Does integrated reporting help reduce the information asymmetry of corporations? : based on listed companies in Japan that published integrated reports

Does integrated reporting help reduce the information asymmetry

of corporations?

（Based on listed companies in Japan that published integrated

reports）

Name: Chaoyang He Student number: 11646586

Thesis supervisor: Alexandros Sikalidis Date: June 24, 2018

Word count: 13796

MSc Accountancy & Control, specialization Control

Statement of Originality

This document is written by student Chaoyang He 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 corporate integrated report is a new type of enterprise reporting method that is being pushed by the international community in recent years and is the trend of future annual reports. This paper first studied the impact of the release of integrated reports on the degree of information asymmetry between companies and stakeholders. This article uses the sample of Japanese listed companies in the GRI-Reports-Database. Using the data from 2010 to 2016, and by comparing degree of information asymmetry before and after adopting integrated reports, the result shows that the release integrated reports are significantly negatively correlated with the degree of information asymmetry, which means the voluntarily disclosed information about Human, Natural Financial, intellectual, Manufactured, Social & Relationship in integrated reports help to reduce the degree of information asymmetry between information providers and users. In this sense, integrated reports should be vigorously promoted as the reporting method of enterprises.

Contents

1 Introduction ... 5

2 Theoretical framework ... 11

2.1 Definition of IR ... 11

2.2 Evolution of IR ... 13

2.3 IIRC Guiding Principles ... 14

2.4 Advantages of <IR> ... 15

2.5 Disadvantages of <IR> ... 19

3 Literature review ... 23

3.1 In general ... 23

3.2 Corporate social responsibility and information asymmetry ... 27

3.3 Voluntary disclosure and information asymmetry ... 29

4 Hypothesis development ... 32

5 Research Design ... 33

5.1 Samples ... 33

5.2 Model ... 34

5.2.1 Dependent variable and independent variable... 34

5.2.2 Control variables ... 34 6 Result ... 35 6.1 Descriptive analysis ... 35 6.2 Multicollinearity test ... 35 6.3 Correlation analysis ... 36 6.4 Regression ... 37 6.5 Robustness test ... 38

7 Discussion and conclusion ... 40

1 Introduction

In the past decades, emerging trend of more transparency disclosure of business in all aspects has gradually dominated the financial market due to influential factors such as globalization, raising awareness of sustainability, broader view of accountability and more consummate regulations. Shareholders are demanding more non-financial information that are relevant to traditional financial information for more insight of current performance and future prospective of an entity. In addition to economic performance that can be reflected directly from financial figures such as profit, earnings per share, etc. external and internal users of annual report are now looking for measurement that can indicate environment performance, (resource saving, waste reduction, etc.), and social performance(employment quality, health & safety, etc.) Financial reports acting alone is consequently far from enough because of its retrospective characteristic and the vagueness regarding to the information that aims to achieve value-creation for stakeholders while simultaneously bears risk. (Eccles & Saltzman, 2011). Although the financial aspect disclosed in those report are seen as ‗The true and fair view‘, non-financial evaluations which measure the long-term financial blueprint should be presented as a supplement to accomplish the comprehensive goal. (Eccles & Saltzman, 2011). According to EY (2015) which tracked on various managerial forces under different country settings, over 70 per cent of those have reached an agreement that more sustainable success and more stable long-term goal can be achieved and enhanced by more disclosure on environment, social, and economic channel performance

Influenced by the trend stated above, since 1990‘s, many companies appeared to voluntarily issue environmental responsibility reports, followed by sustainability reports and corporate social responsibility (CSR) reports, as a supplement to their financial reporting. Reports mentioned above are specialized in providing information on the companies‘ performance on environmental and social perspectives. As there were no mature standards or frameworks established for normalizing those reports, the Global Reporting Initiative (GRI) developed some guidance for companies regarding adapting non-financial reports. Unfortunately, these reports are thought to be vague, because of massive results which do not have a clear connection with its financial side actually distracted shareholders as they had no idea where to focus on. This view is concluded by (Adams & Simnett, 2011) as a main drawback of these separated reports, being ‗silo-ed‘ from the entity as a whole. Various international associations were founded to find a way out of this problem by designing a new framework to match the non-financial aspect with the financial aspect as a whole. In 2010, International

Integrated Reporting Council (IIRC) was established, along with a draft of framework initiating an integrated manner of reporting. Thereby the concept of Integrated Reporting was introduced for the first time in front of the public, aiming at connecting the financial and non-financial side. IIRC believed that if entities fully make good use of this application, the users of reports (shareholders, investors, etc) can get a more comprehensive view of how the firms will make long-term achievements by creating and increasing value, leading to more effective cooperation in the entire capital markets. That is to say, the goal of integrated report is to provide shareholders and other information users with a more comprehensive and scientific prospective of the entity‘s value-creation process as well as upcoming risks by creating a normative information environment and reducing the degree of information asymmetry between stakeholders and external investors.

Multiple countries gave positive responses to the new reporting framework. South Africa is the only pioneer in the world to make integrated reporting compulsive. In February 2010, South Africa imposed a requirement that listed companies in the Johannesburg Stock Exchange should follow the "King III" to publish an integrated report from March 2010 and on. Otherwise, it is necessary to explain the reasons for not releasing.

In January 2011, at the IIRC meeting held in Beijing, China, Vice Minister Wang Jun of the Ministry of Finance reviewed the important progress made in the study of integrated reports. The Director of the Accounting Department, Yang Min, et al. (2012) pointed out that the integrated report can strengthen and integrate the existing reporting framework and reporting practices, stimulating corporate reporting system to develop continuously. Enterprises should pay attention to the relationship between the integrated report and value created behind, and further more in predicting the company's development prospects and capabilities of creating value.

In 2015, The Ministry of Economy, Trade and Industry (METI) in Japan published a report aiming to enhance the communication between report producers and users. In the report, it suggested that issuing Integrated Reporting can be an approach to strengthen the dialogue between entities and investors because it can provide more relevant disclosure of information based on various perspectives and thus reinforce the process of value creation.

