University of Amsterdam MSc Accounting & Control 2017/2018 thesis “Interrelation of Integrated Reporting with information asymmetry”
Interrelation of Integrated Reporting with information
asymmetry
Name: Jacfar Yusuf
Student number: 11419237
Thesis supervisor: Dhr. dr. A. Sikalidis,
Date: June 25, 2018
Word count: 14505, 0
MSc Accountancy & Control, specialization Accountancy Faculty of Economics and Business, University of Amsterdam
Statement of Originality
This document is written by student Jacfar Yusuf 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
The period prior to the introduction of the so called ‘Integrated Reporting Framework’ by the IIRC in 2013 the traditional reports were failing to capture the economic consequenceof corporate innovations in a timely fashion. The framework was presented as a response to the huge demand of the investors for a change in the reporting regulation. The IIRC (2013) mentioned that the IR framework aims to improve the quality of information, promote a more cohesive and efficient approach of reporting, enhance accountability and stewardship and stimulate integrated thinking, decision-making and actions. Nonetheless, does this change faithfully represents the improvement of the economic consequences in the reports? Therefore, the interrelation of Integrated Reporting with information asymmetry is examined during this study. For the study two models are tested in a regression to see whether Integrated Reporting is related with information asymmetry. The two models are the stock liquidity and abnormal return model. Both models are examining if Integrated Reporting leads to respectively lower stock liquidity or abnormal returns. The input that represents the framework in the models are the ESG-scores of 503 companies with the sample period from 2010 till 2016. The final sample consists of 3,155 firm year observations. Firstly, I find that Integrated Reporting lowers the bid-ask spread of the firms that implemented the framework. Subsequently, no empirical evidence is found that the Integrated Reporting framework lowers the company’s abnormal returns. With the reliability issues in mind, I conclude based on this study that the framework of the IIRC has a negative interrelation with information asymmetry. This thesis contributes to the empirical world by expanding and widening the existing empirical literature about Integrated Reporting. By looking at the association of IR and information asymmetry of the Northern-American companies clarifying the relation and holding the criticisms of the framework in mind.
Key words: Integrated Reporting Framework, IIRC, information asymmetry, ESG-scores,
Contents
Abstract ...3
List of figures and tables ...6
1 Introduction ...7
2 Literature review and hypothesis development ... 12
2.1 Integrated Reporting ... 12 2.1.1 IIRC Framework ... 13 2.1.2 Guiding principles ... 14 2.1.3 Content elements ... 15 2.2 Support for IR ... 16 2.3 Criticism on IR ... 17
2.3.1 Denial of the criticism ... 19
2.3.2 Criticism versus the supporting literature... 20
2.4 Theoretical framework ... 20
2.4.1 Agency theory ... 20
2.4.2 Adverse selection ... 21
2.4.3 The efficient market hypothesis... 22
2.4.4 Value relevance theory ... 22
2.5 Hypothesis development ... 24
2.5.1 The bid and ask-spread ... 24
2.5.2 Abnormal returns ... 25
2.6 Paragraph summary... 26
3 Data and research design ... 27
3.1 Sample selection ... 27
3.2 Data sources ... 29
3.3 Stock liquidity model ... 29
3.5 Abnormal returns model ... 31 3.6 Testing... 31 3.7 Framework ... 32 4 Empirical results... 33 4.1 Descriptive statistics... 33 4.1.1 Normality test ... 34 4.1.2 Pearson correlation ... 35 4.1.3 Homoscedasticity ... 37 4.2 Regression analysis ... 37 5 Conclusions... 41 5.1 Summary ... 41 5.2 Conclusions ... 41 5.3 Limitations ... 42 5.4 Further research ... 43 References ... 44 Appendices... 50
Appendix 1: OLS Assumptions ... 50
Appendix 2: Libby boxes ... 51
Appendix 3: Test for normality ... 52
List of figures and tables
Figures
Figure 1 ESG-framework Figure 2 Research Framework
Tables
Table 1 Final Sample
Table 2 Number of observations per year
Table 3 Descriptive Statistics of sample companies with ESG-scores before winsorizing Table 4 Pearson correlations.
Table 5 Spearman correlations
Table 6 Regression Analysis of SPREAD
Table 7 Regression Analysis of ABNORMAL_RETURN Table 8 Hypotheses outcomes of the regression
Table 9 Skewness/Kurtosis tests for Normality Table 10 Shapiro-Wilk W test for Normality
Table 11 Descriptive Statistics of sample after winsorizing
Table 12 Histogram & Box plot SPREAD of the transformation due to winsorizing
Table 13 Histogram & Box plot ABNORMAL_RETURN of the transformation due to winsorizing
Table 14 Breusch-Pagan test for the SPREAD model
Table 15 Breusch-Pagan test for the ABNORMAL_RETURN model Table 16 Variance Inflation Factor (VIF)
1 Introduction
Behind every company there is a unique story, including a specific business strategy. A big difficulty is the understandability of this strategy by the stakeholders. The story must be developed in an understandable and unambiguous manner to let stakeholders comprehend the story effectively (Druckman, 2014). There is an observed trend that annual reports soon would become less relevant/significant for shareholders (FRC, 2011). Companies are reacting by providing more non-financial information, but this does not seem to happen in an understandable and unambiguous manner. The objective to communicate the operations of the business in an integrated and sustainable manner is not met. So, there was a huge demand for a change in the reporting regulation, IIRC countered this by introducing a new form corporate reporting the ‘Integrated Reporting Framework’ (IIRC, 2013).
The overall purpose of traditional reporting is to provide assurance of the current and forthcoming performances of an entity, but nevertheless these traditional reporting methods are failing to clarify the economic consequenceof corporate innovations in a timely fashion (Healy and Palepu, 2001). In this the IR framework can be of use. Druckman (2014) mentioned that the hardest and crucial part is to create insight in how the company's strategy and business model creates value over time for the entity. The so called ‘Integrated Reporting’ complements to the reporting environment of entities and creates a determination of internally performance and attracts external financial capital for investment.
On September 1st in South Africa the King Code of Governance Principles for South
Africa (‘King III’) was released. A significant recommendation of the code King III is that entities should not only adopt and implement sustainability reporting, but they should go a step further. The King Committee Chairman Mervyn E, King says “Sustainability is, however about more than just reporting on sustainability. It is vital that companies focus on integrated performance.” The King III introduces the concept of integrated sustainability performance and integrated reports into South African Corporate Governance principles. In addition, the Johannesburg Stock Exchange Limited (‘JSE’) made the code King III mandatory by incorporating into its listings requirements. This leads to that South-African based companies are required to publish an integrated report, if not , they need to explain why they not choose to meet the requirements of the code KING III (Jones, 2015).
