The impact of the level of integratedness of corporate reporting on the market value of European listed firms

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Master Thesis

The impact of the level of integratedness of corporate

reporting on the market value of European listed firms

Author: Tim de Waal Student number: S4835743

Email: t.dewaal@student.ru.nl Supervisor: D. Reimsbach

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Abstract

A new trend in corporate reporting, ascribable to the growing interest in the inter-linkage between financial and non-financial information, is integrated reporting. Due to the fact that it is a relatively new topic, there are still theoretical and empirical challenges unanswered. One of these unanswered challenges is examined in this research. This thesis examined what the impact of the level of

integratedness of corporate reporting on the market value of European listed companies is. The corporate governance vision and strategy (CGVS) data from the Asset4 database was used as a proxy for the level of integratedness of corporate reporting. Using 1082 European listed companies, the results indicate an insignificant negative relation between the level of integratedness of a corporate report and the market value of European listed companies. Furthermore, the results show a

significant negative relation before the introduction of the IIRC framework and an insignificant negative relation after the introduction of the IIRC framework. The findings suggest that

organizations cannot use the level of integratedness of a corporate report as a tool to increase their market value. However, there is some indication that the negative effect seems to be decreasing, a potential explanation for this is the introduction of the IIRC framework. The findings further indicate that the impact of integrated reporting is not as positive as expected from studies conducted in a country where it is mandatory to publish an integrated report.

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1. Introduction

Since the end of the 20st century and the beginning of the 21st century many multinationals have emerged as a result of the globalization (Nemacc , 2013). This globalisation has generated a financial advantage for many, companies and stakeholders alike, but has also resulted in an increase in negative externalities, such as environmental pollution and poor working conditions. As a result of these negative incidentals, environmental scandals and the recent global financial crisis, a general feeling of distrust has developed around companies' ability to self-regulate (Ioannou & Serafeim, 2017). This resulted in pressure from stakeholders to the companies to communicate in a more transparent way about their impact on people, the environment and society (Eccles, Serafeim, & Krzus, 2011). In order to meet these interests, more transparency is needed from the companies. This transparency was not offered by the traditional financial annual reports, so there was a need for additional non-financial information. This need for additional non-financial information has led to a significant increase in publications of sustainability reports. (Berthelot, Coulmont, & Serret, 2012). These sustainability reports were typically made in separate stand-alone reports. The sustainability reports have become more complex and longer through the years, due to the greater information demand of stakeholders (de Villiers, Rinaldi, & Unerman, 2014).

A more recent trend in corporate reporting is to publish a single comprehensive report, which has been termed an integrated report. An integrated report seeks to measure social, environmental and financial performance within one single document (Dey & Burns, 2010). As formulated by the International Integrated Reporting Council (IIRC), 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 in the short, medium and long term" (IIRC, n.d.). This creation of value is described with use of six capitals, namely the financial,

manufactured, intellectual, social and relationship, human and natural capital. According to the IIRC the aim of an integrated report is to provide higher quality information to the providers of financial capital, in order to achieve a more efficient and increased productive allocation of capital. The optimal use of an integrated report, according to the ideas of the IIRC, is that an integrated report promotes a more coherent report that communicates about all the factors that are essential for an organization to create value over time. The factors that are essential for an organization are embedded in the six capitals which are mentioned before, in an integrated report the

interdependence of these capitals is also shown. An integrated report support overall integrated thinking, decision-making and actions of an organization to focus on the creation of value over the short, medium and long-term (IIRC, 2013).

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4 Since the first integrated reports have been published, many research about integrated reporting has been conducted. However, there are still theoretical and empirical challenges that need to be

answered to guide developments in policy and practice (de Villiers, Rinaldi, & Unerman, 2014). One of the questions that still remains unanswered, according to Villiers, Rinaldi and Unerman (2014) is: "is the decision to disclose an integrated report value relevant, in other words do the financial markets react or reflect a value premium?"

Since 2014 research has been conducted in relation to the question if integrated reporting is value relevant. Baboukardos and Rimmel (2016) have examined if the value relevance of summary accounting information of firms who are listed on the Johannesburg Stock Exchange (JSE) has increased after the mandatory adoption of an integrated reporting approach (Baboukardos & Rimmel, 2016). They noticed a sharp increase of the earnings' valuation coefficient and a decline in the value relevance of net assets (Baboukardos & Rimmel, 2016). Barth, Cahan, Chen and Venter (2017) examined whether the quality of an integrated report is associated with firm value. They found a positive association between the quality of an integrated report and the firm value (Barth et al., 2017). These researches were both conducted on companies who are listed on the JSE, where integrated report publishing is mandatory. However, to this day, the research that has been conducted about the value relevance of integrated reporting, has been scarce. In addition, most research about integrated reporting has been done with use of data regarding the quality of an integrated report or if an integrated report has been published or not. This research will focus on the effect of the level of integratedness of corporate reporting on the market value of a company. According to Mertins, Kohl and Orth (2012) it is more important to focus on the level of

integratedness of a corporate report than on the quality, because an integrated report is just a tool to get a more integrated way of thinking within an organization. The recommendation in their paper was therefore, "future work should relate to the broader concept of how integrated thinking is embedded in an organization, rather than concentrating only on the features of a single document" (Mertins, Kohl, & Orth, 2012). The level of integratedness of corporate reporting concerns itself thus more about whether integrated thinking is incorporated in managers day-to-day decision-making than about the quality of an integrated report. For the best of the author’s knowledge has not been examined what the impact of the level of integratedness of corporate reporting is in a market where it is not mandatory to publish an integrated report. There could be a difference in effect between mandatory and voluntary reporting. This is for example studied by Moneva and Cuellar (2009), they have shown "that after the introduction of the 2002 accounting standard on environmental issues, the value relevance of environmental reporting has increased". It is therefore interesting to explore the impact of the level of integratedness of corporate reporting in a market where integrated report

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5 publishing still remains voluntary, because this could give different results than for a country where it is mandatory. This study will be conducted with the use of European listed companies, because in Europe companies may still voluntarily decide to publish an integrated report or not. The aim of this research is therefore to answer the question, what is the impact of the level of integratedness of corporate reporting on the market value of European listed companies?