The report recommends that reciprocal understanding between report publishers and users can be set up by efficient dialogue and mid-to-long-term goal congruence in a supportive environment. It then forwards some measurements to create a supportive environment,

defined as ‗dialogue-rich nation‘, where integrated disclosure from companies, improved information that can benefit investment decision making process, arrangements setting to realize a conversation-oriented procedure between entities and investors and the in-depth development of ―electronification‖ – adopting updated technology to trigger relations, act together. The IIRC regarded this report as meaningful and welcomed as with the help of the recommendations, companies in Japan will definitely shift their attention to the more efficient conversation between report providers and users to some extent. The IIRC finds it cheerful that METI Japan has reached an agreement with it that Integrated Reporting could be an approach to provide a good environment for both report issuers and users to have a better understanding of crucial disclosure of both financial aspect and non-financial aspect, strengthening value creation.

The report was released following Japan‘s Corporate Governance Code comes into effect on 01, 07, 2015. The code aims to motivate listed companies to voluntarily disclose their own value creation story including strategy, risks and governance, which is in line with the framework provided by IIRC including four perspectives: Risk and opportunities, Strategy and resource allocation, Performance and Outlook, illustrated by the flowchart below.

Figure 1: Illustration of the value-creation procedure

Japanese company did give a positive response to the calling form the Code. ―Concerns worldwide have been attracted by the remarkable amount of entities that adopted integrated reports in Japan, seen as the practical illustration and response to the Japanese Revitalization

Strategy— a fearless step towards better economy. The next stage for Japanese enterprises is definitely to pay more attention to communicate and promote the value-creation process, the connection as well as business model, while demonstrating clear goal regarding to long-term strategy.‖ By Survey of Integrated Reporting in Japan 2016 KPMG

However, it is still questionable about whether implementing Integrated Reporting is worth-doing as in real world practices, companies need to invest a lot of time and personnel in order to gain a holistic view of all capitals that are as disposal, together with the business environment they are confronted with, picturing how resources from financial, environmental and social perspectives cooperate with each other to create value effectively as a whole. The logic behind it is that when investors are making rational decisions, a better way of organizing and processing information of multiple aspects can improve the efficiency in the market. There has been debating on whether adopting Integrated Reporting is value-adding or cost- consuming in the academic world. Some researcher found evidence that publishing Integrated Reports sustains value creating process while others argued that the massive costs incur due to complicated practice actually outweighs the benefits.

Bray (2013) has argued that issuing integrated reports has a positive relationship with the entity‘s financial performance. Kim et al. (2012) found that disclosures related to corporate responsibility can act as constraint condition regarding earnings management. Information disclosed by firms that issue CSR reports are seen as more trustworthy and transparent compared to those who do not. Makiwane & Padia (2012) did research based on South Africa setting and found that the quality of reporting is advanced after issuing Integrated Reporting for listed companies by comparing empirical results of the year that King III was released and one year after that base year. However, opponent suspects that a good deal of costs can incur for some entities due to an evolution of measures of fulfilling the integrative goal. (Adams et al. 2011). In order to solve this contradiction, many researchers had conducted empirical researches to analyze the relationship between Integrated Reporting and indicators of enhanced reporting quality, such as firm value and information asymmetry.

Previous literature that aims to explore the relationship between IR and information asymmetry either based its institutional settings in in a single country, which is South Africa where produce integrated reports is mandatory (Cai & Wang, 2013) or compared companies which did not release various types of Social Responsibility Reports with those did in a

certain period of time based on the data from all over the world (García-Sánchez & Noguera-Gámez, 2017). However, because different countries are differentiated by particular features or quality such as regulations, economic conditions, and different corporate governance systems, results of a researched-based world-wide with very diverse samples may contain bias because the heterogeneity of the companies may influence each other.

This paper will fill in the gap between implementation of Integrated Reporting and information asymmetry based on a single country of which has the largest sample size.(South Africa is not taken into account as it has already been analyzed by precious researchers who focus on compulsive disclosure). Based on GRI-Reports-Database, Japan has the largest sample of 2016. Chart 1 indicates top ten countries which have a larger sample.

Table 1 Top ten countries adopting Integrated Reporting in 2016

Country Number of companies

issued IR Brazil 20 Colombia 9 Germany 10 Japan 30 Mexico 12 Netherlands 25 Norway 8 Spain 14

United Kingdom of Great Britain and Northern Ireland 10

United States of America 8

This thesis has following contributions. To begin with, as mentioned in previous paragraphs, taking samples from all-over the world as whole may contain bias due to heterogeneous reason. Basing analysis on a single country may lead to different consequence. Furthermore, there is no literature that mentions the comparison of a certain group of companies regarding

to its performance before and after adopting integrated reporting in a voluntary reporting setting.

I think the empirical test of the Integrated Reporting - Information Asymmetry relationship is very important, not only because information asymmetry theory is one of the most meaningful modern creation in accounting, economics, finance, management and other business research field, but also because of this relationship may have a significant impact on risk management using integrated reporting initiatives. And is the relationship is significantly negative, it can act as motivation for entities to promote the acceptance of Integrated Reporting

2 Theoretical framework

―An integrated report is a concise communication about how an organization‘s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long-term.‖(<IR> framework)

It is worth noting that Integrated Reporting is the next global accounting trend, and many countries are turning to this new way of thinking. Trade and Industry (METI) in Japan published a report aiming to enhance the communication between report producers and users. In the report, it suggested that issuing Integrated Reporting can be an approach to strengthen the dialogue between entities and investors because it can provide more relevant disclosure of information based on various perspectives and thus reinforce the process of value creation. The forecast shows that about nearly 200 companies in Japan are headed for Integrated Reporting, It is expected that with framework <IR>and other proposals being introduced can enhance dialogue between the company and investors, thus contributing to Japan's sustainable growth.

