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The Moderating Effect of Integrated Reporting on the

Influence of Sustainability Performance on Firm Value

Date: 21 January 2019

Name: Michelle Knobbout

Address: Oeverzegge 3 7909 HH Hoogeveen Phone number: +316 208 402 83

Email: M.J.Knobbout@student.rug.nl Supervisor: Dr. T. Marra

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The moderating effect of integrated reporting on the influence

of sustainability performance on firm value

Abstract: This study investigates the effect of sustainability disclosure and integrated reporting (IR) among firms based in South Africa, Spain and Japan. The sample consists of data from 150 firms for the period 2010-2017. Linear regression models are used to study the value relevance of the quality of sustainability disclosure, IR and the moderating effect of the use of IR for sustainability disclosure. In addition the effect of mandatory IR, found in South Africa, or voluntary IR, found in Spain and Japan, was studied on firm value. By using a modified Ohlson model, this study was able to provide significant positive results for the relationship between sustainability disclosure and firm value and for the relation between integrated reporting and firm value. Significant positive results were also found for the moderating effect of IR on the relation between sustainability disclosure and firm value. Results show a significant negative relationship between mandatory IR and firm value, a significant positive relationship exists between voluntary IR and firm value. The investigation of the moderating effect of IR and the difference between mandatory and voluntary IR is the main contribution of this research, since this research provides the first study on this value-increasing effect. This study can help practitioners shape their considerations concerning sustainability and IR regulations.

Key words: Sustainability disclosure, integrated reporting, firm value, value relevance, voluntary disclosure, mandatory disclosure, Ohlson model, agency theory, signaling theory, stakeholder theory, legitimacy theory

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Table of Contents

1. Introduction ... 3 2. Theory ... 6 2.1 Theoretical background………6 2.1.1 Agency theory………...6 2.1.2 Signaling theory………7 2.1.3 Stakeholder theory………7 2.1.4 Legitimacy theory………. ………...8 2.1.5 Integration of theories………...9 2.2 Integrated reporting……….10 2.3 Hypothesis development………...12

2.3.1 Sustainability reporting and firm value………..12

2.3.2 Integrated reporting and firm value………13

2.3.3 Moderating effect of integrated reporting………...14

2.3.4 Mandatory IR regulation……….14 3. Research Methodology ... 15 3.1 Sample……….……….15 3.2 Data collection……….………17 3.3 Dependent Variable ... 18 3.4 Independent Variables ... 19 3.4.1 Sustainability performance………..19 3.4.2 IR quality……….20 3.5 Control Variables ... 22 3.6 Research design………23 4. Results ... 24 4.1 Descriptive statistics………...24 4.2 Main findings……….……..25 4.3 Additional analyses………..29 4.3.1 Endogeneity tests……….29 4.3.2 Additional sample………29

4.3.3 Sample robustness test……….31

5. Conclusion and discussion ... 33

5.1 Findings………...33

5.2 Theoretical and practical implications……….35

5.3 Research limitations and future research……….35

References ... 38

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1. Introduction

The societal pressure on and interest in individual and corporate social responsible behavior is increasing (de Villiers et al., 2017). Investors and other stakeholders are no longer only interested in the financial performance of a company, but also in the non-financial accomplishments. Corporations have noticed this pressure, and have adapted their businesses to meet the increased public awareness regarding environmental, social and governance (ESG) concerns (Velte & Stawinoga, 2017). Organizations have made an effort to improve their corporate social responsibility (CSR) performance, and are committed to inform shareholders and other stakeholders about their intentions and achievements (Plumlee et al. 2015). We have therefore, among other reasons, seen a rapid increase in CSR reporting by organizations worldwide since the financial crisis in 2008 (Dhaliwal et al., 2011; Velte & Stawinoga, 2017).

Although corporations are providing more information about their financial and non-financial performance, it occurs that organizations do not provide information in such a way that extends shareholders’ understanding of the corporation (Lee & Yeo, 2016). To promote a solution to the shortcomings of financial reporting, improve corporate reporting and shareholders’ understanding of the firm and its disclosed financial and non-financial performance, the International Integrated Reporting Council (IIRC) was founded in 2010 (IIRC, 2013; Dumay et al., 2016).

The IIRC developed an internationally accepted principle-based integrated reporting (IR) framework for organizations. This framework aims to ‘enable organizations to provide concise communications of how they create value over time’ (IIRC, 2013). Since the release of the IR framework in 2013, worldwide interest in IR continues to grow (Barth et al., 2017). According to the IIRC, more than 1,500 firms prepared an IR report in 2017. There has also been strong support for IR from international standard setters and large accounting firms (Barth et al., 2017).