This study will contribute to existing literature by filling the gap of knowledge about the value relevance on European listed companies who voluntarily publish an integrated report, which will attribute to the knowledge about the effects of integrated reporting. These findings are relevant for companies who are interested in publishing or already have published an integrated report, because this thesis gives an indication of the potential effect of an integrated report on the market value of a company. Furthermore it is relevant for regulatory bodies, because findings of this study could be compared with findings of studies conducted for countries where it is mandatory to publish an integrated report. Besides that, will this study contribute to existing literature by conducting a value relevance study for integrated reporting with data about the level of integratedness instead of focusing on the quality of an integrated report.

The thesis will be structured as follows, the second chapter presents the literature review and the development of the hypotheses. The third chapter outlines the research methodology and the data sample studied. The results of the research are discussed in the fourth chapter. The fifth and last section concludes and derives implications for further academic research.

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2. Background & Hypotheses

2.1 From Corporate Social Responsibility reporting to Integrated reporting

As stated in the introduction, negative externalities and environmental scandals have resulted in stakeholders pressuring companies to increase visibility about their impact on people, the environment and society. For stakeholders nonfinancial information is also financially important, because nonfinancial performance can determine a company’s long-term financial picture (Eccles & Saltzman, 2011). This led to an increase in publications of sustainability reports, which are also known as Corporate Social Responsibility (CSR) reports. This increase in CSR reports has also been shown by Boli and Hartsuijker (2001). In 1977 less than 40% of the Fortune 500 firms expressed action with regard to Social Responsibility, while in 1999 almost 75% of the Fortune 500 firms expressed action with respect to Social Responsibility (Boli & Hartsuijker, 2001). CSR reports are published by an organization or company and show the economic, environmental and social impacts that are caused by the everyday activities of an organization or company (GRI, 2015). According to Lee (2008), in the course of the last 30 years, the main question in CSR research was finding the link between CSR and corporate financial performance (CFP). The retrospection in his paper has revealed that the connection between CSR and CFP has become tighter during the years. The CSR reports were typically made and published in stand-alone reports. However, to measure the connection between CSR and CFP, a combination of the both report would be more desirable. Resulting in a comprehensive report where both CSR and CFP are integrated and where the link between them is shown. Since 2013, guidelines have been developed by the IIRC for a report in which both CSR and CFP are integrated with each other. Such a report is called an integrated report, and according to the advocates of integrated reporting, an integrated report connects previously disconnected pieces of financial and sustainability information (Baboukardos & Rimmel, 2016). Further elaboration on integrated reporting will be done in the next paragraph.

2.2 Integrated reporting

Integrated reporting is an extension to traditional annual reports. Traditional annual reports only contain financial data, lacks critical information regarding the total impact of an organization on society as well as nature. The main function of an integrated report is to show stakeholders how the organization creates value over time. An integrated report shows how the strategy, the management model, the performance and prospects of an organization (in the context of the external

environment of the organization), lead to the creation of value over the short, medium and long term.

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7 An integrated report is often configured with use of the value creation model of the IIRC, this model is shown in figure 1. This model consists of a framework for companies and organizations who wants to publish an integrated report. The main purpose of the model is to show how value has been created and which value has been created. By using the IIRC model, we can discern the impact that a company has on its internal and external environment. For example, employee morale, reputation and cash flows are included in the internal environment. The external environment often consists of the impact that an organization has on, among others, the environment and to external

stakeholders, such as customers satisfaction (IIRC, 2013). A big difference with the traditional way of annual reporting is that not only financial data is captured in the report, but that there is paid attention to multiple topics. With an integrated report, six topics are examined, these are called the six capitals. However, the categorization of the six capitals is flexible, according to the IIRC is it possible to adopt other classification structures. Its goal is for an organization to identify its capitals that materially contribute or have an effect on the value creation process and the long-term viability of an organization (EY, 2014).

To be able to understand the value creation model the main parts will be explained. The business model of an organization is the system that transforms the inputs, through the business activities into outputs and outcomes, that has as aim to fulfill the strategic purpose of the organization and creates value over the short, medium and long term (IIRC, 2013). The difference between outputs and outcomes is that for example a product or service is an output and that the impact of that product or service is an outcome. The business activities of an organization are described in an integrated report. These activities can include, how an organization differentiates itself with competitors, how an organization approaches the need to innovate and how the business model of an organization has been designed to adapt to change (IIRC, 2013).

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8 In order to understand what is meant with the terms located around the business model it is

important to understand the content elements. The organizational overview and external

environment of a company is one of the content elements. It describes what an organization does, and shows the circumstances that an organization has to deal with (EY, 2014). The governance part in an integrated report should show the organization’s governance structure, and how this structure support the organization’s ability to create value in the short, medium and long term. (EY, 2014). The business model of an organization is naturally also shown in an integrated report, to create a clear picture of an organization (IIRC, 2013). Risks and opportunities can be explained as the need for an organization to clarify its key opportunities opposing to their key risks, and how they affect or could affect the organization’s possibility to create value in the short, medium and long term. Also, it is important for an organization to show how they mitigates risks and utilized opportunities (EY, 2014). When reporting about the strategy and resource allocation it is important to show the direction the organization seeks to go, and how it tries to get there (EY, 2014). The performance of an organization shows how an organization has performed in relation to its strategic objectives and strategies (Wild & Staden, 2013). The uncertainties and challenges that an organization is likely to encounter in pursuing its strategy, and what the potential implications for its business model and future

performance are, are shown in the outlook part (EY, 2014). An integrated report must show how an organization determines material matters to be included and how these matters are quantified and evaluated, this is included in the last content element which is basis of presentation (IIRC, 2013).