In the big world of corporate reporting, Integrated Reporting is a relative new phenomenon that has been on the rise during the last decade (Serafeim, 2015). Currently
Integrated Reporting is implemented on a mandatory basis in South Africa, and research showed evidence of momentum towards Integrated Reporting in other huge economies around the world. Integrated Reporting relies on a sequence of underlying activities, IR is more than just a corporate report (Robertson, 2015). The International Integrated Reporting Council (IIRC) has a long-term vision embedded within the business practice by formulating the framework Integrated Reporting (IR). IR framework aims to improve the quality of information, promote a more cohesive and efficient approach of reporting, enhance accountability and stewardship and stimulate integrated thinking, decision-making and actions (IIRC, 2013). There is an endless development going on to perfect Integrated Reporting. Frequently there are reports with miscellaneous results published about the strengths and weaknesses of IR. There are e.g. researches which heavy criticize the shareholders-oriented view of Integrated Reporting e.g., in the paper of Flower (2015). The criticism led to the introduction of the Integrated Reporting framework in 2013 by the IIRC, with the purpose to stimulate companies to further develop reporting and to design a better fit of the framework to their organization.
The report of IIRC (2014) contains a recommendation prepared by a panel with members of the six globally largest accounting firms (BDO, EY, Deloitte, KPMG, PWC and Grant Thornton). The panel recommends firms to encourage internally innovations interrelated with corporate reporting (IR) and initiatives for the long-term investors.
For the execution of my master thesis I am prepared with experience of the accounting world and knowledge gained during my MSc study, therefore I use my capabilities to bring insight in how Integrated Reporting is viewed by the market. The main objective of my master thesis is to bring insight in and explain the relation of Integrated Reporting and information asymmetry. To answer the research question: how is Integrated Reporting interrelated with
information asymmetry?, is the reaction examined of the bid and ask-spread and abnormal
stock returns by the implementation of Integrated Reporting within an organization.
This research starts firstly with describing the background literature, for instance what the Integrated Reporting framework means and how it is operationalized. This is essential to understand how the framework perhaps is affected by presence of information asymmetry. Furthermore, I described the theories that reflect the underlying effects and structure of information asymmetry, which are necessary to support the underlying conception of the research hypotheses.
For the dependent variable information asymmetry is translated through two proxies. Stock liquidity is the first proxies defined based on prior studies. For stock liquidity is expected that firms with Integrated Reporting will have a lower bid-ask spread. The first hypothesis is formulated as follows: Organizations with a high level of alignment with the Integrated
Reporting framework results in lowering the bid and ask-spread. To test this hypothesis the
stock liquidity model is used, which will bring insight in the variance of the bid-ask spread. Based on prior studies is abnormal returns defined as a proxies of information asymmetry. For firms with Integrated Reporting is a lower abnormal returns expected. The second hypothesis is formulated as follows: Organizations with a high level of alignment with
the Integrated Reporting framework results in lowering the abnormal returns. To test this
hypothesis the abnormal return model is used, which includes the abnormal returns.
Integrated Reporting, the independent variable of the research is operationalized through ESG-scores, which represent the performance of the capitals environmental, social and governance. 503 Northern-American listed firms are selected including their ESG-scores, in order to function as the sample of this research. These ESG-scores are from the sampling period of 2010 till 2016 retrieved from ASSET4 database available in DataStream.
To map the endogeneity for this research, I have determined based on prior literature the following control variables FIRM_SIZE, VOLUME, ROA, LEVERAGE, PROFIT and PRICE_VOL. The summed up control variables are used for the stock liquidity and abnormal return model.
The first regression tests the effect of Integrated Reporting on the variance of the bid-ask spread. The significant p-value of the model indicates a negative relationship of Integrated Reporting with the bid-ask spread. Furthermore, the first hypothesis is accepted and the null hypothesis rejected.
There is no significant evidence found as result of the regression of the abnormal return model. For the abnormal return model is a positive relationship found of abnormal returns with Integrated Reporting, however there is no support found for rejection of the null hypothesis.
In order to answer the research question, it is essential to determine the reliability of the two research models. Both models have an Adjusted R-square that are interpreted as very low, which don’t explain much of the variance. Altogether is hard to pick which model is more reliable than the other, by a research opinion both models would be seen as not reliable.
Based on prior research it is expected that the implementation of the Integrated Reporting of the IIRC lowers the information asymmetry. For the proxy bid-ask spread of information asymmetry is significant results found. For the second proxy of information asymmetry abnormal return is no significant evidence found. This means that investors are not able to better estimate the abnormal returns when a firm uses the Integrated Reporting framework. The effect might be clarified by other factors, than were included in the scope of the research. Based on the stock liquidity model is suggested that the Integrated Reporting framework has a negative relationship with information asymmetry.
The first contribution of this thesis happens in an empirical fashion by looking at the association of Integrated Reporting framework with the stock liquidity and abnormal returns. This thesis covers the fact that not much empirical research was done about the effect framework itself. Currently known studies look into the quality of the framework. The found results indicates that the integration of integrated thinking in the organization suggest a lower information asymmetry. Due to reliability issues of the models is hard to say that is exactly the case.
This study looks only at the Northern-American setting excluding the European firms. This indicates a limitation that is hard to generalize on a general scale. For further research, I suggest to research a more global setting, by also considering the European companies and their relationship with the different variables.
Over the years numerous academics have criticized the framework. This leads to the objective of this thesis to contribute to the discussion in an empirical manner. The found empirical results indicate that Integrated Reporting reduces the information asymmetry. Integrated thinking is a phenomenon that every firm should implement in their business. This supports the investors in order to make better choices regarding investment choices based on the information incorporated in the financial reports. Subsequently, the IASB or other regulators could follow the reporting situation in South-Africa where Integrated Reporting is mandatory for South-African firms, which this research could be a forerunner in were the development is going.
In paragraph 2 the literature according to the research of the association of Integrated Reporting with information asymmetry. The background of framework is described and relevant theory in order to explain information asymmetry. Paragraph 3 displays the sample
selection and the research models of the study. Paragraph 4 present the empirical results of the study and while paragraph 5 contains the conclusions and limitations of the research.
2 Literature review and hypothesis development
Integrated Reporting has the purpose to inform and give insight to the stakeholders how the firm is creating value over time for the entity. The provided information in the financial statement to the market and how the market perceives the information is very vague. For instance, when a company gives full insight on how it creates value over time for its own organization, this will lead to better decision-making for the investors to make a choice regarding the stock returns.
