come into being as the ultimate solution, Velte (2014) has indicated its undoubtedly raised popularity based on an external expectation of replacing a majority of reporting standards within the capital market. In comparison of standard corporate reporting, <IR> managed to consider, process separate information involved in the business, produce and supply an integrated view in the relevant subjects. As is also suggested by Eccles and Serafeim (2011), information on strategy, governance and future development are therefore more actively engaged. Given those advantages and benefits, South Africa has become the first country to integrate <IR> on its biggest stock exchange - Johannesburg Stock Exchange, and it is deemed that more countries are on their way to implement the transform corporate reporting codes. It is also worthwhile to notice that the research would be carried out from data collected on firms solely based in South Africa, where the concept of <IR> is mandated by the regulation body from 2010. Data would be collected 2 years before, up to 2008, and 6 years later, after the mandating of <IR>, further explanations would be possible within the literature review. 2.1.3 IIRC Guiding Principles Almost certainly there would be an initiation group to help new formats or innovation widen their audience range and receive extensive exposure. (Meyer, 2000) IIRC, or International Integrated Reporting Council, came into being at 2010 - the foundation partnered with a good range of stakeholder groups, aiming at improving transparency and establishing valid communication on corporate value-creation process. (Jones, 2010) They have published a fundamental framework in regards to <IR> in 2013, not only aiming at more exposure and unification of the “integrated” concept, but also providing all stakeholders a contemporarily complete guideline on their concerns. (Eccles & Kruzs, 2013) Instead of one stakeholder fighting for his or her own best, the framework has advocated a mindset that these interests mutually affect, complement and eventually complete each other. (IIRC, 2013a) As a starting point, IIRC Framework perceived the business activity of an organization, such as utilizing and transforming resources or building and influencing relationship, as an engagement with different sets of capitals - namely, financial, manufacturing, intellectual, natural and social capital. (IIRC, 2013a) Those capitals should be processed with the integrated way of thinking, which put an emphasis on the inter-relations among all sorts of capital an organization may come across rather than focus on one singular capital. (IIRC, 2013b) Under this approach, IIRC’s innovative mentality treat business organization as a device of principal, through which

creation, interaction and declination would transpire as consequence. To simplify the understanding of integrated report, 4 Fundamental Concepts and 7 Guiding Principles were given in the 2013 version of Framework. Underneath table 1 provided a cohesive description: 4 Fundamental Concepts 7 Guiding Principles Profound: <IR> is about value-creation over time, affected by external environment and relied on multiple resources. Organizational overview and external environment: <IR> should incline ample understanding on organizational strategy, relating to the ability on creating values and capitals. The Capitals: 6 Key Drivers instead of ‘the 3Ps’ (people, planet and profit) [Human, Natural Financial, Intellectual, Manufactured, Social & Relationship] Connectivity of information: A full, complete overview on factors could cause changes on the value-creation ability. Value Creation: A business should manage to create value for others (stakeholders); in the long-term, accomplish value-creation for the organization per se. Stakeholder Relationships: <IR> would cover the relationship from the key stakeholders and how the organization could respond. The Value Creation Process: Outcome of business activities are emphasized instead of focusing on the conventional business concepts. Materiality: A decent focus on the substantial matters within value-creating process. Conciseness: <IR> should integrate information in the most concise manner. Reliability and Completeness: An exclusion of material errors, missing information should be present in <IR> at all time. Consistency and Comparability: <IR> should be consistent with time being, and comparable with others. Table 1: Fundamental Concepts and Guiding Principles (Deloitte, 2015)

Table 2: Demonstration of value-creation process - various kinds of capital are employed in the ‘’external environments’’, affected by “governance policies” and ultimately engaged in the circular flow of Content Elements. To keep a high standard of materiality, consistency and relevance, this principle-based framework is designed with reasonable discretion on managers executing their judgements. There were no particular measurements or evaluation techniques formulated within the framework. How well the organization conform to the key principles would differentiate from one industry to another, even one firm from its primary competitors. Despite certain academic views on the conceptual thinking being integrated as vague and material, the framework did contribute to form a concise and understandable report, which brings in improvements in market efficiency. (PwC, 2015) However, it is worthwhile to notice that IIRC Framework on implementation of <IR> hasn’t been set as the governmental guideline in South Africa as of now. Yet this systematic framework has been recognized in the official channel as of both importance and excellence. (IoDSA, 2015) IIRC