The six capitals have an import role within the IIRC model. The input, output and outcome of an organization are divided in to one of the six capitals. By using these six capitals, the model shows what the input, output and outcome per capital is. Generally, the input, output and impact are shown with use of key performance indicators (KPI's). The financial capital is the total amount of capital that is available to an organization and show for example the corporate taxes and dividends that are paid (Koninklijke Philips N.V, 2017). Manufactured capital are physical objects that are available to an organization which will be used for the production of goods or the provision of services. (IIRC, 2013; EY, 2013). An example of the impact of manufactured capital could be the amount of lives that are improved due to the goods that are sold, this is for example shown in the annual report of Philips (Koninklijke Philips N.V, 2017). Intellectual capital is about knowledge based- intangibles like, patents, copyrights, software and licenses (IIRC, 2013; Gleeson-White, 2014; EY, 2013). According to the IIRC belongs to human capital, the competences, skills and experience of people and their motivation to innovate. Besides that, are also the alignment with and support for an organization’s governance framework, risk management approach, and the ethical values part of the human capital. (IIRC, 2013) According to multiple annual reports is it important to publish the

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9 amount of employees, a diverse workforce. the amount of completed courses and the employee engagement. (Sodexo , 2017; Barclays PLC, 2018; Koninklijke Philips N.V, 2017). Social and relationship capital concerns the institutions and relationships with stakeholders were the

organization are dependent upon, and the ability to share information with each other to enhance individual and collective well-being (Wild & Staden, 2013; IIRC, 2013). Natural capital consists of all environmental (renewable and non-renewable) resources and processes that provides welfare in the past, currently or in the future for an organization. Examples of environmental resources are, air, water, and minerals (IIRC, 2013).

When the six capitals have been discussed within an integrated report, with the reference to their related KPI's, this does not immediately result in an integrated report with a high level of integration. The Global Reporting Initiative (GRI) distinguish three different integrated reporting structures. The first structure is called a sustainability structure and is "a sustainability report that meets the GRI sustainability criteria and has been self-declared as integrated, but makes now clear links from sustainability to financial performance" (GRI, 2013). The second structure is named a one cover structure, this is "a sustainability report that has been published alongside

a separate financial report, but as a single publication under one cover" (GRI, 2013). The third structure is called an embedded structure which is "a report that has an embedded structure, with clear evidence of inter-linkage between reporting on financial and sustainability performance" (GRI, 2013). The third structure is the most integrated one, due to the evidence of inter-linkage between reporting on financial and sustainability performance. In the paper of Eccles and Saltzman (2011) it is clearly shown that it is important for an integrated report to show and support the linkages between sustainability and financial performance. In order to show the impact of training programs, which is included in human capital, the following question is used, “what is the impact of training programs on improved workforce productivity, lower turnover and greater customer satisfaction?” (Eccles & Saltzman, 2011).The answer to this question shows the inter-linkage between human capital and other capitals. The level of integratedness of corporate reporting is not only affected by the inter-linkage between financial and sustainability performance, but also by the commitment and

effectiveness of a company's management to create an overaching vision and strategy for financial and extra-financial aspects. This overaching vision and strategy reflects, as stated in the introduction, that a company integrates the finanical and sustainability aspects into the day-to-day decision-making processes, which is an indication of a high level of integration (Adams, 2015).

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2.3 Hypotheses development

Mervelskemper and Streit (2017) differentiated two schools of thought to determine whether environmental, social and corporate governance (ESG) activities are value generating or destroying. Lee and Yeo (2016) addressed two points of view to determine whether an integrated report is value generating or destroying. To determine whether an integrated report would be value generating or destroying , these two schools of thought and points of view are addressed in this paragraph and are used to develop a hypothesis.

The first school which is mentioned by Mervelskemper and Streit (2017) is the cost-concerned school. The general idea behind this school is that investing in an integrated report increases costs and therefore lead to an economic disadvantage, which results in lower market values (Mervelskemper & Streit, 2017). Lee and Yeo (2016) also describe why an integrated report could be value destroying. They give three reasons why this could be the case, revealing proprietary information to competitors, foregoing valuable business opportunities that do not fit their values or norms and increasing direct compliance costs (Lee & Yeo, 2016). Revealing proprietary information could be referring to for example the strategy, business models, risk and opportunities meant. Foregoing valuable business opportunities can occur when a company could sell products with adverse environmental consequences. The implementation of information systems and increasing management monitoring effort could result in increasing direct compliance costs (Lee & Yeo, 2016). The second school mentioned by Mervelskemper and Streit (2017) is the value creation school, where integrated reporting can be deemed an instrument to get comparative advantages, which leads to higher returns for the shareholders, resulting in higher market values. In the paper of Lee and Yeo (2016) is stated that, advocates of integrated reporting argue that integrated reports improves the quality of information available to providers of financial capital, which results in a better and more efficient allocation of capital.

As mentioned before not much research is done about the impact of an integrated report on the market value of an organization. However, some studies have covered the impact of integrated reporting on the market value of companies who are listed on the Johannesburg Stock Exchange. Barth et al., (2017) found a positive relation between the quality of an integrated report and the firm value of a company. Lee and Yeo (2016) also found that firm valuation is positively associated with integrated reporting. Besides that, indicates additional analysis of Lee and Yeo (2016) that firms with a high IR score, outperform firms with a lower IR score in stock market performance and accounting performance.

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11 The reason they give for the positive relation between integrated reporting disclosures, "integrated reporting reduces the information processing costs in firms with complex operating and informational environment" (Lee & Yeo, 2016). The results of the two studies suggest that the benefits of an integrated report exceeds the costs. This would imply that there is exceeding support for the value creation theory, which is similar for the relation between the ESG performance of a company and its market value (Mervelskemper & Streit, 2017).

Knowing that results from earlier studies suggest that benefits of an integrated report exceeds the costs, it is important to know what the benefits of an integrated report are. According to Eccles and Saltzman (2011) are there three different classes of benefits. The first benefits are related to the internal environment of an organization. These internal benefits are, “better internal resource allocation decisions, greater engagement with shareholders and other stakeholders, and lower reputational risk” (Eccles & Saltzman, 2011). The second class of benefits are external market benefits. This meets the need of investors to have financial and nonfinancial information, appearing on sustainability indices, and make sure that data vendors report accurate nonfinancial information about the organization (Eccles & Saltzman, 2011). The third and last class of benefits according to Eccles and Saltzman (2011) is managing regulatory risk. This includes "being prepared for a likely wave of global regulation, responding to requests from stock exchanges, and having a seat at the table as frameworks and standards are developed" (Eccles & Saltzman, 2011). These benefits are also mentioned in the paper of Eccles and Armbrester (2011) and especially the benefits which are related to the internal environment are corroborated in the paper of Krzus (2011).