The World Bank and IMF are advocating for greater focus on facets as risk and future development, which can all be found on the webpage of the IIRC (2017), this follows from the present existing information gaps within corporate reports. Furthermore IIRC created Integrated Reporting to enhance company’s accountability, stewardship and trust in order to improve information stream and transparency of the organization. IIRC (IR, 2017) says that when a company’s incentives are influencing negative short-term behavior, capital markets are weak and poor leads to incorrect assessment of the company’s value. Integrated Reporting increases the decision usefulness on efficient capital markets.
The increase of the decision usefulness for investors is not the only goal of the implementation of Integrated Reporting. Another goal of Integrated Reporting is to manage the information gap between the companies and their shareholders by reducing this. This information gap is heavily associated to the main subject of this research information asymmetry. I have chosen and constrained myself to the following four theories:
Agency theory Adverse selection
The efficient market hypothesis Value relevance theory
I suppose that these theories are the most relevant theories regarding my topic. Those theories will support the understanding of the interrelation of Integrated Reporting with information asymmetry.
Integrated Reporting
The following subparagraphs are dedicated to the background information of the Integrated Reporting framework of the IIRC.
In the past decade there has been an increase in the demand of the stakeholder for more financial data in the financial reports. Preferred is a combination of financial and non-financial information in the accounting figures. This combination will give a global picture of the entire organization including the long-term effect of the decision making on the business (Jensen & Berg, 2012). Van Zijl el al. (2017) mentioned that the IIRC (2013) described that an integrated report is not just an aggregated report consisting of traditional corporate reports and sustainability reports. The goal of IIRC is to bring insight on how an entity creates sustainable value for the investors by incorporating financial and non-financial performance in one report (IIRC, 2013; de Villiers et al., 2014; King, 2016). The IIRC formulates Integrated Reporting as follows: “A process that is based around integrated thinking to stimulate entities to release integrated reports about the value creation process over time” (IIRC, 2013, page. 34). The IIRC (2013, p. 34) defines Integrated thinking as follows: “The consideration by several financial and operational units and the capital is been used or affected. Integrated thinking takes in account the value creation over the short, medium and long-term of the decision making and actions effect.” Integrated Reporting shifted the emphasis on the value creation process from looking on a traditional way at the financial reports towards a more forward-looking approach. The IIRC is demanding an explanation from the reporting entity on how it used their financial, manufactured, human, intellectual, natural, social and relationship capital in order to create value over time for its different stakeholders (IIRC, 2013). This process should be in line with the business model, strategy and the key risks faced by an entity (Stubbs and Higgins, 2014; Raemaekers et al., 2016).
2.1.1 IIRC Framework
In 2013, the IIRC released the Integrated Reporting framework for the general public. The framework doesn’t contain hard requirements in the form of e.g. key performance indicators, it is mainly based around principles. The IIRC requires managerial involvement while preparing an integrated report. In this section, I will describing the guiding principles and the content elements. Therefore, follows an explanation of the seven principles and eight elements that are key for the understandability of the framework and organizations their operations. The guiding principles and content elements are significant and highlight the value creation for the stakeholders.
2.1.2 Guiding principles
The long-term and strategic focus is incorporated in the first principle of the Integrated Reporting framework, which would benefit the public by encouraging firms to incorporate more future information in their financial reports. The principle is state as follows: a) “An
integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short, medium and long term and to its use of and effects on the capitals,” (IIRC, 2013, p. 16).
Connectivity of information is incorporated in the second principle which is related to the term ‘integrated thinking’. The principle is stated as follows: b) “An integrated report
should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organization’s ability to create value over time,” (IIRC, 2013, p. 16).
The voice of the stakeholders concerning the relationship is incorporated in the third principle. Disclosing information according to the framework strengthens the trust of the stakeholders in the company. Integrated Reporting increases the transparency and accountability of the company. The principle is stated as follows: c)“An integrated report
should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests,” (IIRC, 2013, p. 17).
Materiality is the key point where the fourth principle focuses on. Materiality is a key decision-making element for the investors. Materiality is incorporated in integrated reports to reach a higher level of information quality. According to Mio (2016) investors should be an important consideration within the integrated reports. The principle is stated as follows: d) “An
integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term,” (IIRC, 2013, p.
18).
Integrated reports should be formulated concisely, this facet is incorporated in the fifth principle. This must leave out all less relevant information that the firm would document in their reports which could hide fundamental and important information about the strategies, governance and firm performance. So all the information must contain added value in the integrated reports. The principle is stated as follows: e) “An integrated report includes
sufficient context to understand the organization’s strategy, governance, performance and prospects without being burdened with less relevant information,” (IIRC, 2013, p. 21).
For organizations it’s crucial to have a good designed internal control and governance structure, which will in turn enhance the reliability and completeness of the produced reports. This is incorporated in the sixth principle which is stated as follows: f) “An integrated report
should include all material matters, both positive and negative, in a balanced way and without material error,” (IIRC, 2013, p. 21).
Consistency and comparability are incorporated in the seventh principle. To enhance the consistency and comparability concepts, integrated reports should stay consistent from one period in comparison to the earlier periods unless changes are needed. The principle is stated as follows: g) “The information in an integrated report should be presented: a) On a basis that
is consistent over time b) In a way that enables comparison with other organizations to the extent it is material to the organization’s own ability to create value over time,” (IIRC, 2013,
p. 23).
2.1.3 Content elements
There are eight content elements that are included in the framework of the IIRC, which firms that produce integrated reports should answer. The first content element is about the organizations identifying and incorporating the core mission and vision in the integrated report and also the effects of the external environment on the organizations culture, ethics, value and operating structure. The content element is stated as follows: a) “What does the organization
do and what are the circumstances under which it operates?” (IIRC, 2013, p. 24).
Governance is incorporated in the second content element of the framework. This element is about how the governance creates value towards the stakeholders. The content element is stated as follows: b) “How does the organization’s governance structure support its
ability to create value in the short, medium and long term?” (IIRC, 2013, p. 25).
The organizations business model is the base for the third content element. This element is focused on the value creation over time by the business activities. The content element is stated as follows: c) “What is the organization’s business model?” (IIRC, 2013, p. 25).
The key risks and opportunities play a central role in the fourth content element. Organizations should identify and incorporate the effect of the value creation of the key risks and opportunities in the integrated report. The content element is stated as follows: d) “What
are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term, and how is the organization dealing with them?” (IIRC,
The strategy and resource allocation are playing a central role in the fifth content element. Integrated reports should include how companies are implementing and achieving strategic objectives over time and how they separate themselves from their competition. The content element is stated as follows: e) “Where does the organization want to go and how does
it intend to get there?” (IIRC, 2013, p. 27).