Framework has founded as one of the core intellection of <Integrated Reporting>, which would be expanded in section 2.3. 2.2 Practice of Integrated Reporting 2.2.1 King III & IV Report Effectuated on March 1, 2010, “Kings Code and Report on Governance of South Africa” (aka King III) was issued by King Committee on Governance. This 75-principle-long code consists of a list of code and handy recommendations during practice, providing corporate directors guidance on governance. (IoDSA, 2009) The target audience of the code locates in senior management, who are expected to refer to the governance code achieving the best interest of company. On top of Kings I & II code, South Africa has taken a de facto leading position across the globe for advancing their own standards and norms for corporate governance. (Deloitte, 2016) Based on the observation of EY (2009), Kings III has taken one step further by providing more detailed explanation and introducing new mindsets. Financial and sustainability information would be needed to integrate with <IR> (PwC, 2009a), companies are required to generate ample information on the impact from the business activities on the local communities, with demonstration on their effort of improvement in the next upcoming period. Apart from integrated way of thinking, it mandates companies to execute all the 75 principles, and “apply or explain” the effort in complying with the code. King III Code initiated to advance the economy with great sustainability and bring positive influence on social and environmental skills. Whilst companies possess discretion of tailoring the framework to their own needs, simultaneously they are in obligation of either applying the aforementioned principles or explaining the rationale of not applying these. (PwC, 2009) As the first stock market embedded and mandated Integrated Reports, Johannesburg Stock Exchange are up to now the only one enforces disclosure of information on corporate governance and policy compliance for its listed companies. The draft of King IV code is published in May 2016, where the expected effective date of a final revised version falls in 2018. On top of a systematic setting of 75 principles, King IV aims to group these codes into 16 areas, facilitating the application with strengthened obligation in regards to compliance. (Deloitte, 2016) Embedded of integrated thinking, it has also required a specialized appointment of social and ethical committee (SEC) for governance affairs, including

preparing and organizing Integrated Report. The significance of Integrated Report has been reaffirmed at the board level, calling for an intensive level of inclusion and conformance of sustainability, environmental and social information. 2.2.2 Implementation of IR and framework Based on the IIRC Framework, <IR> aims at enhancing information flow, bringing improved and cohesive viewpoints on accountability, stewardship and transparency to investors. To start with, managers are encouraged to take in wider and deeper scale of information, moving business along in a more sustainable and holistic way. (Deloitte, 2014) This integrated way of thinking is of such significance that IIRC has set a specific definition as follows, - “the active consideration of the relationships between various operating and functional units and capitals”. As of essence to implement <IR>, integrative thinking would urge organizations to execute full consideration and undertake responsibilities for the hired capital in short, medium and long term. A successful implementation of <IR> would be starting with putting “integrative thinking” into practice, meeting the obligations of <IR>. (IIRC, 2013) There has been different approaches on how to transform the conventional business settings into the newly integrative way, while a main differentiator would be industries. As PwC (2015) suggests, companies in the financial sector may experience a quicker transition phase than traditional mining industries where impose direct effects on the surrounding environment. This would give sufficient reasoning to exclude companies which are solely finance based during research sampling phrase (Sector 4). 2.3 Advantages and Disadvantages of <IR> 2.3.1 Advantages <IR> provides a fully new mindset of reviewing the business and reorganizing key elements crucial to the day-to-day running of corporates. It links all the necessities within an organization and prioritizes what is needed for value-creation, across the short, medium and long haul. (IIRC, 2013) Additionally, since organization now needs to liaise with a wide range of factors, production of an Integrated Report is a dynamic process per se engaged both from and to external environment, instead of staying static and solely collecting and verifying data as in standard report.

In comparison with the conventional ones, <IR> has linked the financial side of a company with the non-financial side in an independent and efficient way. An observation from Berg and Jensen (2013) indicates that the inclusion of environmental, social and governmental information manages to urge companies to tradeoff between maximization of earnings and minimizing negative impacts in the community. At a long-term horizon, this constant inclusion of would potentially lead to innovation of new business models, aiming at achieving financial and non-financial goals in the same time. In this field, there has been a possible alternative called ESG Reporting, which has been advocated in London (London Stock Exchange) and Milan (Borsa Italiana). As well as staying an emerging and specialized standard, ESG is argued by Ioannou (2016) as losing the connectivity between value-creation process and the employed capitals. On the contrary, <IR> and the core way of integrated thinking managed to provide a holistic picture of organizational performance, and a better understanding on the business themselves. There is also evidence on how <IR> could benefit the business corporations themselves following adoption of <IR>. For instance, PwC (2014a) summarized organizations now have a better understanding of the link between business activities and value-creation process. Non-financial information is just as valid as financial information under the integrated approach rather than a negative byproduct requiring management and random disclosure. In other words, <Integrated Reporting> has become an inspiration, especially to small and medium enterprises (SME) that positive value is able to get created throughout social and environmental affairs, apart from their daily operations. (Banerjee, 2016) Since all six capitals possess the same importance from each other, business may now need to introduce performance measures to newly recognized non-finance capitals and transform its hierarchy for better conformance. Eccles & Saltzman (2011) has provided support on this perspective since more data in new dimensions such as non-financial capitals are researched, organized and presented in a systematic way. This new dominating mentality would benefit the firms from modernly structured hierarchy and new strategies in internal management and an improved reputation and swift market reaction at the external level. Additionally, <IR> managed to engage and manage prevailing relationships, which would bring benefits in lowering down the cost of communications. Under the current <IR> framework, an organization is the device to collaborate among different parties, including but not limited to, customers, supply chain, local communities, governmental bodies and the rest of stakeholders. (Garvare & Johansson, 2010) <IR> incurred valid conversation throughout stakeholder groups, shifting their concern away from the short-term financial gains to the long-term value-creation