The results of the studies which are mentionend earlier in this paragraph, suggests a positive relation between integrated reporting and the market value of a company. This positive relation is a result of the benefits of an integrated report.

However, the integrated reporting studies mentioned before in this paragraph are done with a sample of companies who are listed on the JSE where it is mandatory to publish an integrated report. These studies could give a different outcome than the study that is done in this paper, because South-Africa is the only country in the world where it is mandatory to publish an integrated report. Since March 2010, it is through the King III Report mandated for firms listed on the

Johannesburg Stock exchange to disclose an integrated report. Otherwise, they will need to explain the reason for non-compliance (Lee & Yeo, 2016). This study was conducted with European listed firms, for these countries is it voluntary to publish an integrated report and that could give different results.

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12 There is not enough research conducted about the difference between the value relevance of

mandatory and voluntary published integrated reports. However, Moneva and Cuellar (2009) have shown that the introduction of the 2002 accounting standard on environmental issues, have led to an increase of the value relevance of environmental reporting. Another example of a study that has researched the effect of environmental disclosure regulations, is the study done by Ioannou and Serafeim (2017). In their study about the consequences of mandatory corporate sustainability reporting, they concluded that the economic effect of the mandatory disclosure appears to be positive. The results of these two studies imply that in a country where it is mandatory to publish a corporate sustainability report, the report adds more value than in a country where it is voluntary to publish a corporate sustainability report. As stated in the introduction have Baboukardos and Rimmel (2016) found a sharp increase of the earnings' valuation coefficient after the mandatory adoption of an integrated report. It is therefore possible that the results of a research done in a country where it is voluntary to publish an integrated report are different from a country where it is mandatory.

However, you could argue that for investors the boundaries of countries are not there anymore due to the globalization of securities markets (Chan, Gup, & Pan, 1997). This is thought to lead to investors comparing a company and the way it reports with all the companies around the world and not only with companies that are listed on a stock exchange in the same country. It should not make a difference if a company has an integrated report in a country where it is voluntary or mandatory to publish an integrated report, because an investor would not value an integrated report in a mandatory country more value relevant than in a voluntary country. However, home bias has been known to exists and thus that investors are more likely to buy stocks from their home country than they should do according to the optimal portfolio (Cooper & Kaplanis, 1994; Lewis, 1999). Investors tend to focus more on companies of their own country, which suggest that there are still some boundaries that tie down optimal globalization. This results in, companies listed on a stock exchange in the same country are more often compared between themselves than with other companies around the world. That is a possible explanation why there could be still differences between the value of an integrated report in a country where it is voluntary to publish an integrated report compared with a country where it is mandatory.

Nonetheless, according to Mervelskemper and Streit (2017) also the integrated reports from the IIRC IR pilot program members are value relevant. The IIRC IR pilot program is a representation of companies from 25 countries (IIRC, 2013) and thus not only from South-Africa. But, as stated in their paper, the empirical findings presented in their paper cannot be interpreted as a final word on their hypotheses.

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13 They give two arguments to support this statement, "first, the results only reveal statistical

correlations as opposed to causation. Second, future research should validate our findings by using a larger dataset and alternative ESG performance measures when the IR concept is more mature" (Mervelskemper & Streit, 2017). It is therefore still necessary to study the effect of an integrated report on the market value of a company. Together with the thought that even in a country where it is voluntary to publish an integrated report, is expected of an integrated report that it is positively related with the market value of a company. Taking these expectations into account, the following hypothesis is formulated.

Another thought that could be examined in the period 2006 to 2016, is that it could be the case that there is a difference of the value of an integrated report before and after 2013. In 2013 the

guidelines and framework were presented by the IIRC (IIRC, 2013). Before the framework and guidelines of the IIRC were presented, a constraint mentioned in the paper of Eccles and Saltzman (2011) was applicable. This constraint stated, "the lack of a framework and standards for

nonfinancial information makes it difficult to compare the performance of different companies, a core feature of investment analysis" (Eccles & Saltzman, 2011). So, before the framework and guidelines were presented it could have been possible that an integrated report was less valuable, because investors found it difficult to compare the integrated repots of different companies. This results in the second hypothesis.

H2: There is a difference in effect of integratedness of corporate reporting on the value of a company listed in Europe before and after the IIRC published a framework for integrated reporting in 2013.

H1: The level of integratedness of corporate reporting and the market value of European listed firms are positively related.

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3. Research method

3.1 Data & Sample

This research has been conducted with European listed firms for the period 2006 to 2016. There has been chosen for countries from Europe, because there is as stated before, for the best of the author's knowledge no value relevance study done for voluntary publication of integrated reports, which is the case in Europe. Besides that, there is also enough data available about European

companies that published an integrated report, which makes it possible to conduct this research. The time period 2006 up to and including 2016 is chosen because that is the most recent data that is available, and before 2006 there were far fewer integrated reports. This time period gives also the opportunity to test if there is a difference in effect before and after the IIRC published an integrated reporting framework in 2013.

To construct the dataset that was needed for this research, data has been collected from ASSET4. ASSET4 is a database from Thomson Reuters and provides access to profound, comparable and objective environmental, social and governance (ESG) data on over 4,300 global companies (Thomson Reuters, 2012). With ASSET4 it is possible to measure “a company’s management

commitment and effectiveness towards the creation of an overarching vision and strategy integrating financial and extra-financial aspects. It reflects a company's capacity to convincingly show and communicate that it integrates the economic (financial), social and environmental dimensions into its day-to-day decision-making processes” (Thomson Reuters, 2012). This score is shown in a range from zero to 100. This database, as shown in figure 3, has been used in other papers which are related to integrated reporting. Serafeim (2015) used the ASSET4 database for his paper about integrated reporting and investor clientele, while Barth et al., (2017) used ASSET 4 data for their research about the economic consequences associated with the quality of an integrated report. Other data such as the market value (share price), book value, earnings per share, leverage, size and industry are collected from the Thomson One database.

To make clearly visibly which data and models are used in the different papers, an overview of these paper is given in figure 3. This figure presents first who carried out the research and if the research is conducted for CSR or IR reports. In the third column is shown what the research is about. The fourth column presents which database is used and in the fifth column is shown which model has been used.