Performance is a core component within the sixth content element. E.g. qualitative and quantitative information about the performance (targets, risks and opportunities). The content element is stated as follows: f) “To what extent has the organization achieved its strategic
objectives for the period and what are its outcomes in terms of effects on the capitals?” (IIRC,
2013, p. 28).
Outlook is a core topic within the seventh content element. What are actions/reactions of the organizations to/towards challenges and uncertainties that they face. This gives the stakeholders more insight and like this, the company becomes more foreseeable. The content element is stated as follows: g) “What challenges and uncertainties is the organization likely
to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?” (IIRC, 2013, p. 28).
Basis of preparation and presentation are playing an central role in the eight content element. The content element is state as followed: h) “How does the organization determine
what matters to include in the integrated report and how are such matters quantified or evaluated?” (IIRC, 2013, p. 29).
Support for IR
The pervious subparagraphs clarified the underlying thoughts of the objective of Integrated Reporting. It is generally known that the implementation of framwork is required for the South African and Brazilian companies (Robertson, 2015). This subparagraph describes why organizations should embrace and implement the Integrated Reporting framework based on prior literature.
Owen (2013) stated that old fashioned financial reporting is focused on the transactional and operational aspect of business. Traditional financial reporting is missing the long-term strategic and prospective analysis facets of reporting. This kind of reporting leads to a narrower external financial reporting which explains only how the organization is creating short-term value. Bringing insight into the long-term value creation of a business is captured by the
Integrated Reporting framework. Owen mentioned that Integrated Reporting gives a wealthier picture of an organization. This is achieved by referring and accessing broader extended sources than the current model. This includes making use of qualitative and quantitative data as well.
Eccles and Saltzman (2011) find that the impact of Integrated Reporting leads to three main benefits. According to Eccles and Saltzman are businesses benefiting of Integrated Reporting by making better internal decisions, having better relationship with stakeholders and a lower reputational damage. By incorporating qualitative and quantitative data, this will lead to better risk management according to the research of Eccles and Armbrester (2011). By incorporating this type data external advantages will arise as keeping the stakeholders satisfied by providing nonfinancial information which give a complete, accurate and timely picture of the organization. Providing both data leads to the third benefit which is minimized regulatory risk. So an organization must be prepared and organized to meet the requirements of new worldwide introduced regulations on the stock market, e.g. showing the relationship among the organization qualitative and quantitative data.
The studies of Zhou et al. (2017) and Eccles and Krzus (2010) state that a lower cost of capital will benefit the firm. Lower cost of capital arises from an increased reputation, a more transparent organization and information that fulfills the desire of the shareholders. All those elements can be traced back to the implementation of the Integrated Reporting framework, which does not only disclose financial information but also environmental, social and governance (ESG) related information (Eccles & Krzus, 2010). One finding of Zhou et al. (2017) is that companies with a higher degree of implementation of the integrated framework experience a lower cost of capital. This is primarily due to the creation of lower information risk for the shareholders. Another finding of Zhou et al. (2017) is that the framework is relevant to the capital markets. There is a negative relation found between ‘connectivity’, ‘newness’ and ‘forecast errors’. This shows that new information incorporated within integrated reports advances the accurateness of forecasts. There is little evidence found that height of alignment and earnings forecasts are negatively related.
Criticism on IR
At the moment Integrated Reporting is in an advanced stage of knowledge. A number of researchers expressed criticism on the framework of the IIRC. An often cited paper is the Flower (2015) paper. Flower’s deeply criticized the incorporation of the stakeholders within
the framework. Financial capital providers and funders are the targeted audience of Integrated Reporting. One of the objectives of the framework is to bring insight on how firms create value over time for their stakeholders. Despite this, it is one of the objective of the Integrated Reporting framework that is not interpreted in the best interest of the stakeholders according to Flower (2015). According to IIRC (2013) this is only the case when it is material in towards creating value for its own organization.
Another criticism on Integrated Reporting is how human capital is processed in the integrated reports. The IIRC describes human capital as follows: “Human capital as the
people’s their competencies, capabilities and experience, and their motivations to innovate and there:
alignment with and support for an organization’s governance framework, risk
management approach, and ethical values ,
ability to understand, develop and implement an organization’s strategy,
loyalties and motivations for improving processes, goods and services, including their
ability to lead, manage and collaborate” (IIRC, 2013, p. 12).
The people that represent the human capital of a firm, as determined by the IIRC lack intrinsic value according to Flower. The contribution of the people forms the core element in the determination of the value of the human capital. This determination leads to omitting the people who have not contributed to the value of the business. The losses that people make are caused by e.g. pollution, is not part of the framework. This shows the narrow scope of the framework. The same applies for the nature capital, this capital looks into the extent of how it impacts the production process and how it omits the effect on the environment. The IIRC aware of the fact that the several capitals are not fully integrated in the process and takes its stewarding role. Currently, it is predominantly that information over the several capitals are disclosed when regulation is in play. In the framework of IIRC it is stated that companies should accept their stewardship responsibilities to meet the expectations of their stakeholders. Flower (2015) is again pointing out the limited incorporation of the stakeholders in the framework. Again the value of stakeholders, society and environment is only taken into account when it is material to its own business processes. The opinion of Flower is embroidered on the work of Brown & Dillard. Brown & Dillard (2014) are emphasizing the missing underlying ideas of economics of the stakeholders, society and environment.
IIRC (2013) mentions when financial capital is fully utilized, society and environment will profit from it. Flower (2015) mentions that the perception of the stakeholders is not taken into account, while benefits are calculated in advantage of the firms and the costs of the stakeholders as a disadvantage. An example that Flower (2015) gives is, when a firms succeeds in lowering the employee wages this becomes a benefit for the business, but misses the fact that the loss is taken by the employees and this is not incorporated. Furthermore Thomson (2015) votes for emphasizing the underlying ideas of the sustainability difficulties to create a sustainable case. This includes a wider emphasis on more elements than traditional reports had and a shift in focus towards the stakeholders.
2.3.1 Denial of the criticism
The critical paper of Flower (2015) got challenged by Mio (2016) in her book “Integrated Reporting A New Accounting Disclosure”. The core and essential principle ‘materiality’ in the IR framework is heavily criticized by the paper of Flower (2015). Materiality in the framework includes only the investors. IIRC (2013, p. 17) state in the framework that satisfying all stakeholders is not part of the objectives. IIRC (2013) define materiality as follows: “an
element is material when it could substantively influence the opinion of users of the financial statements (investors) with regard to the value over the short, medium and long term”.