process. (IIRC, 2013) In other words, organizations now gain the legitimacy to make a certain level of sacrifice on the short-term financial figures when possible, thanks to the integrated thinking on business, which would help in retaining the long-term sustainable strategic investors. 2.3.2 Disadvantages Despite the benefits <IR> are carrying around, it also maintained quite a few disadvantages which might restrain the adoption of <IR>. (Kooiker, 2014) The concept of Integrated Reporting, with the behind integrated thinking process, does obtain a very small sample compared to the current mainstream standards. As of now South Africa is the one and only country mandates <Integrated Reporting> as its official standard. Eccles & Saltzman (2011) indicates that there is still room for the companies in South Africa to evade away from integrated reporting requirements, since the intrinsic discretion from the <IR> Framework. And EY (2015) has found out companies choose to adopt a laid-back attitude and abuse the designated discretion during implementation. In other words, it could be argued that disadvantages lay in its loose design and small scale of current adoption of <IR>. Stakeholders may have some extra information on the sustainability or accountability from the companies of interest, yet not being able to contribute on the decision-making process or relieve the situation of information asymmetry. As a relatively fresh standard in reporting, <IR> may not deliver as much assurance as other reporting standards, which may also explain the limited scale of adoption of <IR>. Apart from IIRC, there is few assurance codes and operations supporting <IR> with international recognition. Internally, very limited information were given or suggested within <IR>, on the reassurance of disclosed information despite the involvement of non-financial capitals, which should require more complex and difficult verification. Based on Eccles and Saltzman’s research (2011), third-party assurance providers need to engage within the integrated thinking process and wider range of operation fields, instead of focusing on financial figures. The auditing procedure per se hasn’t produced sufficient level of assurance on financial figures themselves, let alone more complicated set of non-financial information. To deliver reliable and credible information within <IR> framework would seem a challenge without participation of valid assurance systems in the modern era, which is the exact case at this stage. (Kolk & Perego, 2012) Transformation on providing and testifying those new integrated information is called for otherwise <IR> may not benefit the stakeholders as supposed with reasonable level of reassurance.

The concept of <Integrated Reporting> engages a new set of information flow, which build multiple potential shortcomings for the implementation of <IR>. As suggested by Deloitte (2015) in its implementation guide, only a small certain amount of non-financial information is directly present before or during reporting period. There is a significant difference between the design of disclosed capital elements in published reports and the actual availability of information in day-to-day business operations. This viewpoint is also supported by Ferrero-Ferrero (2016), as information like social impact, team construction and supply-chain elasticity would call for a different approach from conventional reporting on financial data. Organizations who is prepared for integrated reporting might need to rearrange themselves to meet the minimum threshold of relevance and materiality requirements in the new reporting standards, which potentially would incur high and unforeseeable turbulence. Deloitte (2015) has proposed another instance, human resources are deemed as one of the biggest cost-center in the traditional reporting, yet in the new integrated way they also bring along quantifiable benefits. Nevertheless, providing an accurate, certified viewpoint and linking them with those existed financial capitals would be extremely challenging, since spreading, producing and refining existed information generate a considerable amount of overheads. It would be evident to argue that a full adoption of<IR> would be pseudo-efficient and overly complicated under both cases stated above. Last but not the least, <IR> could lead to confusion and incompetency on audiences in numerous ways despite its intention on aligning capitals and unifying interests. Different users of report have different understanding of reports, including materiality and horizons. (DeVillers, 2014) For example current shareholders would prioritize equity plans or recent financial performance, whilst governmental stakeholders may wish to firstly gather information on corporate social responsibility. Historically conventional annual reports provide insights on guideline for investments while CSR reports separately demonstrate net overall influence onto the community. As long as the integrated reports draw on full range of audience including both shareholders and stakeholders, report materiality may drop below the materiality from linking multiple sides of business as a whole therefore form negative communicative impacts on communications among all parties. (GRI, 2016) In this way <IR> may create incompetency for companies due an absence of information materiality, which may not be an influential issue when reports are prepared distinctly for different user groups. On the senior regulatory side, Serafeim (2015) observed some confusion behind when designating the target audience of integrated reporting. Based on IIRC framework (2013), it stated the principle users of Integrated Reporting are decision-making financial investors, with a particular focus on the sustainability of value-creating in the long term. On the contrary, as the only official