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Figure 2: Data & Method used in other studies

Figure 3 shows sometimes a - sign, which means that it was not relevant or possible to know which model was used. It was not relevant to know for every study which model is used, because from that particular research it is for example only relevant to know which database has been used. This could be the case if the research is about integrated reporting but not about the value relevance of integrated reporting, only the data that has been used in that research is relevant then for this research, not the model that was used.

The companies that are selected for this study are all European companies that were available in the ASSET4 database, this were 1.082 companies. However, not all companies had information available for each year. The first dataset, which was for period 2006-2016 contains 7.789 observations. The dataset for the period 2006-2013 includes 5.317 observations and the dataset for the period 2014-2016 contains 2.472 observation. Most of these companies have the Euro as their currency, however there are also companies with a different currency. Before the dataset could be used, it was therefore needed to convert all the financial numbers to the Euro. This is done with use of Datastream. In Datastream it is possible to select an option to convert all the currencies to one single currency, in this case all the currencies are converted to the Euro.

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3.2 Methodology

In order to answer the research question, a quantitative archival research approach is applied, so this is a regression-based research. The data that has been used, is as stated before, from multiple European listed companies for the time period 2006-2016. In order to test the first hypothesis, the whole period is used. To test the second hypothesis, two datasets with different periods are used. The first period is before the IIRC guidelines and framework were presented (2006-2013) and the second period is after the IIRC guidelines and framework were presented (2014-2016). Not much research is done about the value relevance of integrated reporting, however, multiple times research has been conducted about the value relevance of stand-alone sustainability reports. As presented in figure 3 Moneva and Cuellar (2009), Schadewitz and Niskala (2010) Jorion and Talmor (2001) and Klerk and Villiers (2012) conducted research on the value relevance of CSR reports. They used the Ohlson model or a modified Ohlson model to measure the value relevance of non-financial

information (Moneva & Cuellar, 2009; de Klerk & de Villiers, 2012; Schadewitz & Niskala, 2010; Jorion & Talmor, 2001).

The Ohlson model is a frequently used model to determine the value relevance of a CSR report. In this study the Ohlson model has been used to determine the value relevance of the integratedness of an integrated report. With use of the Ohlson model it is possible to show the relation between the market value of a company and the book value and earnings. The Ohlson model allows also for information beyond earnings and book value. This information is allowed because it could be the case that some value relevant events affect the expected earnings and therefore the market value of a company (Ohlson, 1995).

Sinkin, Wright and Burnett (2008) also used the Ohlson model for their research about the value relevance of eco-efficiency for the firm value. In their research the following equation is stated: Pit = α0+ α1BVit + α2EPSit + β1(EEit

)

+ β2(Levit

)

+ ŋit

Where:

Pit stock price of firm i at date t.

BVit book value of equity per share at time t. EPSit earnings per share for period (t-1,t). EEit an indicator variable for eco-efficiency.

Levit firm leverage measured by long-term debt/equity at time t. (Sinkin, Wright, & Burnett, 2008)

This equation is applicable to examine the effect of an integrated report on the market value of a company. The only adjustment that has to be made is that the indicator variable for eco-efficiency must be replaced by an indicator variable for integrated reporting.

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17 To control for the size of a company and industry effects, also variables for size and industry

dummies are added. Which is done in the following equation:

MVi,t = β1 + β2IRi,t + β3BVi,t + β4EPSi,t + β5Levi,t + β5Sizei,t + β6Industriei + i,t

Where:

MVit Market value (stock price) of company i at time t.

IR A variable for an integrated report score BVit Book value of equity of company i at time t.

EPSit Earnings per share of company i at time t.

Levit Leverage of firm i at time t, measured by long-term debt/equity

Sizeit Size of a company i at time t

Industriei Industry that a company belongs to

3.2.1 Dependent variable

The dependent variable of this research is the market value of a company. This market value is calculated per share. The market value that has been chosen, is the market value of a company at the beginning of the fourth month after the end of the fiscal year. This is done in order to capture the effect of an integrated report, because it takes some time before the information that is

incorporated in integrated reports are reflected in the firm value of an organization (Barth et al., 2017; Mervelskemper & Streit, 2017). The codes that are used in Datastream to obtain the market value and the number of shares outstanding are shown in figure 4.

3.2.2 Independent variables

There are multiple independent variables used in this research. They are all shown and explained in this paragraph. As stated before, all the financial data has been retrieved from Datastream and all the data concerning integrated reporting has been derived from ASSET4. The codes that are used in Datastream to obtain all the data are shown in figure 4.

The first independent variable is the level of integratedness of corporate reporting. As a proxy for this, the corporate governance vision and strategy (CGVS) data from the Asset4 database has been used. This data gives per company a score with a range from 0 to 100. According to the first hypothesis is the expectation that this variable positively related is with the depended variable. The second independent variable is the book value of the equity. The expectation is that the book value of equity, a positive effect has on the market value of a company (Ohlson, 1995). The third

independent variable is earnings per share. For earnings per share also a positive effect is expected on the market value of a company (Ohlson, 1995). The market value, book value and earnings are just like with Baboukardos and Rimmel (2016) scaled by the number of shares.

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3.2.3 Control variables

In accordance with earlier studies conducted about the value relevance of corporate reporting, this study has some control variables. The control variable leverage is added in order to control for the potential effect of leverage (Sinkin, Wright, & Burnett, 2008). This variable is measured by dividing the total debt with the total assets. If the value is zero, this means that the company only is financed with equity. As stated before, to control for the size of a company the variable size is included (Lee & Yeo, 2016). Size is defined as the natural logarithm of total assets. In order to control for industry effects, are just like with other studies, industry dummy variables included (Lee & Yeo, 2016;

Mervelskemper & Streit, 2017) This variable is based upon the standard industrial classification (SIC) code of every company. Due to the two different periods (before and after the IIRC framework) this study already controlled in a way for time effects, therefore no extra control for time effects is done.