Frias-Aceituno et al. (2014) describe that firm characteristics such as firm size, profitability and board size influence the implementation of IR by an organization. Villiers et al. (2017) note that these factors also have a positive influence on the quality of IR. Further research determines that higher IR quality has a positive impact on long-term investor base (Serafeim, 2015), Tobin’s Q (Lee & Yeo, 2016) and analyst forecast accuracy (Barth et al., 2017) and a

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negative influence on cost of equity capital (Barth et al., 2017; Zhou et al., 2017). Velte & Stawinoga (2017) however mention that these market reactions on IR do not differ compared to stand-alone ESG reports, and that information asymmetry only decreases for non-financial firms when disclosing information in an integrated report (de Villiers et al., 2017). The added value of IR to sustainability reporting is therefore not undisputed (Velte & Stawinoga, 2017; de Villiers et al., 2017; Zhou et al., 2017).

1.2 Academic contribution

Prior research on IR mainly focuses on South Africa because, following the King III Code of Governance for South Africa, it became mandatory in 2010 for firms listed on the Johannesburg Stock Exchange to disclose financial and non-financial information in an integrated report (Lee & Yeo, 2016; Zhou et al., 2017; Barth et al., 2017). Given the fact that most prior research is concentrated in one country, there exist difficulties validating and generalizing empirical results. Because of for instance different cultures, legislation or legal origin of law systems (Velte & Stawinoga, 2017). This research is founded on an international sample of 150 observations from firms based in three countries, South Africa, Japan and Spain. South Africa due to its unique mandatory IR stance, Japan since it is the Asian country with the most progressive stand towards IR and Spain because it takes a very progressive stand towards sustainability performance and disclosure and is generalizable for Europe. An academic contribution will therefore be that it adds new international observations to existing IR literature. This research thereby replies to Velte & Stawinoga’s (2017) call to analyze the impact of country-specific factors of the influence of IR.

Another academic contribution is the way firm value will be measured in the field of IR research. Although the use of the Ohlson model to measure the value relevance of voluntary disclosure is quite common in generic voluntary disclosure literature (Botosan & Plumlee, 2002; Klerk et al., 2015; Marcia et al., 2015; Plumlee et al., 2015), it has not been done yet by IR research. Existing literature uses either Tobin’s Q (Barth et al., 2017; Lee & Yeo, 2016), cost of capital (Barth et al., 2017) or cost of equity (Zhou et al., 2017) as a proxy measure for firm value. Dhaliwal et al. (2011) declare the Ohlson model the primary and most sophisticated measure of firm value. The use of a different measure will therefore add to existing IR literature (de Villiers et al., 2017).

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On top of these academic contributions, this research can also be of added value for practitioners. This research makes it possible to compare the potential added value of mandating IR disclosure by firms as done in South Africa versus voluntary IR in Japan and Spain. This comparison has not been made before by research, and is therefore not only an academic as well as a practical contribution (de Villiers et al., 2017). If the results indicate a positive effect of legislating mandatory IR disclosure, perhaps more countries might want to consider introducing IR legislation. It is of additional value to investigate the moderating effect of IR, because research has not yet found a significant positive or negative effect of integrated reporting when compared to CSR disclosure (Velte & Stawinoga, 2017). This evidence can help firms decide about their stance towards reporting, and whether it would be profitable, in terms of firm value, to disclose information in an integrated manner.

The research question that will therefore guide this research is; to what extent does IR moderate the influence of the sustainability disclosure on firm value. Prior to the research on the possible moderating effect of using IR as disclosure method, this research will look into the effect of a higher quality sustainability disclosure on firm value. This research follows the coding framework of Zhou et al. (2017). This in cooperation with the IIRC developed framework differentiates eight different IR subcategories based on the IR framework. Since this coding framework is of high congruence with the initial IR framework, this provides a sophisticated measure of determining IR quality.

The found results show that there exists a positive significant relation between sustainability disclosure and firm value as well as between IR and firm value. Higher disclosure quality leads thereby to higher firm value. Based on an additional test research also found evidence that IR is of added value to sustainability disclosure, IR enhances the effect sustainability disclosure has on firm value. Voluntary IR has thereby a significant positive effect on firm value, and mandatory disclosure has a significant negative effect.