governmental body who mandates <IR>, South Africa’s KING III & KING IV indicate that <IR> is ought to take place with priorities on full stakeholders, acting as a communication tool addressing different interests. Different perceptions on how companies should integrate the new code may subsequently mislead the process of preparation, which explains the variety of post-implementation practice and outcome in South Africa. (Eccles & Saltzman, 2011) Still, as noticed by Serafeim (2015), <IR> is a considerably new, revolutionary code of reporting where calls for collaboration of different parties. There is considerable amount of challenges yet could be overcome with time being, where mature practice of implementation is then formed. 2.4 Literature Review 2.4.1 Regulation, Disclosure of Information Accounting information, as argued by Leidner (2006), occupied two roles when disclosed towards providers of capital - valuation role and monitoring role. Namely, it enables a sense-making, accurate valuation on the expected return of their investment against subjected risk. No matter how well a business is performed in the current fiscal year, organization also get monitored from their disclosed information and help disseminate private information like how capital is utilized. (Hopper, 1985) Nevertheless, the modern business world is far away from the ideal academic settings, Palepu and Healy (1993) indicates multiple threats preventing accounting information acting those roles. Firstly, there is a certain level of information asymmetry between the principal (shareholders) and the agent (management), whilst managers have more inside access on day-to-day operations. Therefore, it may arise dislocation between the interest of the shareholders and management, given managers have the access and means to manipulate financial figures for their own interest instead of for the fellow shareholders. In addition, both parties could face different choice of horizons - managers may be supremely motivated to fish for their own extra bonus for a short-term bonus, at the cost of long-term investors who prioritize long term sustainable growth. As an overview of the second layer, the phrase of “lemon problem” explains another sense of imperfection would externally mislead investors with wrong perceptions - poorly performed companies may get highly valued than companies actually staying competitive. (Akerlof, 1996) In the last, Huang (2017) has testified the existence of multiple loopholes underneath the

current standard settings and reporting codes, stating a certain level of possibilities for managers to abuse and manage earnings. To deal with those deficiencies, there has been numerous attempts from the regulation side to optimize the information flow. The emergence of new generation of remuneration contracts and reporting codes incentivize a complete, future-orientated information disclosure from management. Moreover, internal and external auditors are in place for the provision of extra credibility on their reporting outputs. (PwC, 2014) As the multiple studies revealed, there would be dynamic consequences from corporate disclosure. To start with, Healy and Papelu (2001) has found visible evidences of disclosure on the capital market, namely, a straightforward increase on both stock liquidity and efficient capital market coverage. Within the background of integrated reporting in South Africa after 2010, it is observed that the quality of reporting get better enhanced with more intensified level of integration on the code of <IR>. (Raghaven, 2015) It reflected on increased confidence level from capital market, by-following reduction of the cost of capital, diminished inaccuracy for analysts in an unchanged coverage. (Owen, 2013) Secondly, an advanced setting of disclosure guideline would bring significant benefits in overall disclosed information, relieving negative impacts from information asymmetry. In the setting of South African debut of <Integrated Reporting>, Lee (2015) managed to discover a valid and positive link between the participation of <IR> and market valuation, especially for firms with multinational existence and complex information environments. <Integrated Reporting> settled in the role of efficiency stimulator during collecting, processing and producing various kind of information. (Healy & Papelu, 2001) Those corporation fully embrace this innovative reporting code would suffer less from local compliance pressure when expanding to new regions, since they are more likely perceived as a positive example of developing the current sustainable models, with good linkage on multiple capitals employed. In other words, <Integrated Reporting> does provide solid foundation that information asymmetry could actually be relieved, given assistance and recognition from both regulatory bodies and cooperation on management side. Lastly, it is of significance to point out that there exists consistent support among high-ranking regulatory bodies from different countries. In accordance with multiple quantified models from Lambert (2006), there does exist a negative relationship between the informative disclosure and the market cost of capital. EY (2013) also has strengthened this link after the adoption of <IR> in South Africa, namely, companies of superior alignment with this integrated way of thinking actually rationalized a better amount of return for investors in Johannesburg Stock