Mio (2016) says the framework of IIRC should be viewed through a ‘dynamic’ viewpoint rather than a ‘static’ one.
How an issue is impacting the decision making of the investors is included under the static perspective. The actions of the stakeholders and the reactions of the firms are a missing component in the static perspective. Most researcher use the static perspective for their researches.
The dynamic perspective considers a broader scope than the static perspective. It includes the actions of the stakeholders and the reactions of the firms. The dynamic perspective makes sure that the stakeholders have more input and control over what companies disclose or leave out the integrated reports. The stakeholders must have an dynamic attitude towards this aspect.
There are still questions about were the targeted audience in the framework of IIRC is in place. It might be the case that the choices could be an effect of political actions. The framework gives the freedom to interpret the concept value creation by your own perception.
2.3.2 Criticism versus the supporting literature
Over the last decade Integrated Reporting gained its momentum in the scientific world (Mio, 2016). Currently investors are prioritized in the information that is been served. Nonetheless Mio (2016) argue this is not the case. The IR framework considers investors as the targeted audience, however investors are left out in the determination of the integrated reports. Nonetheless Mio (2016) votes for a more dynamic approach. My attitude towards this subject is that these drivers are inadequate. The IIRC should review the given comments and perhaps make changes to the framework.
According to Thomson (2015) it is possible for the IIRC to create a sustainable case. In order to realize a sustainable case the IIRC must move their situation from a static towards an more dynamic attitude. An example is the earlier mentioned case that all the stakeholders are affected by the choices/actions made by a specific firm, which only would benefits the investors.
From my point of view, I don’t think corporate reporting is all about the accounting numbers. It is mainly about the accounting techniques that arrange the numbers on the balance sheet in the annual report. The Integrated Reporting framework can be the solution in creating a more sustainable case, which would create value on the short- and long-term for the firm and their stakeholders.
Theoretical framework
2.4.1 Agency theory
One of the theories that explains the cause of information asymmetry is the agency theory. Jensen and Meckling (1976, p.308) define an agency relationship as a contract between a principal and an agent, e.g. a company and their employees. Within this relationship there is some decision making delegated to the agent. The principle must create an optimal setting with the proper incentives for the agent to make right decisions that favor the entity best as possible. For example, the principle which incurs monitoring costs will influence the decision making of the agent in a positive manner. In other situations principal pays the agent in form of a bonding cost or incurring compensation costs to incentivize the agent to take decisions, that would not affect the principal in a negative manner. The information asymmetry arises from the aspect of when there are no costs occurred within the agency relationship and there is no
assurance that the agent will make the ideal decisions for the principal when there are zero cost involved (Jensen and Meckling, 1976).
Separation of ownership and control creates well-known agency problems within companies (Badertscher et al, 2013). Badertscher et al (2013) says that managers, ‘insiders’, are having more information than e.g. stakeholders, ‘outsiders’. So, the outsiders are demanding corporate reports that contain very detailed firm specific knowledge to make useful decisions regarding their maximization of their stock return. As I earlier mentioned the IIRC (2017) stated that they reduce this information asymmetry by narrowing the information gap with their Integrated Reporting. This research is about whether this is significant.
Another agency problem is the ‘lemons’ problem. The ‘lemon’ problem addressed by Akerlof (1970) who has a different opinion on the information asymmetry between companies and their stakeholders. This problem regards the information asymmetry between the buyer and seller of the value of an investment or product. Healy and Palepu (2001) described the core problem, this is when the investors of an enterprise cannot distinguish the bad type companies that pretend that their ideas as good form the good type. Again capital markets enhance the ‘lemons’ problem by overprizing bad ideas and underpricing good ideas. This is a very important subject because one of the goals of Integrated Reporting is explaining how it creates value over time for an entity, which again resolves the ‘lemons’ problem.
2.4.2 Adverse selection
Available information on the market is very crucial for the trading choices investors make. Due to the difference in how well the investors are informed, differences in bidding and asking price are caused. For this effect Stoll (2000) found evidence in his research. Stoll (2000, p. 1482) has elaborated on the researches of scholars Copeland and Galai (1983), Glosten and Milgrom (1985), and Kyle (1985). Stoll (2000, p. 1482) included in his paper two branches often not distinguished. The work of Copeland and Galai (1983) is foundation for the first branch. The first branch is about the difference between value of the trading options and the posted quotes. There is a time lag between posting and removing quotes. When new information is published and a quote is placed, then the investor or dealer would lose. The second branch is more prevalent with superior information, which suggests the presence of information asymmetry. There is a risk that adverse selection would incur that a person with superior information would take the bid or ask price. The informed traders would buy at the ask price when they know its
value is a higher price and sell at the bid-price when its value is a lower price (Stoll, 2000, p. 1482).
Stoll (2000) mentioned that information asymmetry can be measured by the bid-ask price spread and is seen as a proxy information asymmetry. Inventory holding, order processing and asymmetric information costs are facets of bid-ask spread. The asymmetric information costs aspect within the bid-ask price spread reflects and measures how well the investors with private information can influence the difference within the bid and ask spread.
2.4.3 The efficient market hypothesis
The ownership in form of stock capital and the allocation is a significant aspect on the capital market. The valuation of stock capital must happen in an efficient way, in order to provide the right signal towards the capital market to create better decision usefulness for the investors for better investment selections. So, it is very fundamental to incorporate all available information in the market prices. There are lots of papers available about efficient markets. The most cited and quoted paper is the Fama (1970) paper. Fama’s paper reviewed all the existing literature on the efficient markets model. The review is done by comparing the adjustment of the security prices at three levels of efficient markets, weak form, semi-strong form and strong form. These three level stand for how well markets are incorporating newer information into the prices. The strong-form is that some investors or parties are the only with the superior information like the case in a monopoly. These could be parties like specialists or insiders of an organization. This seems to be an extreme case, but this efficiency markets model is used as a benchmark to judge different market efficiency cases. Under the semi-strong form it is expected that the market has taken all noticeable and accessible information such as announcements and annual reports into account. Markets that are covered by the ‘weak-form’, only take historical firm existing information (e.g. returns) into account in their prices.
For the capital markets it matters how much private information companies communicated to the markets, in order to the market to be efficient. So, for this research I will be examining the effect of integrating reporting on the information subset within the company’s stock prices.