The concept of Integrated Reporting comes from the rising significance of non-financial information in the modern accounting world. Multiple transformations such as more competitive and unstable markets, rapid change of demands, a fast process of globalization and highly liquid capital have led to heavier regulations, more complicated frameworks and guidance, making it more complex for companies to disclose accounting and non-accounting information. That is to say, the complexity of modern business operations has huge practical needs for dealing with different issues of technology, environment and sustainability. (Kolk, 2005)

From the perspective of shareholders, information access is regarded as the core value, supplemented by compliance with laws and regulations. Satisfying these two requirements makes companies more reliable from the point of view of investors. Integrated report enables them to better understand the overall information of the organization's strategy, business model, etc., and make it easier to assess the company's long-term development capabilities,. From the perspective of companies, managements are also dedicating to make their disclosure more compliant with the updated laws, regulations as well as current concerns. Disclosures in detail that aims to illustrate particular aspects such as environment and social

responsibility were also frequently released and are adopting by increasing number of companies. (Eccles and Krzus, 2009)

In September 2011, the International Integrated Reporting Committee released a draft discussion paper on the integrated report ―The Process of Integrated Reporting: The Value Transmission of the Century‖ which advocated the launch of an international integrated reporting framework and proposed for the first time the establishment of an integrated corporate reporting system. A number of ideas and principles, the preparation and release of integrated corporate reports were mentioned to help the company's value creation and ongoing value management. On April 16, 2013, the International Integrated Reporting Committee released the ―Consultation Draft for International Integrated Reporting Framework‖, which is for global consultation. The draft for consultation is divided into five chapters, which are overview, basic concepts, guiding principles, content elements, and preparation and presentation. Among them, the capital is divided into financial capital, manufacturing capital, intellectual capital, human capital, social and relational capital, and natural capital categories, in regarding to the importance, simplicity, reliability, completeness, consistency, and comparability of the guiding principles, etc. The aspect defines the characteristics of the company's integrated report, and the content of the enterprise's integrated report is constructed from the organizational overview and the external environment, governance, opportunities and risks, strategy and resource allocation, business model, performance and outlook.

However, the very first version of enterprise environmental report or social responsibility report actually was released at the end of the 1980s, much earlier than the date that IIRC was established. It shows the motivation of enterprise itself to provide more information, not restricted to financial aspects. Since then, more and non-financial reports appeared. EY conducted a survey regarding to the sustainability, social and environmental performance and found that among those Global Fortune 500 companies, 95% have released related reports while two years before, there were only 39% of them were doing so.

During the past decade, the disclosure practices have changed significantly due to the large number of non-financial involvement - companies are willing to disclose for the first time the details of how they can generate income or any responsibility in an environmentally friendly way. (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) 2.2 Evolution of IR

Although with more and more non-financial information disclosures established, from the first sustainability report released in the late 1980s, there is still not much choice to monitor, regulate, and supervise information disclosure in these fields. (Zickliene, 2013) Dated back to 1997, Global Reporting Initiative (GRI) was funded, and In 2000, the Global Reporting Initiative (GRI) released the first sustainability reporting guide for any size and type of organization with an initial focus on full range of sustainability; the second revised version was issued in 2002. The revision guide states that in general, sustainability reports can be released at the same time as the financial report, or as part of the overall financial report. At this point, the disclosure of the company‘s sustainable development information includes information disclosure in the financial reporting system and information disclosure of sustainable development independent of the financial reporting system; The third edition of the Development Report Guidelines, known as the G3 standard, is the most widely used and most influential reporting guide in the world. At the same time, in 2010, the International Organization for Standardization (ISO) also issued the Social Responsibility Guideline Standard (ISO2600), which has also given birth to the development of a global social responsibility movement in a broader and higher-level sense. In 2011, the Global Reporting Initiative prepared and released the G3.1 guidelines on the basis of the G3 standard, which improved the disclosure of corporate social responsibility reports, including development strategies, management guidelines, corporate governance, economic performance, environmental performance, and social Performance, labour performance, product liability, etc. According to the viewpoint of Jean-Francois (2015), the emergence of more mature reporting guideline has improved the reliability and credibility of sustainability reports and made them more comparable. ―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) Integrated Reporting has become the ultimate solution to combine financial and non-financial reports together in an informative way and are ambiguously heading to meeting external demands and replacing other reporting framework that are available now in the market. (Velte, 2014) Richens (2012) believes that the essence of the integrated report is to integrate

the company's strategy, performance, and development prospects, and to disclose the information to a certain standard. Regarding the implementation value of the consolidated report, Charles (2012) pointed out that the integrated report can be regarded as an additional value for the company because it can promote the enterprises to have a clearer understanding of their own operating models and financial performance.

2.3 IIRC Guiding Principles

Table 2: Fundamental Concepts and Guiding Principles (Deloitte, 2015)

4 Fundamental Concepts 7 Guiding Principles

Profounds: <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 of organizational strategy, relating to the ability of 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.

The 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.

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.

2.4 Advantages of <IR>

“<IR> provides a fully new mindset of reviewing the business and reorganizes the key elements crucial to the 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) Moreover, as it is required for entities to disclose multiple value drivers and how they coordinate together to create value, a process of composing integrated report is not limited to accounting data collecting and analysis but also demand insight into both internal and external environment. According to IIRC's survey, companies which adopted integrated reporting commonly obtained deeper understanding of the whole process of value-creation. 95% of those companies have seen that value-creation enhancement has brought remarkable improvements for the company as whole. These benefits probably attributes to the shift of attention from solely focusing on financial aspects, evaluations measured by figures of profit, return on investments or EPS to wider range of capitals and drivers, especially those cannot be easily measured by money, such as human resources, knowledge, and experience. Companies‘ business pattern may then be changed or optimized with the guidance of the integrated reporting framework, following instructions of the suggested 6 capitals and value-creation models, leading companies to focus more on the significant role that on-financial drivers are playing and to set goals based on longer term success and broader range of responsibilities.