Exchange. Within global flow of capitals and ease of international investments across the emerging countries, wide discussion and prompted acceptance on <IR> are also prompted, as same as a few other encouraged reporting codes. (Chen, 1999) Various observations from London to Hong Kong, traced upon multiple governmental and market-trading forces, has strengthened above viewpoints that a net increase on overall stakeholders’ interest could be achieved with gathering more information on both financial and non-financial side for listed companies. (Bodie, 2013) Disclosure of information, urged by governmental bodies demonstrates its potential as ultimate aspiration since it could also incur a reduction of share price’s beta and an increase the earnings sensitivity. 2.4.2 Institutional Mechanism of Value Relevance As inspired by Amir & Lev (1996), the definition of “value relevance” could appear as follows - the ability of both financial and non-financial information disclosed to capture and summarize corporate value. In the context of this thesis, value relevance could be extended as the linear analysis process on how influential <IR> could be on the ability of asset and earnings’ information (disclosure) reflecting values. Based on the findings of both Watts and Holthausen (2001), the research of value relevance could be divided into three layers differentiated on hierarchy and precision. The first one rests on a general level of relative associations, whose prime focus is on the value relevance of the very elementary accounting mechanism. For instance, US GAAP and IFRS incurred different understandings on one nature of business, subsequently leading to an overall distinction of value relevance. Secondly, the study set itself downwards at the level of incremental associations, which investigates the extent of value relevance in the background of given variables. Earnings quality, come into being at this stage and multiple studies have pointed out its linkage to the general extent of value relevance. (Hellström, 2011) In the last, the study of value relevance moves onto the marginal information contents and enable the most detailed observations on specific accounting figures, engaged the concept of value relevance at the most elementary level. (Holthausen, 2001; Van der Meulen, 2003) Value relevance per se, have attracted different sources and research proposals in the past few decades, however more systematic observations and established common grounds in academics are still heavily called for. Trends in the field of value relevance, as summarized by Beisland (2009), get diversified in

two streams - either explaining the fluctuation of equity prices or how accounting figures are closely linked with financial market performances. Beisland (2009) stated academics are more likely to attribute the extent of value relevance to provision of financial information, in comparison with slightly scarce source of non-financial information. To give a concise overview on the development of value relevance research on non-financial information, there has been disperse research outcome with time being. Wyatt (2002) has found out a certain amount of non-financial disclosures, like brand loyalty and customer satisfaction rate, could turn out a bit vague and controversial in term of measuring, which in turn reduced value relevance. He also suggests that a certain facilitation would be a thorough understanding on corporate strategies and capabilities. Despite this piece of contradictory opinion 15 years ago, it is widely agreed that non-financial information occupied very strong value relevance than financial information disclosed from multiple sources of reports. (Jorion & Talmor, 2001; Pearson & Trompeter, 2001) Using the airline industry as an instance, Pearson (2001) has demonstrated that non-financial performance indicators carried around a very high level of value relevance compared to easily-manipulated financial metrics. Web traffic data, as heavily used by career analysts for multinational tycoons, if combined with a reasonable understanding of industrial characteristics and technology, would be very likely to get way more relevant than financial information disclosed. With specific regards with earnings’ value relevance, it is of a majority academic viewpoint that earnings figure do occupy a strong sensitivity on the overall value relevance. In regards to corporate responsibility reporting, as one of the key component of non-financial information, is in general of value relevant. (Berthelot, 2012) As pointed out by Ball and Owen (2000), publishing reports in social and corporate responsibility is a value-adding process, as it creates comparable advantages, strengthen the credibility in daily corporate operations, eventually leads to more confidence from the market and reduced communication costs. Niskala & Schadewitz (2010) has looked into the market performance and stock value on all Finnish companies adopted the Global Reporting Initiative (GRI) code, only finding out that corporate and social information disclosure did manage to rationalize the strong performance than those who didn’t. Among the field of integrated reporting, there has been quite a few researches and reports in the form of interviews and surveys but quantified studies. Existing studies have established a basic yet positive link between <IR> participation and market valuation. With specific regards to the South African observations from several case-based studies, information on corporate

responsibility contributes positively to the market share performance, with incremental significance after mandating the code of <Integrated Reporting> in 2010. (Heslin & Ochoa, 2008; Atkins & Marouns, 2012) Also in Johannesburg Stock Exchange, a recognized participation in either the integrated thinking or reporting would also attract institutional investors, which in turn lessening investment risk and increasing and stabilizing the market values. Similar outcome also could be traced from Tsoutsoura (2004) saying corporate social information is superbly influential on the stock performance, under the condition of corporate choosing a valid channel for full disclosure. However, the direction of movements on the market values could alter the degree of value relevance, mainly due to the varied comprehension on the information disclosed. Claasen & Roloff (2011) has argued that a widely accepted code and comparable bar would be the key determinants to realize the full potential of social and sustainability disclosure, hence achieving most of the aforementioned bottom-line benefits. Despite this slight uncertainty, it could be concluded that there is a stable ground of both financial and non-financial information could turn out to be representatives of in-time market trading values, whilst different categories of information do differ with each other when actualizing the value relevance. (Tsoutsoura, 2004) 2.4.3 Key Value Relevance Studies From the research outcome of Kolk (2005) and Kole & Pinkse (2010), comparison made on both the pre-implementation period and post-implementation period could give out a better focus on the actual effect of key events across the time-lapse. Since the full concept of <IR> is still relatively new compared to the conventional reporting code, I am naturally intrigued by its realistic potential academically and how different sorts of stakeholders perceive, research and accept this evolving concept. On the other hand, there are multiple business practices from accounting practitioners across the globe, including but not limited to South Africa, proved <IR> produce better prospects on long-term strategy, transparency of disclosed information.