In the remainder of this thesis I will first discuss the theoretical background related to the research question, resulting in the development of four hypotheses. Thereafter I will offer an insight into the used research methodology in section three, followed by the results in section four. The fifth section concludes and discusses the findings, implications and limitations of this research.

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2. Theory

The research on sustainability disclosure follows from the traditional research on voluntary disclosure. Corporate voluntary disclosure is an important method that firms can use to communicate their performance and standing relevant for shareholders and other stakeholders (Healy & Palepu, 2001; Lee & Yeo, 2016). An et al. (2011) argument that voluntary disclosure can best be explained and understood by using a multi theoretical framework, since the decision to voluntary disclose information as a firm is a reaction to different levels of influence and motivations. An et al. (2011) and Velte & Stawinoga (2017) advocate to use the agency, signaling, stakeholder and legitimacy theory to explain the diverse motives behind voluntary sustainability disclosure and IR.

2.1 Theoretical Background

2.1.1 Agency theory

Following the agency theory, an agency relationship exists when agents, the managers, who are appointed by the principal, the owner of the firm, are given the power to make decisions on behalf of the principal (Jensen & Meckling, 1976). An agency problem occurs when there exists information asymmetry between the owners and managers and both agent and principal have differing interests. The aim of disclosure is to address market imperfections and reduce the information asymmetry between agents and principals and thereby the information advantage of one party (Healy & Palepu, 2001; Dhaliwal et al., 2011). Lee & Yeo (2016) and Dumay et al. (2016) report on the shortcomings of corporate financial disclosure and the information asymmetry that exists between shareholders and managers as a result of these shortcomings.

By voluntary disclosing information on sustainability performance, firms can reduce agency costs between managers and investors and shareholders by giving them insight in the firm’s position and considerations (Dhaliwal et al., 2011; Lee & Yeo, 2016). Following this reasoning, the development of corporate reporting can also be attributed to the need to address information asymmetries and facilitate efficient allocation of capital (Marcia et al., 2015).

Integrated reporting also provides more transparency to stakeholders and it reduces information asymmetry about the capitals that affect value (Barth et al., 2017; García-Sanchez

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& Noguera-Gamez 2017). As Zhou et al. (2017) explain, IR can provide new value relevant information and present information in a more concise manner that helps stakeholders in getting more knowledge of the performance of a firm. This reduces the agency problem and thereby related agency costs, which can eventually lead to an increase in firm value (García-Sanchez & Noguera-Gamez, 2017).

2.1.2 Signaling theory

In addition to a decrease in information asymmetry and agency costs between managers and shareholders and investors initiated by voluntary disclosure, companies can also signal the quality of their company to other stakeholders using voluntary disclosure (Zhou et al., 2017). Spence (1973) argues that, based on the signaling value provided by disclosures, a company has a motivation to voluntary release information about its business processes and how it creates value. Frias-Aceituno et al. (2014) agree and describe that ‘information disclosure is a signal conveyed to the market in order to reduce information asymmetries, optimize financing costs and increase the value of the firm’. These effects can contribute to economic growth, a lower cost of capital and eventually would enable a firm to raise its level of investment (An et al., 2011; Zhou et al., 2017).

An et al. (2011) name that sending a signal is usually grounded on the assumption that it should be favorable to the signaler to disclose information and send a signal. Other research thereby proves that voluntary CSR disclosure is one of the most effective methods to signal the quality of the firm (Pistoni et al., 2018).

2.1.3 Stakeholder theory

Research into voluntary disclosure often employs the stakeholder theory (An et al., 2011; Lee et al., 2015; Pistoni et al., 2018), which underlines the importance and influence of various stakeholders. Freeman (1984) defines stakeholders as ‘any group or individual who can affect or is affected by the achievement of the organization objectives’. This includes customers, governments, employees, communities and shareholders (Lee et al., 2015). Stakeholder theory frequently refers to ‘accountability’, from an accounting perspective this term describes the responsibility of a firm to disclose information regarding its position, (financial) performance, investments and compliance (An et al., 2011).