Differ from conventional reports, integrated reporting fill in the gap of financial and non-financial while maintaining an independent feature of both. Berg and Jensen (2013) indicates that by taking non-financial disclosures such as social responsibility and environmentally friendly, companies‘ tendency of profit-pursuing become not as absolute as before as they are now trying to find a balance between maximizing profits and shouldering responsibilities of community. Besides Integrated reporting, ESG(environmental social，corporate governance), as a substitution, also enjoys certain status world-wide, especially in UK and Italy. However the connectivity of capital resources and procedure of value creation is suspected by researcher Ioannou (2016) On the contrary, In the light of improving the connection of financial and non-financial information, entities that undergoes with more experienced setouts of integrated reports tend to pay more attention to how are non-financial information influenced by financial information. For example, how customer satisfaction or firm reputation influence the profitability prospective the entity, or how investments in research and development impact the expectation of consumers and the market share. Recognizing the influence of non-financial information on financial capital is of vital importance because it provide a new and influential insight of the value-creation process and will further development more solid foundation for decision-making. From the view of shareholders, they also get deeper understanding of the relevance of various types of information. In terms of the significance and relevance of different capitals, in order to integratedly reflex the value of the entity, companies generally increased the evaluation indicators of various resource types such as social, natural, and human resources, and the measurement of corporate value creation became more diversified.

Evidence also proofed that adopting Integrated Repots attribute to the enhancement of coordination among different departments and improvement of efficiency of decision making. Taking PwC (2014a) as an example, it concludes that companies now have a better insight into the connectivity between financial activities and value-creation procedures. From the view of the board of directors, the integrated report makes the board capable of understanding the value-creation procedure of the entity in a deeper way because it offers better demonstration of well-structured and integrated information, enabling more efficient communication and collaboration between the management and the board of directors, reducing the information asymmetry among them. According to IIRC's investigation report, majority if companies have faith in that the implementation of integrated reports has improved the efficiency and accuracy of level of decision-making, and some companies even

consider it to be the most significant gain from adopting integrated reports. The emphasis on comprehensive thinking in the integrated report also prompted changes in organizational management information and systems, especially in companies that implemented integrated reports at an early time, including the extension report of the board of directors, the integration of management reports, changes in the compensation system, and changes in the budget process. These management information and management system changes have improved the process and quality of decision-making. According to interviews with a company conducted by IIRC, as organizations pay attention to non-financial capital, such as human resources, intelligence capital, and relationship capital, which are closely related to the ability to create value, the organization has a deeper understanding of the risks and opportunities it is confronted with. It can make more reasonable and effective assessments of strategy and product advantages, and ultimately improve the organization's decision-making level. The validity of the non-financial information is regarded as a counterpart to financial information under the structure from the integrated report and is no longer a byproduct that attracts little attention of investors or cost little resource of the companies. Integrated reporting is inspiring and motivating companies, small and medium enterprises (SME) in particular, to pursue long-term value creation through taking responsibility in the environment and social perspective. (Banerjee, 2016) Since all six capitals have the same importance to each other, companies are expected to add performance evaluations to newly defined non-financial capital and transform their hierarchy to better match. Eccles and Salzman (2011) provided support for this view because more data are being studied, organized, and presented in a systematic way in new dimensions such as nonfinancial capital. This new dominating mentality will benefit the company from the modern structural level and new internal management strategy, improve reputation and prompt market response at the external stage.

According to the IIRC investigation report, 96% of the interviewees witnessed an improvement in the level of internal collaboration within the organization, and the organizations that have released integrated reports are more likely to feel the strengthening of internal cooperation than the organization that do not. This is consistent with the results of the 2012 IIRC survey. The integrated report helps to break the silo thinking and increase mutual understanding and respect among departments. The integration of information requires the collaboration between different departments to complete, which provides a channel for cross-departmental or cross-functional communication and eliminates divisions between

departments. For example, in order to discuss how the organization creates value for stakeholders and effectively communicates this information to the market, CEOs, key business leaders, and department leaders need to gather together to brainstorm, and once different teams work closely together for integrated reports, more convenient and efficient communication is needed. The non-financial performance indicators and financial performance indicators required for the integrated report must be based on the same unit of measure and time span. This improves the process of collecting and analyzing data between the financial department and the non-financial department, making the communication and cooperation more effective and making more departments engaged.

As this thesis is focused on Japanese companies, I took the integrated repot from Takeda Pharmaceutical Company in 2016 as an example to illustrate advantages brought by the integrated report in practice from the prospective of the adopter.

In the report, the company disclosed information about the following aspects: Corporate responsibility, human rights, labour, environment, anti-corruption and corporate employee activities. It explains to the public the performance of the company in a concise and easy-to-understand form, including various social and environmental related activities that the company has carried out in the course of conducting business activities, and the results achieved.

After adopting the integrated reporting form, there are several obvious advantages that have gradually emerged: (1) The emergence of integrated reports has given employees more incentives and pressures in terms of CSR, etc., as an important performance evaluation indicator plays a role in increasing productivity. (2) The issuance of integrated reports has replaced the issuance of various types of reports such as environmental reports and CSR reports, avoiding duplication and confusion of content and enhancing the relevance of content. The similarity in content between the integrated report of Takeda Pharmaceuticals and the financial report is based on such a consideration: It not only improves the convenience of information users, but also reduces the cost of preparing reports. (3) With the release of the integrated report, Takeda Pharmaceuticals has linked the activities of various departments with CSR and played an educational role. In particular, as far as the company itself is concerned, it has gained a benchmark for objectively judging its own work when facing information users.