Table 3. A general Overview of key literature adopted

Author(s) Year Research Matter / Name of the topic Relevance & Importance to this study Original Source Daniel W. Collins, Edward L. Maydew, Ira S. Weiss 1997 Changes in the value-relevance over the past 40 years Selection of the right value-relevance model, how accounting information’s value relevance is researched in the past Journal of Accounting and Economics - Mid 1997 Robert G. Eccles Daniela Saltzman 2011 Achieving Sustainability Through Integrated Reporting A case study on multiple multinational firms - how Integrated Reporting contributes to higher sustainability in value-creating, also provide real-life applications in South Africa. Also provide comparison between two reporting codes (ESG & Integrated Reporting) Stanford Social Innovation Review - Summer 2011 Richard Lambert, Christian Leuz, Robert Verrecchia 2007 Accounting information, Disclosure and Capital Based on Capital Asset Pricing Model, how accounting information related to cash flow is revealed. Indirect & direct effects of accounting information on the investment market, raising of capital are also linked Journal of Accounting Research - Vol.45 - 2007 Mingyi Hung 2001 Accounting standards and value relevance of financial statements: An international analysis A quantitative study on value relevance, making a comparison between accruals accounting and cash accounting. It explores further on the regulation side and its effects on protecting shareholders. Journal of Accounting and Economics - Vol.30 - 2001 Irene M. Herremans, Parporn Akathaporn, Morris 1995 An investigation of Corporate Social Responsibility Reputation and Economic Performance A numerical study from observations on US based companies - how an excellence in ethical, social performance could translate into better stock market returns and risk. The application of accounting information in reality test how it leads to changes in the social side. Accounting, Organizations and Society - Vol. 18 - 1995 (UK) Sofie Van der Meulen, Ann Gaeremynck, Marleen Willekens 2003 Attribute differences between US GAAP and IFRS Earnings: An exploratory study Based on multiple observations in accounting firms, it compares the quality of accounting information under both standards and their correspondingly accounting quality. The observation generates from earnings (within Financial Statement) The International Journal of Accounting - Vol. 42 -2007 Amanda Ball, David L.Owen, Rob Gray 2000 External Transparency or internal Capture? The role of third party statements in adding value to corporate A numeric based study on how could a verified statement from third party could contribute to the value of corporates. Also introduced the engagement of Accounting awards - how Business, Strategy and the Environment - Vol. 9 - 2000

environmental reports companies received accounting awards differentiate themselves compares to those who does not. Margarita Tsoutsoura 2004 Corporate Social Responsibility and Financial Performance An empirical test revealing the emergence of corporate social responsibility, how this would influence financial performance. Overall a positive relationship is found, also bringing a series of bottom-line benefits (where could be utilized by the research of Integrated Reporting) Center for Responsible Business - UC Berkeley Dorothy E. Leidner, Timothy Kayworth 2006 A review of culture in information systems research: toward a theory of information technology culture conflict A value-based research, aiming at how value-adding process could be distracted, diluted from the culture. (Importance of an ultimate aim of organization in creating long-term values and how organizational culture could contribute to this goal) MIS Quarterly (Management Information Systems) - Vol.30 - 2006 Charl de Villiers, Leonardo Rinaldi and Jeffrey Unerman 2014 Integrated Reporting: Insights, gaps and an agenda for future research Under a recent and rapid emergence of Integrated Reporting, what else could be added and improved? An empirical research also included conclusions from a great bunch of empirical studies Accounting, Auditing & Accountability Journal - 2014 - Special Issue on Integrated Reporting Sylvie Berthelot, Michel Coulmont, Vanessa, Serret 2012 Do investors Value Sustainability Reports? - A Canadian Study How does capital markets take emergence of newly developed Integrated Report into account - Also a test in firms and organization’s commitment in this new type of disclosure Corporate Social Responsibility and Environmental Management - Vol.19 - 2012 Vivian W. Fang, Allen H. Huang, Wenyu Wang 2017 Imperfect Accounting and Reporting Bias A new insight on errors and bias, whilst the value relevance of accounting information gets lowered, it also helps forming new bias. Through a series of observations, purely financial-based disclosure is born with imperfections therefore a deep understanding on the motivation behind would help. Journal of Accounting Research - 2017 Hannu Schadewitz, Mikael Niskala 2010 Communication via Responsibility and its effect on firm value in Finland A regional example on how the reporting of responsibility could contribute to comprehending firms’ performance and valuation. If better communication would rectify the above born defects Corporate Social Responsibility and Environmental Management - Vol. 17 - 2010