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Freeman (1984) notes that, succeeding the stakeholder theory, companies should take into account the interest of all their stakeholders, because firms that consider their stakeholders more perform better (Barth et al., 2017). Plumlee et al. (2015) describe that voluntary disclosures related to sustainability inform stakeholders who support or work for sustainable firms, lead to superior sales and firm performance. Lee & Yeo (2016) support this finding by writing that voluntary disclosure leads to higher stakeholder engagement, an improved understanding of the firm’s risk, better investment decisions and ultimately higher firm value. The IR framework was developed through a ‘multi-stakeholder engagement consensus-building process’ (IIRC, 2013; Rinaldi et al., 2018). The aim of IR is to serve financial capital providers and other stakeholders by disclosing more important information and in a more relevant way, following the demand of stakeholders for continuous transparency (de Villiers et al., 2017). IR meets this demand by providing a better link between a firm’s strategy, business model and value creation (Barth et al., 2017). This is especially beneficial for shareholders and investors, since it allows them to better understand the risks a firm is facing (García-Sanchez & Noguera-Gamez, 2017). The improved transparency and a firm’s relation with stakeholders can lead to improved investment decisions and successively to an increase in firm value (Lee & Yeo, 2016; Barth et al., 2017).

2.1.4 Legitimacy theory

Somewhat related to the stakeholder theory is the legitimacy theory, which implies that an organization has ‘a social contract with the society in which it operates, it assumes that a firm has no right to exist unless it operates in congruence with the expectations from society’ (Velte & Stawinoga, 2017). Legitimacy enables a firm to attract resources and gain the continued support of stakeholders. Stakeholders’ expectations are however not fixed, a legitimacy gap might appear when correspondence lacks between the expectations of society and the actions and performance of an organization (An et al., 2011).

This legitimacy gap can be mitigated by focusing on communication with stakeholders. Setia et al. (2015) advocate voluntary disclosure to increase transparency and understanding and decrease the legitimacy gap. Lee et al. (2015) agree and note that stakeholders view social responsibility disclosure as a measure of organization’s reliability and legitimacy. As discussed, the societal pressure to meet and disclose about environmental, social and

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governance performance is increasing (de Villiers et al, 2017). Velte & Stawinoga (2017) and Camilleri (2018) report that IR can be an effective instrument to gain legitimacy, since stakeholders can analyze if the firm operates in congruence with their expectations. Disclosing information is one of the most important elements to gain the approval and support of stakeholders (Slack & Tsalavoutas, 2018). When the performance is in line with the expectations of society and stakeholders, firms will obtain support and legitimize their operations and existence (Bernardi & Stark, 2016). Firms thereby increase their legitimacy towards stakeholders and legitimize their own existence (Plumlee et al. 2015; de Villiers et al., 2017). This is important for the firm’s long-term existence, its ability to attract resources and eventually its value (García-Sanchez & Noguera-Gamez, 2017).

2.1.5 Integration of theories

An et al. (2011) and Velte & Stawinoga (2017) use an integrated model to describe the relation between the aforementioned theories and sustainability disclosure. The model and its arguments in favor of sustainability disclosure are founded on three principles:

- Sustainability disclosure can reduce the information asymmetry between a firm and its stakeholders

- Sustainability disclosure can discharge the accountability a firm has towards its stakeholders

- Sustainability disclosure can gain and maintain legitimacy through providing evidence that its performance is in congruence with the expectations of society.

An et al (2011) describe that key concepts of the agency theory are the agency problems that exist due to information asymmetry between principal and agent (Healy & Palepu, 2001). Interrelated concepts with stakeholder theory are thereby information asymmetry, but stakeholder theory argues that this exists between the firm and all its stakeholders. Stakeholder theory also values the accountability of firms towards the social system that consists of all the stakeholders of the firm (Lee et al., 2015). Interrelated concepts with the legitimacy theory are accountability and organizational legitimacy towards society (An et al., 2011). The legitimacy theory shares core values as signaling the organizational legitimacy towards its stakeholders with the signaling theory. Which thereafter shares concepts as information asymmetry which can be diminished through signaling the firm’s performance and stance towards topics shareholders and stakeholders find important (Zhou et al., 2017).

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2.2 Integrated Reporting

Although both traditional CSR reporting and IR aim to decrease the information asymmetry that exists between stakeholders and insiders of a firm, they vary in both their target group and reporting structure according to Velte & Stawinoga (2017). CSR has been qualified as a tool to address all major stakeholders of an organization thereby focusing on stakeholder engagement and management (Rinaldi et al., 2018), but only concerns the ESG performance of a firm (Setia et al., 2015). Whereas the primary purpose of IR is to enhance capital market efficiency (Zhou et al., 2017).