2.5 Disadvantages of <IR>

Although integrated report provides more comprehensive performance information compared to financial reports as it allows users to better understand the company's strategy, risk, governance and future goals, so as to facilitate the interpretation of various data disclosures, despite the advantage and benefits of Integrated Reporting stated above, it also facing several challenges during the exploration period. (Kooiker, 2014) There is no denying that compared with the current mainstream of standards and frameworks, integrated reporting together with the thinking patterns behind it, only occupies a small size of market share. Even in South Africa, the only country that Integrated Reporting is mandated under national regulation, Eccles & Saltzman (2011) still argue there are chances remain for the companies in South Africa to play around the requirements of Integrated reporting due to the intrinsic discretion of the Framework. EY (2015) also found that the company chose to adopt an idle attitude in the process of implementing the regulations and abuse the designated discretion. In other words, it can be considered that the disadvantage of Integrated Reporting is that the design of <IR> used in the current framework is loose and small in scale. Stakeholders may have some additional information about the sustainability or sense of responsibility of the companies they are interested in, but they do not contribute to the decision-making process or mitigate information asymmetries.

As a relatively new reporting standard, assurance of integrated reporting may not be as much as other traditional reporting, partly attribute to the limited scope of "IR" adoption. In addition to the IILC, there is very little assurance that can be provided according to the code and operations supported by other internationally recognized organizations. From the internal perspective, very limited information is provided or suggested in integrated reports, although the disclosure of non-financial capital information requires more complex and difficult verification. With the launch of the integrated report, the issue of auditing non-financial information will soon be faced with, which will pose considerable challenges to auditors and even the audit industry. The diversification of non-financial information is difficult to measure. It will impose higher requirements on the knowledge and professional capabilities of the auditors. At the same time, it also increases the auditing risk of the auditing and certification organization, and it easily leads to related audit responsibility problems. In addition, the launch of the comprehensive report also urgently requires the auditing industry to speed up the introduction of relevant auditing standards for non-financial information and improve the auditing and certification system for integrated reports.

The argument is supported by Eccles and Saltzman‘s research (2011) where they conclude that auditing firms and other third-party assurance providers should shift their narrow focus from solely financial or accounting aspects to broader operational areas to be engaged in the transformation of integrated thinking model. In other words, the level of assurance provided by current auditing process is far from satisfactory when confronted with highly complex comprehensive information that covers every driver in value creation procedure. (Kolk & Perego, 2012) also argued that assurance work can face a severe challenge if an updated system is not participated, because the kind of system that is in use is not able to provide objective and reliable information according to the framework of Integrated Reporting

In addition to the level of assurance, quality of supervision is also worth-concern. The integrated report covers many aspects such as finance, social responsibility, corporate governance, and the environment. The diversity of information also puts forward higher requirements for the supervision of the reports. At present, not enough supervision, regulation or evaluation system is put forward in the field of integrated reporting regarding to the non-financial perspective. What‘s more, the essential characteristic of non-non-financial information makes it difficult to evaluate performance objectively and authenticity is not easy to achieve. To avoid ―supervisory loopholes‖ and possibility of bias due to subjectivity, during the supervision procedures, much attention is expected to be paid to the cooperation and unification of various related departments. For instance, the environmental protection department issues corresponding regulatory requirements for disclosure of environmental information, the energy sector issues corresponding regulations for energy conservation and emission reduction. With the social security department, employees‘ labor environment and service guarantees have been issued with corresponding regulations. However, even after the regulatory requirements are improved, they will still face the question of whether an integrated regulatory agency will supervise the integrated report or whether different departments will separately report different modules of the report. The supervision of integrated reports still has a long way to go.

Apart from supervision, coordination with other regulatory organizations also attracts attention. Up to now, the theory and practice of the integrated report are still not mature. The Committee has not formulated uniform standards on how to prepare, how to disclose information, how to select non-financial information, how to calculate key indicators, whether it should be enforced, and how it should be audited. In addition, the integration of

international standards and relevant national standards to be adjusted and revised accordingly. This also requires the Committee and the International Accounting Standards Board and the International Federation of Accountants, strong communication and effective consultations between the International Auditing and Assurance Standards Board, the International Securities Regulatory Commission, and national accounting standards setting bodies to coordinate and the workload and difficulty of coordination should not be ignored.

When considering the users of integrated reports, when cannot ignore the quality of communication. The integrated report is dedicated to meaningfully reflecting the long-term development capabilities of the organization to satisfy the demand of information users. Factors that may contribute to the long-term development of the company, such as human intelligence, environmental resources, as well as corporate governance, will also be reflected in the integrated report, but its impact will not necessarily be quickly reflexed in the general concerns of current stakeholders. Regarding to financial information, stakeholders may not be sensitive enough to capture in-depth information, resulting in their inability to benefit from useful information. Therefore, related institutions should also provide support services to stakeholders, through training, education, and release of relevant materials, so that they can truly understand the connotation of the integrated report, so that non-financial information can be clearly included in its analysis framework. Companies should adjust themselves to transformation of providing and testifying updated comprehensive information, if not, integrated reporting cannot bring advantages as it is expected to be.

The concept of Integrated Reporting consists of various information flows, which cause some underlying challenges for the adoption of integrated reporting. The most significant problem it is facing is that measures of non-financial information can be vague and there is too much discretion when implementing. The integrated report requires companies to fully disclose financial information and non-financial information. It involves a wide range of related information that is not easy to collect, and measurement remains difficult. The following outstanding problems exist: To start with, how to define the scale of non-financial information contained in the integrated report can hinder the pre-actions in the very beginning. Since the user groups of the integrated report are very diverse, it is very challenging to meet the information demands of different groups of stakeholders at the same time. The s cope of non-financial information should be clearly stated in the report. What‘s more, how to measure non-financial information can also be questionable. Although the theoretical community has conducted research on non-financial information such as