Krishna G. Palepu corporate disclosure and the capital markets: A review of the empirical disclosure literature rationale behind multiple forms of disclosure. From empirical studies, it also reveals the potential benefits from minimising disclosure defects (information asymmetry) Economics - Vol.31 -2001 Gareth Owen 2013 Integrated Reporting: A Review of Developments and their implications for the Accounting Curriculum Discovery and provision of information on how sustainability-related accounting initiatives lead to the evolving of IR, and why it has been widely accepted like next to nothing. Also include demonstration of how public interest reacts Accounting Education: an international journal - Vol.22 -2013 Ray Ball 2006 International Financial Reporting Standards: (IFRS) pro & cons for investors A demonstration of how economic and political, regulatory forces reshape accounting information disclosure policies. And how investors perceived those new changes - the balance between financial and non-financial information Accounting and Business Research - 2006 Olivier Boiral and Jean-Francois Henri 2015 Is Sustainability Performance Comparable? A Study of GRI Reports of mining organizations An industrial-specific example in demonstrating the importance of maintaining of a proper channel of sustainability information. How does the adoption of GRI improve the image of mining industry and also the comparability before and after unifying the code of disclosure Business & Society - Vol.56 - 2015 Kin-Wai Lee, Gilian Hian-Heng Yeo 2016 The Association between Integrated Reporting and Firm Valuation How could the adoption of Integrated Reporting contribute to the actual value-adding process - A cost-efficient overview on the adoption of IR, and also the benefits and potential shortcomings whilst adoption Review Quantitative Finance and Accounting (Forthcoming) - 2016 Rickard Garvare, Peter Johansson 2010 Management for sustainability - A stakeholder theory Stakeholders’ perspective on managing business side of sustainability. It involves a model from actual implications sustainability management in corporations. Total Quality Management Barry Ackers, Neil Stuart Eccles 2015 Mandatory corporate social responsibility assurance practices - The case of King III in South Africa How the mandatory code of King III Code affects South Africa, based on an actual investigation of stocks in Johannesburg Stock Exchange (JSE). The importance of KING III code and its actual practice with its impact on capital market. Accounting, Auditing & Accountability Journal - Vol.28 - 2015 Carol A. Marquardt, Christine I. Wiedman 2004 The Effect of Earnings Management on the Value Relevance of Accounting How the extent of value relevance of accounting information gets affected by on earnings managements based a large example study. Journal of Business Finance & Accounting - Vol.31 - 2004

Information Testify what could improve or decrease the factor links to value relevance Richard A Riley Jr., Timothy A. Pearson, Greg Trompeter 2003 The value relevance of nonfinancial performance variables and accounting information: the case of the airline industry Another industry-specific study, with a special focus on the relative robustness of value relevance on following types of information: traditional accounting variables, non-financial performance variables and the rest of financial indicators. Also building links among those factors to quality of reports Journal of Accounting and Public Policy - Vol.22 - 2003 Leif Atle Beisland 2009 A review of the Value Relevance Literature Demonstration of various approach and methodology when conducting the value relevant research - models, examples and future research orientations The Open Business Journal, Issue 2, 2009 George Serafeim 2015 Integrated Reporting and Investor Clientele IR has been dominating around multiple important financial markets across the globe, and arose various stakeholders’ awareness in the value-creation process. Would investors react and change their decision-making process correspondingly? Journal of Applied Corporate Finance, - Sustainability and Shareholder Value Issue - Vol. 27, 2009 Alan J. Richardson, Michael Welker 2001 Social disclosure, financial disclosure and the cost of equity capital How could change of disclosure codes and practice pass on to the equity markets, and how capital markets taking in disclosed information. Accounting, Organization and Society - Vol.26 -2001

3

Hypothesis Development

Under this paragraph I am aiming to explore possible solutions to the core research question: if Integrated Reporting forms value-creating experience for the participants in Johannesburg Stock Exchange? H1 is an overall testing on the value relevance of the Johannesburg Stock Exchange market, across the mandatory implementation of the Integrated Reporting Code. Followed by H2, I have put on a separate concentration on the post-implementation period. With specific regards to the book value of earnings, H3 shed light on how the published earnings link to market value of equity, within consideration of <IR>. 3.1 H1 To give a comprehensive overview, information disclosure, as part of integrated reporting, does maintain some data-proven potentials including enhancements on accounting quality. (Imhoff, 2003) With specific regards on the effects on non-accounting information, the preliminary researches have been relatively scarce to date, given the complexity and variety in how to measure different factors. From the example of Barth and Beaver (1996) under the code of SFAS No.107, extra information newly required in the legal form and disclosed including held securities and bank-verified loans would have positive impacts on value relevance of figures concurrently. Given the above background on the emerging reporting code of <IR>, the first hypothesis would appear as follows: H1: Integrated Reporting for JSE-listed companies is value relevant in general. 3.2 H2 Empirical researches on value relevance of corporate social responsibility information have diverse outcome tracing back to market values. One perspective focusing on incurred costs have retrieved negative impact on net earnings since a wide variety of non-information call for resources and financial inputs. On the contrary, reorganizing and restructuring corporate social responsibility information would form comparative advantage over its peers who hasn’t included relative information in previous published reports, therefore creating value and positive effects on earnings on the financial reports by the end. Existing literature and reports have indicated shared similarity between <IR> and Corporate Social Responsibility reporting. Advantages could be located in the enhanced structure internally within an organization, with better knowledge on the utilization of capital across different time frame. Stakeholders are more