2.4.4 Value relevance theory
Only in South Africa, application of the framework Integrated Reporting is mandatory. Where standard corporate reports only report financial information to the investors, Integrated
Reporting adds non-financial information to the information flow, which aids for the investors to better assess the value of the organization.
Prior research showed a positive association between standard sustainability reports and the firm value of an enterprise. These standard sustainability reports contain mainly nonfinancial, social, ecological and economic content (Berthelot et al., 2012). Berthelot et al. (2012) concludes afterwards by better understanding of value relevance study that the stakeholders can better estimate future cash flows of enterprises, all due to the relevance of the incorporated information in the sustainability reports. Berthelot et al. (2012) researched Canadian enterprises that published sustainability reports on the Toronto Stock Exchange's
S&P/TSX Composite Index. However, there is very little research’s available and done about
the added value to the firm value by IR. Mervelskemper and Streit (2017) stated in their paper that prior research (Malik, 2015) investigated the value relevance of sustainability reports. Other researchers (Orlitzky et al., 2003; Margolis et al., 2009; Fulton et al., 2012) found a
positive but small relationship between value creation and sustainability reports.
Mervelskemper and Streit find an association between value relevance and entity reporting on
the corporate governance, environmental and social pillars (sustainability reports). In the paper
about value relevance Barth et al (2001) mentioned that accounting amount contains value relevance if it is cohesive with equity market values. This means that all the relevant information to the investors is incorporated in the stock prices.
Authors Holthausen and Watts (2001) classify the relevance of important papers in three categories according the relevance theory. The three categories are:
Relative association studies (Category 1) Incremental association studies (Category 2) Marginal information content studies (Category 3)
The first category compares the relative association of the stock value and the change with the underlying measures (e.g. IFRS with US GAAP). The second category is about the explanatory power of the accounting numbers on the stock prices or future returns. Scholar Venkatachalam (1996) created a trustworthy estimation model by looking into accounting figures that could predict the values. The third category looks into the add value of accounting figures towards available information. All together the value relevance theory can be conceived broadly. This theory is basically investigating the effects of managerial choices, underlying measures or accounting figures on the value of the prices or returns.
During this research I am testing the level of information asymmetry related to the choice of releasing an Integrated Reporting or holding on to the current corporate reporting method.
Hypothesis development
The research of scholars Lee and Yeo (2016) is predominantly the reason that information asymmetry is linked to Integrated Reporting. Businesses that are in line with the framework are more likely to have a higher percentage of external investors and a higher firm valuation according to lee and Yeo (2016). The scholars mention that the framework reduces the information asymmetry between the internal and external parties. Stubbs and Higgins (2014) brought insight in how the level of provided information is related with how firms use the Integrated Reporting framework. The implementation of the framework did not resulted in to a reduction in information asymmetry according to the evidence found by Stubbs and Higgins (2014). Firms are not obliged to provide information towards investors regarding their investment decision making. Overall is the subject investors in the framework misunderstand. To make information asymmetry explicit, I formulated proxies based on prior literature.
2.5.1 The bid and ask-spread
The researchers Bischof and Daske (2013) found that many oversight watchdogs as IIRC use stock liquidity as an element within the disclosure regulation design. Many scholars delivered researches with results that strength the association quantity of disclosures and the stock liquidity (Healy et al, 1999), (Leuz & Verrecchia, 2000), (Welker, 1995). The bid and ask-spread is a stand-in of the firm’s stock market liquidity which Bischof and Daske (2013) used.
On the market there are two types of traders: definable liquidity and informed traders (Glosten, Milgrom, 1985). Informed traders have the privilege that they have private information that is not incorporated in the market security prices. Liquidity traders trade on other information apart from having hidden information. When liquidity and informed traders are involved in the same transactions, the informed traders are ending up with a loss, this is reflected in the bid and ask-spread (Glosten, Milgrom, 1985). The bid and ask-spread is basically the difference between the price of the traders are willing to buy or sell from or to the experts (Amihud & Mendelson, 1986). This is in line what Copeland and Galai (1983), and Glosten and Milgrom (1985) indicated that the association of a higher level of information asymmetry leads to a wider bid and ask-spread for the traders. As earlier mention in paragraph 2.4.2 is the bid and ask-spread functioning as a proxy for information asymmetry.
Bischof and Daske (2013) and Roulstone (2003) let the bid and ask-spread function as a stand-in of the firm’s stock market liquidity. The only proxy for market liquidity that is use is bid and ask-spread within theoretical and empirical literature according to Callahan et al. (1997). Guenster el al. (2011) and Jo and Harjoto (2011) found that CSR is positive related with the enterprise value. For this research I will add the enterprise value in the bid and ask-spread which would help me to better assess and distinguish larger and smaller firms.
Based on the existing papers, I formed a hypothesis for testing the bid and ask-spread as the stand-in for information asymmetry. See here below hypothesis 1 of this research.
Hypothesis 1: Organizations with a high level of alignment with the Integrated Reporting framework results in lowering the bid and ask-spread.
If the hypothesis is supported, than can be suggested that Integrated Reporting has a negative effect on the bid and ask-spread. Therefore when the hypothesis gets rejected, that indicates that Integrated Reporting has a minimal effect on the information asymmetry.
2.5.2 Abnormal returns
Furthermore during this research I investigate whether Integrated Reporting impacts the decision making of the investors regarding to the stock returns. Past researches sees abnormal returns as an stand-in of information asymmetry. The study of Nichols and Wahlen (2004) is assisting me to assess whether Integrated Reporting positively affects abnormal stock returns. Nichols and Wahlen (2004) looked into how the changes of abnormal annual stock returns is affecting the change in yearly earnings including abnormally yearly stock returns. An integrated report contains in comparisons with traditional reports more non-financials information about the business. The non-financial information is incorporated within the accounting numbers in the financial statements. This leads for the investors to better decisions making about their investments. This is earlier described in subparagraph 2.4.3. As earlier mentioned for the capital markets it matters how much private information companies communicated to let the market be efficient. All the future expectation of the direction is incorporated with in the current stock price. So, this mean that the stock price would be based on more superior information and secondly leads this a lower abnormal stock returns e.g., when an organization has implemented the Integrated Reporting framework. (Nichols & Wahlen, 2004). The research of Nichols and Wahlen (2004) is the reason to add abnormal stock-returns to determine the association of Integrated Reporting with information asymmetry.
Nichols & Wahlen (2004) continued were the prior study of Ball & Brown (1968) stopped. My calculation will be identical in comparison to Nichols and Wahlen (2004). For this research there will be a limit, this is further explained in the next chapter. Nichols & Wahlen used the formula: total business stock-return – (minus) day return market index, to calculate the abnormal stock returns.