Some research reproach traditional CSR reporting of enhancing silo thinking in their performance measurement and reporting efforts, since the IIRC mentions that IR specifically aims financial capital providers (Velte & Stawinoga, 2017; Camilleri, 2018). The IIRC therefore now recommends a process of IR whereby the way a firm creates value overtime would be reported in an integrated report, which ‘communicates an organization’s strategy, governance, performance and prospects, in the context of its external environment, to show value creation over the short, medium, and long term’ (IIRC, 2013; Cheng et al., 2014). The IR framework aims to meet this goal by ‘improving the quality of information available to financial capital providers, provide a more cohesive and efficient approach to corporate reporting and enhance accountability and stewardship for the broad base of capitals’ (IIRC, 2013). Next to this the IIRC (2013) added that ‘an integrated report and other communications resulting from IR will be of benefit to all stakeholders interested in an organization’s ability to create value over time’.

This broad base of capital refers to six fundamentals on which the IR framework is based: financial, manufactured, intellectual, natural, human, social and relationship capital (IIRC, 2013). By providing stakeholders with a holistic overview of value creation measurement and reporting, IR tries to address and overcome the criticisms and shortcomings of sustainability reporting, by considering all the organization capitals and by breaking down operational and reporting silos (Camilleri, 2018).

Next to the capitals, the IIRC describes 8 content elements which an organization can include in its IR report. These elements are: organizational overview and external environment,

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governance, business model, risk and opportunities, strategy and resource allocation, performance, outlook, and basis of preparation and presentation (IIRC, 2013).

In order to decrease the risk of information overload for stakeholders and to reduce the value gap between equity and firm value, IR aims to connect the material information of other reports (for instance corporate governance, financial, compensation and CSR reports) (Velte & Stawinoga, 2017). García-Sanchez & Noguera-Gamez (2017) suggest that IR can help mitigate agency problems, by connecting material information, and can also improve the quality of material information for investors. IR explains how industry and firm-level characteristics can play a significant role in the determination of material, non-financial disclosures (Camilleri, 2018).

IR hereby provides stakeholders a holistic overview of the socially related value creation process within one centralized reporting tool, as opposed to separate financial and sustainability reporting (Slack & Tsalavoutas, 2018). However not all research is this positive about the IIRC’s IR framework. Stubbs & Higgins (2014) discuss that IR focuses on the supply side of information, the preparers of corporate statements, whilst not paying enough attention to the demand side, the stakeholders. Stubbs & Higgins (2014), following the stakeholder theory, highlight thereby that IR offers a limited approach to ensure the corporate accountability towards stakeholders. The IIRC formulated in 2013 that its main goal was to improve disclosure for financial capital providers. Literature is therefore skeptical whether IR pays enough attention to the tension field that exists between investors and creditors, who require information regarding future profitability, and external stakeholders who expect broad-based information concerning different capitals (Stubbs & Higgins, 2014; de Villiers; 2017; Camilleri, 2018). Cheng et al. (2014) and de Villiers et al. (2017) add to this that IR focuses more on stakeholder management rather than on stakeholder accountability. They therefore question the added value of IR concerning enhance a firm’s legitimacy towards society and serving all stakeholders (Cheng et al., 2014; de Villiers et al., 2017).

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2.3 Hypothesis development

2.3.1 Sustainability reporting and firm value

The FASB defines voluntary disclosure as ‘the provision of information by a company’s management beyond requirements’. Dhaliwal et al. (2011) add that this information is thought to be relevant to the decision-making of users of the firm’s annual statements. By providing this decision-useful information, information asymmetry is reduced, comparability of financial information is improved, estimation uncertainty is decreased and the efficient allocation of capital ensures a reduced cost of capital and debt (Marcia et al., 2015).

Frias-Aceituno et al. (2014) assert that voluntary disclosure is associated with enhancing the company’s image and raising investor confidence, by giving positive voluntary signals to its shareholders and increasing the firm’s legitimacy towards its stakeholders by voluntary providing information. Botosan (1997) shows that voluntary disclosed information is value relevant to shareholders and that high-quality voluntary disclosure reduces a firm’s cost of capital by lowering the information asymmetry (Dhaliwal et al., 2011; Plumlee et al., 2015; Sahut & Pasquini-Descomps, 2015).

Plumlee et al. (2015) extend this reasoning by providing evidence that voluntary environmental disclosure quality is positively related to firm value, through a decrease in cost of equity capital. In general, this line of research suggests that disclosing more information will eventually have a positive effect on firm value. Sahut & Pasquini-Descomps (2015) describe that investors are willing to pay a premium or value goodwill higher because of the synergy that is created when firms invest in sustainability and disclose about this. Firms can therefore expect higher demand, growth and higher market prices of their shares, as investors recognize the added value and lower risk.