actively engaged with credit to integrated data produced, together with a more active risk management built-in. On the disadvantages side, it has been a major concern that credibility, reliability of information produced would drop down, accompanied with high transition costs when implementing the way of integrated thinking. Nevertheless, since mandating of KING III Code, Integrated Reporting were required for every single company listed in Johannesburg Stock Exchange. Byard et al. (2010) has argued that introduction of newly mandatory reporting code would create positive influence on the comparability in the short term, since the removal of confounding reporting practices. Additionally, if previously voluntary information are partially converted towards a mandatory basis, it would enhance the efficiency of the capital markets with provision of more available information equally supplied by each listed company in the market. (S.Chen & P.Bouvain, 2010) With a full consideration of the <IR> benefits and the mandating nature within South Africa, H2 would be reasonably developed as: H2: Integrated Reporting creates a positive influence on the value relevance for JSE-listed company. 3.3 H3 The idea of developing an in-depth research direction in addition to above research derive from the empirical outcome of Ferrero-Ferrero et al. (2016), who indicate there would exist inter-relation influences between the determinants of corporate social reporting. On top of taking into consideration of book value of equity, implementation of IR and book value earnings, research among particular factors would broaden and strengthen our understandings on the implementation of <Integrated Reporting>, testing if <IR> could achieve higher level of value relevance straight by itself or indirectly through affecting other factors. There would exist occasions one single determinant, for instance, book value of reported earnings would not create much effect on the extent of value relevance on its own. However, its effectiveness would be amplified by some other current factors, namely, mandatory adoption of IFRS. Theoretically, book value of earnings would then be reported, managed and organized under one unified code, providing ease for analysts, investors and decision-making to compare, comprehend and utilize the data. By the end an overall improvement of accounting quality would be observed, whose synergistic effect also received support from Slusky & Caves (1991) and multiple other researches. With attentive regards in the <IR> setting, testing among the effects of and between, mandatory adoption of <IR> and book value of earnings would contribute to a holistic understanding on the inter-collaboration in improvement of accounting

reporting quality, specifically, enhancement of value relevance. Despite an absolute scarce of quantitative researches and academic papers between <IR> and other determinants in improving value relevance, mandatory implementation of Integrated Reporting do share number of resemblances with carrying out IFRS. EY (2015) has observed accuracy and wider usefulness accounting data in general after the adoption of Integrated Reporting within South Africa, making up of numerous anticipated advantages on the market efficiencies and report quality. With recognized effect of book value of earnings on value relevance, an important composition of accounting quality, H3 could be carried out as followed: H3: With specific regards to book value of earnings, adoption of IR increases the accounting quality through increasing its value relevance.

4 Research Method An ultimate goal for this research is to investigate if <IR> in South Africa enhance the value relevance, and how it works if enhancements are observed. To start with, this research would testify if <IR> incentivize additional relevant information compared to conventional reporting practice. In 2010, KING III is the game-changing practice code where <Integrated Reporting> is required for all listed companies in Johannesburg Stock Exchange. The first two hypotheses expand across the timeframe of implementation, comparing the extent of value relevance ex-ante and ex-post. It is vital to form a fundamental understanding that KING II Code, the reporting guideline in prior to the mandatory practice of KING III, whereas companies are required to ‘comply or explain’ instead of a complete conformation. According to KPMG (2013), only few companies was complying voluntarily with KING II Code, others opted in the explanation option elaborating the rationale and existing situation. This would create difficulties in comparing reports before and after 2010, with a non-existent unified reporting code beforehand. Given in the above inconsistency, an alternative would be conducting a comparison among the full period as a base (H1), then retrieving data on the post-implementation period, where <IR> has implemented as one singular reporting code (H2). Conventional reporting is hereby represented by KING II Code, whilst a comparison between the outcome would be directly revealing if <IR> has actually improved the reporting practice. In addition, it acts as a elementary testing towards H3 - how <IR> shapes other factors within the practice. The model adopted here for testing value relevance is a widely recognized Ohlson (1995) model, which would be expanded in the following chapter. 4.1 Methodology Selection of valuation model would be the key to form a comprehensive understanding on how non-accounting information influence on stock markets. As indicated by Basu (1997), there could be severe and negative consequences of wrongly selected valuation, for instance, overly exaggerating how changes in reporting figures could affect the stock price. In reality, there would be constant turbulence and highly complex financial arrangements, whilst a reasonable choice of valuation model could contribute to evaluate the coefficient in the most accurate way. Ohlson (1995) model has been widely used among various value relevance studies. Within his model, market value of equity is perceived as a linear functioning of book value, accounting earnings, together with a sum of information not directly related to finances as in non-finance