Variable Explanation

Market value per share

Market value of the organisation (Datastream code: MV) at the end of the fiscal year divided by the number of shares outstanding (Datastream code: NOSH)

IR rating Shows the level of integratedness of a corporate report on a scale from 0 to 100 (Datastream code: CGVS)

Book value per share

Book value of an organization is captured by the total shareholders' equity (Datastream code: WC03995), divided by the number of shares outstanding (Datastream code: NOSH)

Earnings per share

Earnings before interest & taxes (Datastream code: WC18191 divided by the number of shares outstanding (Datastream code: NOSH)

Leverage The leverage is measured by the total debt (Datastream code: WC03255), divided by the total assets (Datastream code: WC02999)

Size Defined as the natural logarithm of total assets (Datastream code WC02999)

dIndustrie Multiple dummies for the different industries (Datastream code: WC07021)

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3.2.4 Regression

To examine the relationship between the variables, a panel data regression analyses is used. In order to see if the variables were normal distributed the histograms are checked. These histograms showed that all the variables were not normally distributed. To get a better normal distribution, all the variables has been log-transformed in the analysis. The scatter plots showed some outliers, to handle these outliers winsorizing is used. Winsorization minimizes the influence of outliers, by assigning lower weight to an outlier or modify the value so it is closer to the other values in the dataset (Ghosh & Vogt, 2012). For all three datasets with different periods, which are discussed in paragraph 3.3, a 1% wisorization is used. Figure 5 presents the correlation matrix of the total sample, thus for the period 2006-2016. Figure 5 presents a highly positive correlation of 0,81 between EPS and BV. The correlation matrix for the period 2006-2013, which is shown in figure 6, shows also a highly positive correlation of 0,81 between EPS and BV. The same applies for the period 2014-2016, figure 7 shows also a highly positive correlation of 0,81 between EPS and BV. In order to check if multicollinearity causes a problem, the variance inflation indicators (VIF) are calculated. An overview of the VIF for all periods can be found in figure 8. As can be seen in figure 8 no high VIF's are found (VIF≥10 according to Farahani, Rahiminezhad, Samec, & Immannezhadd (2010), which means that there is no problem with multicollinearity. To test for heteroscedasticity the Breusch Pagan test is used (Breusch & Pagan, 1979). To test for autocorrelation the Wooldridge test for autocorrelation in panel data is used. In all three datasets is heteroscedasticity and autocorrelation observed. A command in Stata is used to correct for heteroscedasticity and autocorrelation. 1 This command corrects for heteroscedasticity and autocorrelation and allows the computation of clustered standard errors (Hoechle, 2007). To find out if a fixed or random effects model had to be used, the Hausman test has been used. This test showed that for all three periods the fixed effects model had to be used. However, using the fixed effects model does have a disadvantage. It makes it impossible to control for industry effects, because the industry variable stays constant over time and, therefore, are the industry variables omitted in a fixed effects model.

MV IR Score BV EPS Leverage Size

MV 1 IR Score 0,0834 1 BV 0,8353 0,0744 1 EPS 0,8361 0,0608 0,8062 1 Leverage -0,0853 0,0890 -0,0264 -0,0009 1 Size 0,2038 0,3412 0,3639 0,2685 0,1300 1

1_{In order to correct for this is the command reg, xtreg cluster used in Stata.}

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Figure 6: Correlation matrix for the period 2006-2013

MV 1 IR Score 0,0713 1 BV 0,8343 0,0788 1 EPS 0,8379 0,0668 0,8068 1 Leverage -0,0922 0,0852 -0,0309 0,0018 1 Size 0,2034 0,3553 0,3648 0,2852 0,1377 1

Figure 7: Correlation matrix for the period 2014-2016

MV 1 IR Score 0,1106 1 BV 0,8387 0,0692 1 EPS 0,8411 0,0649 0,8101 1 Leverage -0,0689 0,1076 -0,0171 -0,0127 1 Size 0,2023 0,3134 0,3636 0,2389 0,1171 1 Figure 8: VIF Variable 2006-2016 2006-2013 2014-2016 IR Score 1,13 1,14 1,11 BV 3,08 3,08 3,17 EPS 2,90 2,92 2,97 Lev 1,03 1,04 1,03 Size 1,28 1,30 1,25 Mean VIF 1,89 1,90 1,91

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4. Results

4.1 Descriptive statistics

Figure 9 provides an overview of the summary descriptive statistics of the data sample for the whole period, figure 10 presents this for the years before IIRC launched the framework and figure 11 shows the summary descriptive statistics for the period after the IIRC launched the framework. In these tables all the variables are included that are used for this research. The descriptive statistics shows that the mean of the scores for the integrated reports for the total sample period 4,00 is. The mean before the introduction of the IIRC guidelines and framework is 3,96, while after the introduction of the IIRC guidelines and framework the mean is 4,08. This shows that the mean of the scores for the integrated reports is increasing, which indicates that the level of integratedness of corporate reporting is increasing. The exact means and not the means of the natural logarithm of the IR score are shown in appendix 1. In this appendix an overview is given of the descriptive statistics where only for size the natural logarithm is used. The mean score of the integrated reports according to these descriptive statistics are, 64,98 for the total sample period, 63,43 before the introduction of the IIRC framework and 68,26 after the introduction of the IIRC framework. A potential explanation for this increase could be that the framework of the IIRC have helped to improve the level of integratedness of corporate reporting.

Variable Obs Mean Std. Dev. Min Max

MV 10.696 -4,42561 1,495626 -8,686567 -0,58000759 IR Score 9.391 3,999959 0,6778111 2,243896 4,565077 BV 10.507 1,902921 1,483557 -1,980467 5,590496 EPS 9.427 0,3410595 1,560663 -3,938702 4,266656 Leverage 10.693 -1,757207 1,224539 -7,193532 -1,628231 Size 11.326 15,30967 1,907195 11,27 20,64285

MV 7.556 -4,440514 1,46917 -8,468403 -0,6980453 IR Score 6.354 3,963601 0,6967817 2,235376 4,57337 BV 7.430 1,903789 1,47035 -1,849426 5,517997 EPS 6.688 0,3892171 1,55335 -3,813501 4,331034 Leverage 7.631 -1,73486 1,199636 -6,96731 -0,1634606 Size 8.087 15,23182 1,93967 11,05195 20,74185

Figure 10: Descriptive statistics for the period 2006-2013 Figure 9: Descriptive statistics for the period 2006-2016

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4.2 Test of hypotheses

The first hypothesis is, the level of integratedness of corporate reporting and the market value of European listed firms are positively related. The results of testing the first hypothesis are presented in figure 12. This regression includes the whole sample period from 2006 to 2016. The results show that the IR score for the full sample period has a negative, insignificant coefficient (coefficient=-0,0171, p=-0,75). This indicates that there is no evidence that the level of integratedness of

corporate reporting and the market value of European listed firms are positively related. Therefore, hypothesis 1 is not supported. This was not expected according to earlier studies (Barth et al., 2017; Lee & Yeo, 2016).