environmental information and social responsibility information and proposed some preliminary measurement methods, for example, use index methods for the measurement of social responsibility information, the types of existing measurement methods for non-financial information are still relatively small. The current obstacle lies in how to make the ―intangible‖ non-financial information tangible, standardized, digitalized and measurable. The problems stated above are proved by multiple types of researches conducted by Big Four accounting firms. In Deloitte (2015) implementation guide, it suggested that companies struggling are with the feasibility of actual information in daily practices. It appeared to be that the scope of measures is not in line with the planned elements in reporting structure, because too little amount of certain information of non-financial aspects is accessible. This view was also supported by KPMG (2013) because information such as social impact, team building, and supply chain resilience cannot be measured the same way as traditional financial data. Organizations that are heading to the integrated reporting may need to adjust themselves to meet the minimum requirements of the new reporting standards, which may incur high and unforeseen turmoil. Deloitte (2015) offers another example. Human resources are considered to be one of the largest cost centers in traditional reporting, but they also bring quantifiable benefits to the new integration approach. Nevertheless, providing an accurate, reliable view and linking them to existing financial capital will be extremely challenging, as the dissemination, production, and refinement of existing information will generate significant indirect costs. In both cases, it is clear that the full adoption of <IR> will be pseudo-efficient and overly complex.

As already mentioned above, preparing integrated reports can be cost and personnel consuming. The requirement of conventional financial reports is comparably straight forward that it only request accountants to collect financial figures and illustrate them in the report. However, the integrated report expects to expand the scale of work and aggravate workload of the report preparer. In order to prepare such an integrated report, organization are required to dedicate to collect information from various departments such as sales, human resources, finance, operating, and marketing, and being finalized by specific personnel who can illustrate information coming from various channels in a comprehensive and systematic way. In contrast to the financial information, the relevant personnel are more difficult to obtain, analyze, measure, and process non-financial information. All these factors will lead to a substantial increase in the cost of preparing the report.

3 Literature review

Bridge the gap between <IR> and information asymmetry by two intermediates, cooperate social responsibility and voluntary disclosure

3.1 In general

In the first two years (2010 ~ 2012) of the concept of the integrated report, studies mainly introduced the basic theory of integrated reporting and the IIRC framework, and put forward relevant recommendations for the preparation of integrated reports. Eccles and Armbrester (2011) pointed out that the most important feature of the integrated report is the organic integration of corporate financial and non-financial performance. The purpose is to more clearly demonstrate how the company creates value for a wide range of stakeholders. Adams and Simnett (2011) introduced the basic theory and development process of the integrated reporting, they analyzed the feasibility of implementing the integrated report in the non-profit organization, and put forward suggestions and measures for implementation. Branwijck (2012) believes that the issuance of an integrated report can effectively reduce the cost of corporate communication, and that companies should integrate social responsibility reports and intellectual capital reports and disclose them in the form of integrated reports. In addition, some of the world's leading management consulting agencies and accounting firms, such as PwC and KPMG, have also published research reports on integrated reports. These reports mainly analyze the development trend of the integrated report in the international arena, and on this basis put forward suggestions and measures for future development.

After 2012, the theoretical level research on integrated reports has continued to increase. As a useful complement to the IIRC framework, Abeysekera (2013) and Haller and Staden (2014), put forward an integrated report template that is built by them but is more practical for enterprises, under the guidance of the existing framework. It provides guidance for a better preparation of integrated reports. After reviewing the basic theory and development history of the integrated report, Owen (2013) put forward relevant proposals for accounting curriculum reform in the era of integrated reporting, providing references for embedding integrated reports into the accounting teaching system and further promoting integrated reports. Miller (2014), based his argument on the stakeholder theory, believes that each company is in a network of relationships. The level of operational efficiency of the network depends on the degree of trust among the various parts of the network, and the integrated report is relative to

the financial report. This places an enterprise's economic and social benefits in an equally important position. It is therefore an important way to establish such a trust relationship. Wulf et al. (2014) believe that the German dual-track system is more conducive to the implementation of integrated reports by enterprises. By comparing the impact of integrated reports and management comments on corporate governance, it was found that the proper implementation of integrated reports can improve corporate governance structure and help to achieve corporate governance goals.

Before 2012, there were few empirical studies on integrated reports. The only one was done by Jensen and Berg (2012), based their theory on Institutional Theory and took the 309 Sustainability Reports compiled in the world as the best sample. They empirically examined the factors that influence the company's implementation of the integrated report. And compare with those factors that affect the company's release of the sustainability report. The results show that at the national institutional level, the factors influencing the company's implementation of the integrated report and the issuance of the sustainability report are very different. The main manifestations are the legislative strength, market-oriented degree and equity concentration of the state‘s protection of the rights and interests of investors and employees, the level of social development, the overall performance of a country's corporate social responsibility, and the country's traditional values. In general, the greater the role played by these country-level influencing factors, the greater the likelihood of the company implementing an integrated report.

After 2012, empirical studies on integrated reports began to increase gradually, including both Quantitative Research and Qualitative Research. Quantitative empirical research mainly examines the determinants affecting the implementation of integrated reports by enterprises and the effect of integrated reports. The study found that the decisive factors affecting enterprises' implementation of integrated reports mainly include the state legal system, national cultural system, industry, company size, industrial concentration, and growth opportunities (Frías-Aceituno et al., 2013; García-Sánchez et al., 2013; Frías-Aceituno et al., 2014). In terms of the implementation effect of the integrated report, most scholars found that the release of integrated reports can trigger positive market responses (Barth et al., 2015; Bernadi, Stark, 2015; Martinez, 2015; Lee, Yeo, 2016). For example, a study by Barth et al. (2015) shows that the higher the disclosure quality of an integrated report, the higher the company's expected cash flow and the value of Tobin Q. However Maniora (2017) came to

examination of related company data from 2002 to 2011 and found that companies that issued integrated reports only do better than those companies which did not separately publish environmental, social, and governance (ESG), or companies that embed ESG reports in their annual reports, but they do not have significant advantages over those that have already released ESG reports alone.