Results however appear to be sensitive to many factors such as; country specific regulations or factors (Klerk et al., 2015; Lee et al., 2015; Sahut & Pasquini-Descomps, 2015), missing control variables such as leverage ratio (Kuzey & Uyar, 2017) and presence of market intermediaries (Botosan, 1997). It is therefore relevant to conduct subsequent research to determine this relationship.

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Hypothesis 1: The quality of sustainability disclosure is positively associated with firm

value.

2.3.2 Integrated reporting and firm value

The intention of IR is to provide financial capital providers with more cohesive information, to ensure an efficient allocation of resources and thereby enhancing capital market efficiency (Zhou et al., 2017). Barth et al. (2017) explain that IR can provide new value relevant information in a more concise and useful manner, even if the information is previously published, because IR helps investors explain the relation between financial and non-financial information. IR clarifies this relation since IR supports integrated thinking. Integrated thinking promotes a long term outlook and value creation process, it discusses thereby not only financial determinants but also components like human capital, employee engagement and environmental awareness (de Villiers et al., 2017). Eccles & Krzus (2011) discuss that IR and integrated thinking lead to better decision-making, lower reputational risk and greater corporate transparency.

Since IR contains forward-looking information that lacks reliability and deals with subjects that are hard to quantify, disclosing more IR information leads to a decrease in information asymmetry about the capitals that affect value (Barth et al., 2017). Because investors have limited access to this information, disclosure results in meeting the interests of the firm’s stakeholders. Publication of information thereby stimulates the use of new IR information which leads to additional trading by informed investors (Barth et al., 2017). By this means, higher IR quality affects liquidity, and Dhaliwal et al. (2011) prove in their research that higher liquidity has a positive effect on firm performance and value.

Plumlee et al. (2017) also document a positive relation between disclosure quality and overall firm performance. Lee & Yeo (2016) extent this reasoning by proving that higher IR disclosure quality leads to higher firm performance, measured by the firm’s Tobin’s Q. De Villiers et al. (2017) explain this relation that by disclosing IR information, a firm increases its legitimacy towards investors and other stakeholders. Setia et al. (2015) refer to this that legitimacy enables an organization to attract resources and gain the continued support of its investors, when it meets the covenants of their social contract with society.

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The above described literature leads to the following hypothesis;

Hypothesis 2: The quality of integrated reporting has a positive influence on firm value.

2.3.3 The moderating effect of integrated reporting

De Villiers et al. (2017) describe the aim of IR as to get managers and providers of financial capital to consider the long-term consequences of a broader set of capitals than just financial performance. Described advantages of IR are better internal decision-making (Velte & Stawinoga, 2017), lower reputational and regulation risk (de Villiers et al., 2017), better financial stability (Zhou et al., 2017; Barth et al., 2017), greater corporate transparency (de Villiers et al., 2017) and ultimately contributing to a better society (Lee et al., 2015; de Villiers et al., 2017). However de Villiers et al. (2017) also criticize IR for only focusing on stakeholder management rather than stimulating accountability towards stakeholders.

Marcia et al. (2015) note that South African investors view IR information as an improvement, compared to standalone CSR information. Serafeim (2015) nonetheless mentions that investors are unsure whether IR is an enhancement since they question if IR is just a change in reporting format, or if it actually changes the nature of reporting. Following this ambiguity, it is relevant to conduct further research into the added value of IR, when compared to standalone sustainability reporting. Since research in general however, merely indicates advantages of IR, the following hypothesis is phrased in a positive way;

Hypothesis 3: The quality of integrated reporting enhances the positive influence of

sustainability disclosure on firm value.

2.3.4 Mandatory IR regulation

Dhaliwal et al. (2014) find that the publication of a standalone sustainability report in countries where this report is mandated, has a significantly larger negative effect on a firm’s cost of capital than it has in countries where such a report is not mandated. So far, South Africa is the only country in the world that mandated the use of integrated reporting for firms when disclosing information in their annual reports (Velte & Stawinoga, 2017; Rinaldi et al., 2018). The research of Baboukardos & Rimmel (2016) investigates the effect of pre and post South African King Code III legislation concerning IR. They find strong evidence of a sharp increase