The variables BV (coefficient=0,539, p=-11,54) and EPS (coefficient=0,295, p=20.92) have a positive, significant coefficient at the 0,1 percent level. Which indicates that book value and earnings per share are positively related with market value. This is consistent with the theory and earlier studies (Baboukardos & Rimmel, 2016; Mervelskemper & Streit, 2017).

MV 3.140 -4,389457 1,556406 -9,021011 -0,34721 IR Score 3.037 4,076173 0,6299694 2,259678 4,554929 BV 3.077 1,901081 1,516286 -2,24357 5,737718 EPS 2.739 0,2240904 1,573971 -4,182878 4,145887 Leverage 3.062 -1,810791 1,27521 -7,482364 -0,1568377 Size 3.239 15,50456 1,819262 11,80147 20,57578 Fixed effects 2006-2016 IR Score -0,0171 (-0,75) BV 0,539*** (-11,54) EPS 0,295*** (20,92) Lev -0,000840 (-0,07) Size 0,0675 (1,49) Constant -6,450*** (-10,10) Observations 7.789 Adjusted R-Squared 0,488

Figure 12: Results total sample period (2006-2016) Figure 11: Descriptive statistics for the period 2014-2016

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23 The second hypothesis is, there is a difference in effect of integratedness of corporate reporting on the value of a company listed in Europe before and after the IIRC published a framework for

integrated reporting in 2013. To test this, two samples are used, a sample with a period from 2006 to 2013 and a sample with a period from 2014 to 2016. Figure 13 presents the results of the sample before the introduction of the IIRC framework (2006-2013). These results show that the IR score has a significant negative coefficient (coefficient=-0,0915, p=-3,38). The coefficient is significant at the 0,1 percent level. This indicates that the level of integratedness of corporate reporting and the market value of European listed firms are negatively related for the period 2006 to 2013. However, as discussed by the first hypothesis the opposite was expected. The variables BV (coefficient=0.504, p=7.94) and EPS (coefficient=0,335, p=17,32) have again a positive, significant coefficient at the 0,1 percent level. Fixed effects 2006-2013 IR Score -0,0915*** (-3,38) BV 0,540*** (7,94) EPS 0,335*** (17,32) Lev 0,0216 (1,51) Size -0,0501 (-0,80) Constant -4,316*** (-5,05) Observations 5.317 Adjusted R-Squared 0,458 *** p<0.001, ** p<0.01, * p<0.05

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24 Figure 14 presents the results of the sample after the introduction of the IIRC framework (2014-2016). These results show that the IR score has an insignificant negative coefficient (coefficient= -0,0258, p=-0,81). This indicates that there is no evidence that the level of integratedness of

corporate reporting and the market value of European listed firms are related with each other for the period 2014 to 2016. The variables BV (coefficient=0,645, p=8,22) and EPS (coefficient=0,0786, p=3,76) have again a positive significant coefficient at the 0,1 percent level. The results of figure 13 and 14 suggest that there is a difference in effect of integratedness of corporate reporting on the value of a company listed in Europe before and after the IIRC published a framework for integrated reporting in 2013, which supports hypothesis two.

Fixed effects 2014-2016 IR Score -0,0258 (-0,81) BV 0,645*** (8,22) EPS 0,0786*** (3,76) Lev 0,0312 (1,78) Size -0,163 (-1,89) Constant -2,803* (-2,23) Observations 2.472 Adjusted R-Squared 0,416

Figure 14: Results sample period after IIRC framework (2014-2016)

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4.3 Robustness Test

In order to test the robustness of the results an additional test is done. As described before in paragraph 3.2.4 are all the variables log-transformed in order to get a better normal distribution. It is common to take the natural logarithm of total assets to include size in a regression (Lee & Yeo, 2016; Ioannou & Serafeim, 2017; Matsumura, Prakash, & Vera-Muñoz, 2014). However, it is not common to take the natural logarithm of all the variables. To test whether this affects the results, an extra regression for all three periods is done. In the additional test only the natural logarithm of total assets is taken and not the natural logarithm of all the variables. The results of these tests are shown in appendix 1. As can be seen in appendix 1, are the results for the whole period with only natural logarithm of total assets (size), quite similar to the results for the whole period which are shown in figure 12. However, the IR score for the whole period with only the natural logarithm of total assets has a very small positive, insignificant coefficient. This is different than the IR score shown in figure 12, that IR score had a small negative, insignificant coefficient. For period 2006 to 2013 the results are also quite similar as the results presented in figure 13. The results of the test with only natural logarithm of total assets shows just as in figure 13 a negative and significant coefficient for the IR score. However, now it is only significant at the 1 percent level and not at the 0,1 percent level. The coefficients of BV and EPS are still positive and significant at the 0.1 percent level. The last extra test is conducted for the period 2014-2016. As presented in figure 14, the coefficient of IR score is negative and insignificant, while the coefficients of BV and EPS are positive and significant at the 0.1 percent level. The results of the regression with only the natural logarithm of total assets for the period 2014-2016 presents that the IR score becomes positive but still insignificant, that the coefficient of BV becomes positive and significant at the 5 percent level and that the coefficient of EPS not significant is anymore.

There are thus some differences between the tests with natural logarithm for all the

variables and the tests with only the natural logarithm of total assets. For the total sample period the IR score coefficient of the test with only natural logarithm of total assets (size) is positive, but the coefficient is very small and insignificant so it is still not possible to conclude that the IR score is positively related with the market value of European listed firms. Before the IIRC framework the IR score coefficient is still negative and significant while after the introduction of the IIRC framework the IR score coefficient becomes positive but insignificant. There is thus still a difference before and after the introduction of the IIRC guidelines. Therefore, the decision to use the natural logarithm of all variables does not influence the conclusions for hypothesis 1 and 2.