Qualitative empirical research in the same period mostly uses institutional theory or practical theory as the theoretical basis. Through case analysis or interviews, the company conducts investigations into the behavior and performance of a company and its management in the process of implementing integrated reports and institutionalizing integrated reports. And summarize the useful experience of the company's implementation of integrated reports (Stubbs, Higgins, 2014; Lodhia, 2014; Beck et al., 2015). For example, Lodhia (2014) based her research on practice theory, using case analysis method, through interviews and records of stakeholders in G banks, discussed the driving factors for the transition from corporate reports to integrated reports. The study found that corporate ownership is the driver of the innovative report. Based on the model, only when the business owner fully understands the potential value of combining economic, social, and environmental goals, can he better implement the integrated report and give full play to the integrated advantages of the integrated report.

Asymmetric information, also known as information failure, occurs during a transaction procedure when one side possesses greater material knowledge than the other side. The reason why this asymmetry exists may attribute to that some investors hold private information about a firm‘s value while others do not. (Akerlof. 1970). Information asymmetry triggers adverse selection problem especially in security market because investors who are more informed can have an advantage when trading with the help of private information. This also leads to the fact that uninformed investors tend to invest more in companies which voluntarily release information that is not required because the voluntary disclosure can reduce private information to some extent. (Bushee &Miller, 2012; Diamond, 1985). Other researches that focused on capital markets also looked into the correlation of quality of accounting information and stock price. Kothari (2001) argues that financial reports prepared according to certain standards or frameworks release more relevant information to the outside users. And unique characteristics of companies and various corporate governance system of countries can influence the level of informativeness of accounting reports.(Collins and Kothari, 1989). Healy& Palepu, (2000) also found a positive

relationship between investors‘ demand for more reporting and disclosure either from financial or non-financial aspects and level of information asymmetry as well as agency conflicts of internal management and external investors.

As a response to all sectors of the society, some leading companies have begun to attempt to publish integrated reports. The relevant information has been effectively integrated in the report, which has helped investors and other stakeholders make investment decisions. ―This statement provides, in a composite, organized, and cohesive form, information on the company‘s strategy, corporate governance, performance, and prospects, in such a way as to reflect the commercial, social, and environmental context in which it operates. Thus, a clear and concise statement is provided of how the organization operates and how it creates and maintains value.‖ (IIRC, 2011). Companies that adopt Integrated Reporting gains multiple advantages, such as making their relationship with shareholders more sustainable, improving fame, goodwill and market value, providing information related resources planning and value creation, enhancement of responsibility and resiliency, as well as obtaining competitive strength when confronted with markets fluctuations and technological transformation. (Soyka, 2013)

Remarkable amount of literatures proved that adopting of integrated reports has benefited the information environment as a whole. Lee and Yeo (2016) used the sample of South African listed companies to examine the relationship between the integrated report and the company's value. The study found that the quality of the disclosed information disclosure is significantly positively related to the value of the company. The average earnings of the company's integrated report exceeded its cost, that is to say the implementation of integrated reports can reduce the company's information processing costs; In addition, the study also found that the implementation of integrated reports can ease the information asymmetry between companies and external funding providers. The results are supported by Cai & Guo(2013) who find that value relevance of corporate accounting information should be improved after the company publishes the integrated report also based on South Africa listed companies. Besides that, García-Sánchez & Noguera-Gámez(2017) concluded that more relevant and larger amount of information are seen in reports that voluntarily release non-financial information, attribute to the decreased level of information asymmetry.

3.2 Corporate social responsibility and information asymmetry

Although the definition of CSR vary from different perspective, many studies agreed on that it generally refers to serving people, communities, and the environment in ways that go above and beyond what is legally required of a firm (McWilliams and Siegel 2001; Margolis and Walsh 2003; Orlitzky et al. 2003; Ioannou and Serafeim 2014). Furthermore, corporate social responsibility is an extension of companies' efforts made to cultivate and achieve sustainability through sound business practices. In IIRC principal, there are 6 Key Drivers for capital part namely Human, Natural Financial, intellectual, Manufactured, Social & Relationship. All of these aspects have a close relationship with corporate social responsibility and are embedded in the definition.

Several previous literatures analyzed the relationship between corporate social responsibility and information asymmetry based on different settings and focused on various aspects. Cui et al. (2016) found that based on U.S setting, CSR engagement has a negative relationship with reputational risk measure and the lower predicted value of reputational risk is, the lower will the level of information asymmetry be. Similar results were found in China setting, Wang et al. (2016) concluded that firms actually restrain earnings management after adopting CSR reports mandatorily and decrease information asymmetry, thanks to improvements in reporting quality. Researches were also conducted in specific industry; for example, it is argued that CSR projects can act as instruments to mitigate information asymmetry in the banking industry because CSR payments are advanced to uncover the financial robustness of the entity to its stakeholders. Otherwise they are not stakeholder-oriented. (Semenescu, A. & Curmei, C.V. 2015)

Previous studies also suggest that the fame of organizations can be improved by CSR activities (Albinger and Freeman 2000; Greening and Turban 2000), which is particularly important because reputation is regarded as a core value of long-term success for a large amount if companies. To be more specific, the reputation-building benefit brought by adopting CSR suggests that organizations that are more actively engaged in CSR activities firms enjoy more systematic information environment, enabling them to achieve decent reputation in a long-term, as long as staying in a high fame status is of vital importance for every company. Hong and Kacperczyk (2009) believe that companies fulfilling social responsibilities are attractive to consumers and investors with strong social responsibility awareness, and disclosure of social responsibility information can be used as an effective way to communicate with them. Dhaliwal et al. (2011) and Servaes and Tamayo (2013) pointed

out that disclosure of information on corporate energy consumption and waste emissions can help investors assess the company's potential environmental liabilities. Seong Y. Cho et al. (2012) pointed out that no matter the company disclose positive social responsibility information or negative social responsibility information, it will reduce the degree of information asymmetry, and the negative information reduction effect is more obvious. Michael Welker (1995) believes that corporate social responsibility information disclosure is part of the information disclosure policy. Good information disclosure policies will reduce information asymmetry and increase the liquidity of equity markets. The enforcement of IFRS, which is similar to the mandatory disclosure of social responsibility information, has been extensively studied. And Danqing Young (2012) pointed out that by making similar affairs more close while making the differences of different transactions smaller, the enforcement of IFRS increased the information comparability among the 17 member states of the EU.