Based on the described papers I formed a hypothesis for testing the abnormal stock-returns as the stand-in to examine and making the interrelation explicit between Integrated Reporting and information asymmetry. See here below hypothesis 2 of this research.
Hypothesis 2: Organizations with a high level of alignment with the Integrated Reporting framework results in lowering the abnormal returns.
If the hypothesis is supported, than can be suggested that Integrated Reporting is negatively related with abnormal returns. It would lead to better estimation of the abnormal stock-returns which removes the uncertainty of the stock-stock-returns. I would assume this based on the existing theory and research. Therefore when the hypothesis gets rejected, that indicates that Integrated Reporting has a minimal effect on the information asymmetry.
Paragraph summary
Integrated Reporting ensures that the stakeholders receive a broad perceptive of the whole organization of a company. By giving insight in the financial as the non-financial data and having an efficient market potential investors get the opportunity to better assess the future cash flow to make better investment decisions. The effect of minimized information asymmetry must be traced back in the bid and ask-spread and abnormal stock-returns. This study is bringing if Integrated Reporting is negatively related with the stock liquidity (information asymmetry), which is translated in to two proxies bid and ask-spread and abnormal stock-returns.
3 Data and research design
This paragraph contains how the sample is selected and which databases or data sources the data is retrieved from, all to explain the interrelation of Integrated Reporting and information asymmetry. Additionally, in this paragraph are the stock liquidity and abnormal returns model explained in detail. Furthermore, Libby boxes are added that represent the framework of the research that shows how the examining process of the interrelation. This framework is the backbone of this study. The models are based and elaborate on existing and prior studies.
Sample selection
Since 2010, South-African corporations are compulsory to use Integrated Reporting as their reporting standard and was acknowledged in more and more countries worldwide (Jones, 2015). Due to the rise of IR in 2010, I choose to start the sample period of the data from 2010. Eccles and Krzus (2010) their criticism in their One report: Integrated Reporting for a
sustainable strategy shifted to how IR should be implemented within companies. The report of
Eccles and Krzus (2010) made The IIRC presented a framework in 2013 as a response to this riticism. For this study I choose to run the sample till the latest accessible year 2016.
The scope for this study comprehends only North-American based corporations. This limitation within the research is due to impossibility to gathering the necessary data of European companies, even with the granted access in DataStream. This forces me to focus only on the North-American companies for this research and due the limited timespan is it not possible for me to gather the European data by hand.
The earlier formulated research question is being answered and the interrelation is examined by using a sample of 600 North-American with the biggest market capitalization, that represents the entire population in the US. These 600 companies are retrieved out the DataStream. In the sample are e.g. Apple Inc, Amazon.com Inc and Alphabet Inc inlcuded. Due the research of Eccles and Krzus, that showed similarities between Integrated Reporting and CSR, I used ESG-scores out the ASSET4 ESG database as a proxy for Integrated Reporting. The way financial, environmental, social and governance information are incorporated in the financial reports is very similar in both type of reporting. The ESG-scores stands for the overall performance subdivided in four pillars economic, environmental, social and corporate governance (see figure 1).
Figure 1 ESG-framework
For the research I took the assumption that in 2010 the firms start adopting Integrated Reporting, makes all the adopting firm years equally. This could be a limitation of the study. I sort the available companies on market capitalization, and retrieved ESG-scores of the 600 companies with the biggest market capitalization including Apple, Alphabet/Google and Amazon. Subsequently dropped 97 enterprises from my sample as result of missing the
matching data. Altogether my final sample contains 503 enterprises started from 2010 till 2016. The final sample represents the independent variable of the research and is used for the two models of the research explained in subparagraphs 3.3.1 and 3.3.2. See table 1 the final sampled that is expressed in observations years.
Data sources
To collect the necessary data of the dependent variables I used first the database The Center for Research in Security Prices (CRSP) in WDRS. I retrieved the stock prices, bid & ask prices, distributed dividends and the S&P 500 returns to compute the abnormal returns and spread of the stocks. I used DataStream to retrieve the required data to compute the control variables: firm size, volume, ROA, leverage, profit and price volatility.
Stock liquidity model
In most researches (Glosten & Milgrom, 1985; Copeland & Galai, 1983) is found an effect that a higher level of information asymmetry leads to a wider bid and ask-spread for the investors. An assumption is that the bid and ask-spread remains persistent throughout the examined period. This bid and ask-spread represents the grade of information asymmetry, inventory cost element and order processing costs. Due to the interaction of information asymmetry, inventory cost element and order processing costs can the bid and ask-spread experience abnormalities. Here below is the equation of the ordinary least regression (OLS) shown (including the control variables) to test hypothesis 1.
Model 1
SPREAD = βo + β1*ESG_SCORES + β2*FIRM_SIZE + β3*VOLUME + β6*ROA + β8*LEVERAGE + β9*PROFIT +β10*PRICE_VOL + ɛi,t
The ESG-scores are calculated by taking the average of the performance scores of the 283 key performance indicators. To calculate the yearly bid-ask spread, I first calculated the daily bid-ask spread by taking end of the day daily spread according to Ayaraman (2008). Secondly, I use Harris (1994) method to transform the end daily spread to an average yearly spread.
SPREAD =
According to prior literature I forecast and expect an effect of higher alignment with IR in lowering the SPREAD for investors, that is coherent with hypothesis 1. This indicates a positive relationship of Integrated Reporting with information asymmetry.
Control variables
To map the endogeneity for this research, I have determined based on prior literature the following control variables FIRM_SIZE, VOLUME, ROA, LEVERAGE, PROFIT and PRICE_VOL. This determination is in line with the researches of Frias-Aceituno et al. (2013, 2014), Bischof & Daske (2013), Healy, el al. (1999), Sierra et al. (2013), Roulstone (2003) and Leuz (2003).
Total assets represents the component FIRM_SIZE of a specific company and by taking the log the FIRM_SIZE is determine. The component firm size is functioning as a proxy for the total available information and its effect on the market’s reaction during the event period. Larger amount of information results into lower adverse selection. Therefore, I forecast and expect that FIRM_SIZE has a negative association with SPREAD.
By taking the shares traded annually and dividing it by the total shares outstanding the control variable VOLUME is determined. I used log transformation to nuance the spread of the variable. Traders who received more opportunities are more likely to succeed in managing their stocks inventory and recouping their losses form the knowledgeable traders from companies with a higher trading volume ratio. Subsequently is expected that VOLUME has a negative correlation with SPREAD.