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of the earnings’ valuation coefficient after King Code adoption but also a significant decline in the value relevance of net assets and earnings per share (Baboukardos & Rimmel, 2016). Other research concerning the effect of mandatory or voluntary IR is to my knowledge not available, seen the fact that such a comparison has not been made before. It is therefore hard to predict the outcome of the analysis whether there exists a difference in the effect of IR on firm value when it is mandatory, as in South Africa, or when it is voluntary, as in Japan and Spain. The following hypothesis is therefore formulated in a neutral way;

Hypothesis 4: Mandatory integrated reporting in country of origin has a different effect on firm value than voluntary integrated reporting in country of origin

3. Research Methodology

In this section I will first describe the used sample and data collection of this sample. Here after I will discuss describe the dependent, independent and control variables used in this research. Based on literature I will define the variables and explain which research methods will be used to conduct the research.

3.1 Sample

The Johannesburg Stock Exchange (JSE) became the first stock exchange worldwide to incorporate mandatory IR into its listing rules in 2010 (Zhou et al., 2017). The King Code III calls for the integration of information about a firm’s sustainability and financial performance (Baboukardos & Rimmel, 2016). South Africa is currently the only jurisdiction that mandates IR on a mandatory ‘apply or explain basis’ (Dumay et al., 2016). This unique situation has let to ideal conditions for conducting research, since the King Code III dictated uniformity and all firms faced similar economic conditions and regulations which resulted in more precise measurement (Velte & Stawinoga, 2017; Dumay et al., 2016; Barth et al., 2017; Lee & Yeo, 2016). Since the King Code III was implemented in 2010, this research studies the years 2010 and 2011 to measure the effect of sustainability disclosure and IR on firm value.

In a KPMG report on IR, Japan is named the number two country, South Africa being number one, with the highest number of integrated reports worldwide (KPMG, 2016). The

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report also states that several recent initiatives from the Japanese government, financial regulator and stock exchange have helped to increase the rates and quality of IR in the country (KPMG, 2016). In 2014 the Japanese authority on ensuring stability of the Japanese financial system, published a code for institutional investors that reminded them of their non-financial duties and stimulated investors to encourage their investors to practice IR (Barth et al., 2017). In June 2015, the Japanese Corporate Governance Code published by the Tokyo Stock Exchange came into effect. Among other regulations and recommendations, the code also stimulated firms listed on the Tokyo Stock Exchange to adopt IR (KPMG, 2016). This study therefore investigates the firm years 2017 and 20181.

The EU imposes regulations applicable to all its member states and strives to create a single market for goods, services and people. Since Spain is an EU member, inquiring firms based in an EU-member state will make the results of this study more generalizable for European firms. The results of this study can therefore provide a stimulus for the adoption of IR on a European base. In 2011, the Spanish government made sustainability reporting mandatory for state-owned corporations and entities controlled by the central government. A KPMG report notes that Spain is one of the European countries with the highest quality of CSR reports (KPMG, 2013). The report also mentions that Spain ‘has demonstrated both strong communication and professionalism over time’ (KPMG, 2013). The Spanish government launched a new corporate governance code in February 2015 for listed companies, its main goal being building trust and transparency for shareholders and investors. The new code includes specific recommendations concerning corporate responsibility, with the firms being subject to a ‘comply or explain’ principle (Seguí-Mas et al., 2018). On top of this, in 2017 Spain was the worldwide number three country with the highest number of integrated reports, and also showed the third biggest rise in issuance of integrated reports (KPMG, 2017). This sample therefore spans observations of the years 2016 and 2017.

All the collected financial data is displayed in euro’s at the exchange rate applicable in that specific year, in order to increase the comparability of the data. From the collected data, observations with incomplete data are deleted. Besides, companies active in the financial

1 The majority of studied Japanese annual integrated reports covered a timespan starting in either February or

March. A Japanese IR report covering 31st March 2016 – 31st March 2017 was therefore seen as a report on

2016, since the majority of the reported months are part of 2016, although the firms themselves names this the 2017 annual report. The sample thus includes IR reports covering March 2016 – March 2017.

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sector, such as banks and insurance firms, are also excluded from the sample because these firms face other disclosure regulations and reporting requirements.

3.2 Data collection

This study makes use of both archival and hand collected data. The required information on financial indicators is extracted from Datastream, ESG reporting and performance scores are found in ASSET4, and IR quality scores are hand collected from firms’ annual reports and corporate websites. Since the quality of integrated reports is a vital part of this study, and alternative existing measurements of IR quality were not available or not sophisticated enough, IR quality was determined by hand collecting the data.