Increasing information disclosure can reduce the information disadvantage of uninformed investors (Diamond and Verrecchia, 1991; Baiman and Verrecchia, 1996). If the CSR report is not announced, some investors with lower information acquisition costs (such as institutional investors, etc.) will be more aware of the company's CSR information and will have higher information asymmetry in the market. Disclosure of CSR reports will solve the problem. (Mingyi Hung et al. 2013). Verrecchia (2001) concludes that CSR information disclosure may play a part similar to conventional accounting information disclosure. That is, by providing more relevant information, to cut down transaction costs as well as to reduce forecasted errors to eventually decrease capital costs. Richardson et al. (1999) also theoretically analyzed the likely impact of social responsibility information on capital costs from the perspective of information asymmetry and demonstrated that disclosure of social responsibility information could reduce capital costs.

It is also worth asking under which circumstances the reduction of information asymmetry is more significant with the help of CSP reports. The empirical analysis shows that higher the level of marketization of the area in which the organization is situated, the better the quality and reliability of the information released in CSR reports, thus the severer the influence of CSR disclosure on reducing information asymmetry between information providers and users. (Xu & Liu. 2017; Martínez-Ferrero et al. 2015) conducted research from the perspective of the stakeholders, it provides evidence that meets the above conclusions, that is, there is an

can conclude that after a company has disclosed relevant information in a sustainable manner, its trust in the financial market will increase, which will lead to improvement of its corporate value.

3.3 Voluntary disclosure and information asymmetry

Another characteristic of <IR> implementation of Japan is that companies are encouraged to issue <IR>, but it is not mandatory, in other words, issuing <IR> in Japan is a kind of voluntary disclosure.

Many scholars have analyzed the impact of information disclosure on the degree of information asymmetry in the capital market. These analyses have found that there are two main ways to reduce the level of information asymmetry through information disclosure. The first method is to improve informed traders' investment behavior. Merton and Robert (1987) found that non-informed traders generally invest funds in more familiar companies. Therefore, if a company frequently conducts information disclosure and the disclosed information quality is relatively high, then the transparency of the company will be higher. When investors are also more willing to invest in the company, the proportion of informed transactions will also be reduced. This is the so-called investor identification hypothesis. Some studies also hold that if the company's information disclosure level is lower than that of the business, the investor's cost of obtaining relevant information will be reduced, and there will be more non-informed traders investing, thus reducing the proportion of informed transactions and degree of asymmetric information in the market. The second method is to weaken the willingness of investors to obtain private information (Fishman & Hagerty, 1989). When the level of corporate information disclosure is brittle, the timeliness of the disclosed information will be stronger, and more information will be available on the company's development prospects and profitability. Therefore, investors will have less access to private information, and the level of information asymmetry in the market will also be reduced. (Diamond & Douglas, 1985). There are also studies that show that the level of information disclosure by companies is closely related to private information. If the level of corporate information disclosure is high, the cost for investors to collect private information will increase, which will weaken the willingness of investors to collect private information (Lundholmetal, 2002).

In theory, more information will reduce the price risk of information. Similarly, the role of voluntary information disclosure is to reduce the degree of information asymmetry (Barry &

Brown, 1985; Diamond, 1985); Diamond & Verrecchia, 1991, Kim & Verrecchia, I994). Some scholars have studied the relationship between voluntary information disclosure and stock liquidity, and companies may seek information disclosure strategies to address the lack of liquidity in the stock market. The literature on information disclosure shows that high-quality information disclosure will reduce the degree of information asymmetry, thereby improving the market liquidity of stocks (Welker, 1995; Healy et al. 1999; Leuz & Verrecchia, 2000). Information asymmetry can be measured by trade and orders, namely trading volume and bid-ask spread (Welker, 1995; Bushee & Noe, 2000; Leuz & Vei-recchia, 2000).

On the empirical side, Heffin et al. (2000) used empirical methods to select the reverse selection part of the spread to study the relationship between corporate disclosure and spreads. It was found that if the level of information disclosure is high, then the lower is the degree of adverse selection. This fully proves that the company's more information disclosure will reduce the proportion of informed transactions and enhance the market's liquidity. Moreover, Lee et al. (1993) Callahan et al. (1997) considers market depth as a measure of market liquidity, so Heffin (2000) first studied the relationship between corporate information disclosure and bid-ask spreads. Furthermore, he also selected the market depth as an indicator. Through analysis, he concluded that if the company‘s information disclosure level is high, the company‘s offer price will be lower. Because the level of corporate information disclosure is low, the asymmetry of information generated by the company and potential investors will make the adverse selection of the company‘s stock buyers and sellers, resulting in a significant increase in capital costs (Petersen & Plenbo, 2006). In order to improve people‘s perception of corporate information disclosure, companies use considerable resources to establish and enforce laws and regulations. By controlling the fluctuation of stock returns, stock prices, and trading volume, we can find that the higher the level of corporate information disclosure, the lower the bid-ask spread. That is to say, the information asymmetry in the market can be controlled through perfect information disclosure, and it will also improve the liquidity of the stock (Welker, 1995). Asymmetric information can lead to trade resistance and increase capital costs. Since investors are willing to trade with more informed market participants, price protection against potential losses (Bhattacharya & Spiegel, 1991). Previous studies show a positive attitude towards the role of voluntary disclosure regarding to decreasing the information asymmetry of on the relationship between