The profitability of companies is measured by the return on assets (ROA). A positively influencing effect of the profitability of companies on the level of disclosed information is found by Frias-Aceituno et al. (2014). Expected is that ROA has a negative correlation with SPREAD.
By dividing the total liabilities by the total equity you determine the LEVERAGE of a specific firm. According to Sierra et al. (2013) a higher LEVERAGE ratio is related toward higher probability of occurrence of an economic disaster. Altogether is expected is that LEVERAGE has a negative correlation with SPREAD.
To calculate the PROFIT for the share capital the net income is dividend by the share capital. Frias-Aceituno et al. (2014) found that more resources are invested into the development of maturing Integrated Reporting by companies that are more profitable. Altogether is expected that this leads to lesser information asymmetry.
To determine the PRICE_VOL are the annually daily returns used and showed as the standard deviation. Holding firm stocks on a short-term is affected by more uncertainties due the higher volatility in the firm’s stock prices. This lead to an increase in the bid & ask
SPREAD, so the traders can protect themselves against the volatility. Subsequently, Jegadeesh et al (1993) and Stoll (1978) reported that a positive correlation of PRICE_VOL with SPREAD can be expected.
The ε stands for the residual term. There are no implications made towards the residual term.
Abnormal returns model
As in the literature review in section 2 mentioned and discussed are the abnormal returns functioning as a good representation of the information asymmetry of a firm. Here below is the equation of the ordinary least regression (OLS) shown (including the control variables) to test hypothesis 2.
Model 2
ABNORMAL_RETURN = βo + β1*ESG_SCORES + β2*FIRM_SIZE + β3*VOLUME + β6*ROA + β8*LEVERAGE + β9*PROFIT +β10*PRICE_VOL + ɛi,t
The ABNORMAL_RETURN represents the abnormal returns which is the second dependent variable. The ABNORMAL_RETURN are computed by first determining the stock returns and subtracted by the returns on the S&P 500.
Stock return =
ABNORMAL_RETURN =
According to prior literature I forecast and expect an effect of higher alignment with IR in lowering the ABNORMAL_RETURN for investors, that is coherent with hypothesis 1. This indicates a positive relationship of Integrated Reporting with information asymmetry. Keeping efficient markets in mind for investors the user of integrated reports is expected that they can make better forecasts about the stocks returns of a firm. The same control variables discussed in 3.4 for SPREAD are also applicable for ABNORMAL_RETURN.
Testing
The proxy of IR ESG_SCORES are tested if there is any effect on the SPREAD and ABNORMAL_RETURN. Initially I will start with ordinary least squares regression if there is
any statistically significant effect of X on Y. Subsequently a multivariate analysis is executed to look for validation of the two models in accordance with univariate analysis. Furthermore difference in difference test is used to examine if there is any impact by the Integrated Reporting framework on the SPREAD and CAR. Last but not least robustness tests are executed. Subsequently are from these tests the inferences of the hypotheses and the answer of the thesis question derived. The thesis question is : “how is Integrated Reporting interrelated
with information asymmetry”.
Framework
The regression model of the research is testing the effect of ESG-scores on the bid-ask spread and abnormal return. To see and prove if the test are actually testing what it claims and purports to measure, is all captured by the construct validity.
For the independent variable Integrated Reporting are the average ESG-scores used as a proxy. This is very directly designed which may can be a limitation of the research.
Stock liquidity is translated into SPREAD that is computed by taking average differences of the daily ask and bid prices to determine the yearly average spread. The yearly abnormal returns are computed by taking the average of the subtracted stock day returns from the market day return which are in this case the returns on the S&P 500. The Libby boxes of the research are shown in figure 2 in the appendix that shows and paints in an arranged manner how the interrelation of Integrated Reporting with information asymmetry is going to be tested. The two upper boxes reflect the concepts and are translated in operational measures in the lower boxes. In the separate boxes are the control variables added. For the research question there are two hypotheses hypothesized that the framework is positive interrelated with information asymmetry. This means that is expected that Integrated Reporting positively influences the outcome of the SPREAD and ABNORMAL_RETURN.
4 Empirical results
This paragraph contains the empirical results of the executed tests and overall analyses of the research hypotheses executed during the research. To test the normality of the research sample the descriptive statistics and the correlation of the research variables are shown and explained. Furthermore, is a regression executed and analyzed for the two research models.
Descriptive statistics
In table 2 are the number of observations per year displayed. The 3,155 observations are representative of the data set originated from 503 North-American companies. The observations are approximately equally distributed over the sample years from 2010 to 2016.
Table 2 Number of observations per year
For the descriptive statistics are the number of observations, means, standard deviations, minimum and maximum presented in table 3 for the independent, dependent and control variables. The total of 3,155 observation firm years represent the research sample. The independent variable ESG-scores has a mean of 59.18693. The dependent variables bid-ask spread and abnormal returns have respectively a mean of 0.0237083 and 0.003058. For the control variable firm size is a mean displayed of 16.65642. For volume is a mean displayed of 16.65642. The mean of profit is 0.0397719. The mean of ROA is 0.0621177. For leverage is a mean displayed of 0.4875014. The mean of price volatility is 24.35635.
Table 3 Descriptive Statistics of sample companies with ESG-scores before winsorizing
Notes: This table shows for the variables the descriptive statistics before winsorization total observations (N), mean, standard deviations, min, max and median over the sample period 2010-2016.
4.1.1 Normality test
For the variables bid-ask spread and abnormal return are their normality tests executed to determine if the distribution of the data sample is normally distributed. The skewness and kurtosis tests and Shapiro-Wilk test are both significant 0.000, additional test values under 0.05 indicate a non-normal distribution for the two variables. The box plots of the variables displayed in table 12 and 13 in the appendix illustrates that the distribution is heavily effected by outliers in the sample. An observation that strongly differs from the other observations in the sample are described as an outlier (Field, 2013). One of the methods to eliminate outliers is winsorization. With winsorization the observation in the lowest and highest percentile respectively 1st and 100th are equalize to the 2nd and 99th percentile in the observation sample by using the mean of bid-ask spread and abnormal return as a reference point. The means of the variables bid-ask spread and abnormal return after winsorizing are much better shaped, despite the variable can be susceptible to reliability and inaccuracy errors, I assume that the variable are normally distributed. The winsorized values of the variables are presented in table 11 disclosed in the appendix. Furthermore, are in the appendix table 12 and 13 presented, that shows the transformation of the distribution by displaying the histograms and box plots of the variables bid-ask spread and abnormal return before and after winsorization.