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5. Conclusion & Discussion

The aim of this study was to answer the question, what is the impact of the level of integratedness of corporate reporting on the market value of European listed companies. With the use of two

hypotheses this main question is researched. For the first hypothesis, the results vary from the expected results. The expectation was that the level of integratedness of corporate reporting and the market value of European listed firms are positively related with each other. However, figure 12 shows that the IR score for the period 2006-2016 has a negative, insignificant coefficient. So the first hypotheses is not supported.

The results of this study, are also in contrast to the findings of Barth et al., (2017) and Lee & Yeo (2016). They found a positive relation between the quality of an integrated report and the firm value of a company. However, there is an important difference between this study and the study of Barth et al., (2017) and Lee & Yeo (2016). This study is conducted for companies who voluntary published an integrated report, while Barth et al., (2017) and Lee & Yeo (2016) conducted the study for companies listed on the JSE, where it is mandatory to publish an integrated report. This is an important difference, because investors could value a report in a different manner if it is mandatory to publish instead of voluntary. This is, as stated in paragraph 2.3 supported by Moneva and Cuellar (2009), Ioannou and Serafeim (2017), and Baboukardos and Rimmel (2016). Moneva and Cuellar (2009) demonstrated that the introduction of the 2002 accounting standard on envrionmental issues, led to an increase of the value relevance of environmental reporting. According to Moneva and Cueallar (2009) a potential explanation for the difference between voluntary and mandatory disclosure is that "compulsory accounting standards may solve some of the disadvantages of voluntary disclosure by increasing the relevance of environmental information". Ioannou and Serafeim (2017) have also found that the economic effect of mandatory corporate sustainability reporting appears to be positive. Baboukardos and Rimmel (2016), conducted a study about the mandatory adoption of integrated reporting in South-Africa and noticed a sharp increase of the earnings' valuation coefficient. The difference between a mandatory and voluntary publication of an integrated report could therefore be a possible explanation for the difference between this study and the studies done by Barth et al., (2017) and Lee & Yeo (2016).

A different potential explanation why the results of this study differ from the findings of previous studies, is the difference in data used. In this study the corporate governance vision and strategy (CGVS) data from the Asset4 database is used as a proxy for the level of integratedness of corporate reporting, while Bart et al., (2017) used data from EY as a proxy for the quality of an integrated report and Lee & Yeo (2016) used their own index as a proxy for the quality of an integrated report. The difference in data used could explain the variances in results. Which would

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27 imply that there is a difference in effect on the market value of a company, between the level of integratedness of an integrated report and the quality of an integrated report.

The expected results from the second hypothesis was a difference in effect of integratedness of corporate reporting on the value of a company listed in Europe before and after the IIRC published a framework for integrated reporting in 2013. The period before the IIRC framework results in a significant negative relation between the IR score and the market value. After the introduction of the IIRC framework an insignificant negative relation is found between the IR score and the market value. These findings supports the expectations for hypothesis two, because there is a difference in effect before and after the IIRC published a framework for integrated reporting. However, this conclusion has to be drawn with discretion because there is only a modest difference before and after the introduction of the IIRC guidelines. Besides, the period after the introduction of the IIRC framework is relatively short, therefore is further elaboration on this topic included in the recommendations for future research. A potential explanation to the small difference in effect could be, that it is difficult for investors to compare the integrated reports for different companies with eachother without a framework or guidelines. This is in line with the constraint mentioned by Eccles and Saltzman (2011), which is shown in paragraph 2.3. Thus, before the framework and guidelines were presented it could have been within reason that an integrated report was seen as value destroying due to the lack of knowledge among investors about an integrated report. After the publication of the IIRC guidelines and framework, investors were aware of the essence of an integrated report, which could lead to the difference in results before and after the introduction of the IIRC guidelines and framework.

However, the conclusions resulting from this thesis should not be considered without some limitations. First, in Europe for all the listed companies it is voluntary to publish an integrated report. So, it was not possible to study the difference in effect of integratedness of corporate reporting on the value of a company listed in Europe before and after it is mandatory to publish an integrated report. However, from reporting year 2017 and onward, EU law requires large public-interest companies with more than 500 employees, to publish non-financial information about their

operational business and their social and environmental challenges (European Commission, n.d.; EY, 2017). It is not mandatory to publish an integrated report, but in multiple reports and presentations is integrated reporting mentioned as one of the best frameworks to comply with the new legislation (EY, 2017; Sands, n.d.). This new law will therefore result in a lot new publications of integrated reports. Due to this, an integrated report will be seen more frequently, which could result in a better knowledge about integrated reporting. Besides that, it is mandatory for large public-interest

companies to publish non-financial information, which could increase the value relevance of integrated reporting. This European transition into mandatory publication of non-financial information makes it possible to conduct a study which is increasingly comparable to the studies

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28 done by Barth et al., (2017) and Lee & Yeo (2016). It is therefore interesting to study the impact of the level of integratedness of corporate reporting on the market value of European listed companies after the new law is enforced.

A second limitation is that the number of observations per company in the dataset for the period 2014-2016 is small. This sample is based on only three years of data. If it is possible to study a longer time period, the results could be more significant. A recommendation for future research is therefore to study a longer period after the introduction of the IIRC framework.

Third, a limitation of this study is that it was not possible to control for industry effects. A recommendation is therefore to conduct the same research for different industries. If the coefficient of IR score is different for the different industries, this would imply that the level of integratedness of corporate reporting has a different impact on different industries. For example, Moneva and Cuellar (2009) found some evidence that there is a difference in value relevance of environmental disclosure between industries.

Concluding from this research, there are also still plenty of interesting possibilities for further research which are not related with a limitation of this study. The last recommendation for future research is to conduct the same study for different continents. The research question would be, is there a difference between continents in effect of the level of integratedness of corporate reporting on the value of a company. This would contribute to existing literature, because there is for the best of the author’s knowledge, no research conducted whether the impact of the level of integratedness of corporate reporting on the market value is different between continents.

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The impact of the level of integratedness of corporate reporting on the market value of European listed firms

Master Thesis