On top of this, according to Fogarty (2006) at least one variable of a research should be hand collected to realize differentiation of the study and increase its reliability. The data in order to determine the quality of IR reporting was hand collected in accordance with the framework of Zhou et al. (2017) which is included in Appendix I. This framework will be discussed in more detailed in paragraph 3.4.2.

Starting point of the data collection were the three major stock exchanges in South Africa, Japan and Spain; the JSE, Nikkei 225 and Bolsa de Madrid (BME). Based on the market capitalization accessed in Datastream, the 75 largest firms per stock exchange were selected.

For the firms listed on the JSE, this research focuses on the year the King Code III became effective, 2010, and the subsequent year to the mandatory implementation of the code and IR adaption. For firms listed on the Nikkei 225, this research focuses on the first complete financial year the Corporate Governance Code became effective, 2016, and the subsequent year to the implementation of the code to measure its effect. The sample of firms listed on the BME focuses on the first complete financial year the new corporate governance code was effective, 2016 and the following year.

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Table 1 Sample collection Total number of observations

Initial amount of observations 225

Less: Incomplete data on firm value extracted from Datastream - 10 Less: Incomplete data on ESG reporting extracted from Datastream - 34 Less: Observations from firms in the financial sector - 13

Less: Integrated report not available - 18

Final Sample 150

3.3 Dependent Variable

The dependent variable of this research is firm value, which will be used to determine the value relevance of disclosed sustainability or IR information. Value relevance is defined as ‘the ability of accounting or non-accounting measures to capture or summarize information that affects equity value’ (Hassel et al., 2005). The value relevance and influence on firm value will be measured by using the Ohlson model, in accordance with the studies of Hassel et al. (2005), Marcia et al. (2015), Plumlee et al. (2015) and Barth et al. (2017). This model is a valuation technique based on accounting information, which measures the influence of disclosed accounting information on firm value. Market value (MV) can be defined as the present value of expected net future cash flows according to the Ohlson model (Ohlson, 1995). So market value is a linear function of book value of equity (BV), real income and other financial information (Ohlson, 1995). The other financial information can incorporate non-accounting information into a valuation (Ohlson, 1995).

When using the Ohlson model, real income is often measured as residual income or abnormal earnings (Hassel et al., 2005; Marcia et al., 2015; Plumlee et al., 2015). Abnormal earnings are then calculated as the difference between actual earnings per share at the end of the fiscal period minus the required rate of return on the beginning book value (Plumlee et al., 2015). This approach can however result in valuation errors stemming from estimations necessary to calculate the residual income. It is therefore common to substitute residual income with net income (Marcia et al., 2015). Following this line of reasoning, this study will also substitute residual income with net income (NI).

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The other non-financial information component is also topic of discussion (Marcia et al., 2015; Plumlee et al., 2015). This kind of information is any news or event besides financial information that could be of relevance for valuation. Following Baboukardos & Rimmel (2016) and Hassel et al. (2005), it is acceptable to include sustainability and IR disclosure as a proxy for the other non-financial information component.

Based on the above described literature, this study will measure firm value as the market value of the firm, calculated by adding book value, net income and the extent of sustainability disclosure and integrated reporting. This results in the following Ohlson model;

MVt = β0 + β1BVt + β2NI t + β3v t +

ε

t

Where

MV t market value at the end of the fiscal year t;

BV t book value per share at the end of the fiscal year t;

NI t net income at the end of fiscal year t;

v t the quality of sustainability disclosure and integrated reporting; and

ε

t a random error term

3.4 Independent Variables

3.4.1 Sustainability performance

Montiel & Delgado-Ceballos (2014) write that a lot of ambiguity exists concerning defining the sustainability performance of a firm, and have therefore created an overview of most commonly used definitions. Research often combines corporate social performance and corporate sustainability in order to define corporate sustainability performance (CSP) (Montiel & Delgado-Ceballos, 2014; Lee et al., 2015). CSP is frequently based on the triple bottom line principle, following the People, Planet, Profit philosophy (Setia et al., 2015). The definition that best applies to this research is the definition given by the Brudtland Commission in 1972 on the Stockholm Conference on the Human Environment; corporate sustainability is ‘the development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (Lee et al., 2015).

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Corporate sustainability will be measured by using ESG-scores found in the Asset-4 database (Montiel & Delgado-Ceballos, 2014; Sahut & Pasquini-Descomps, 2015). These scores provide an independent and weighted score for numerous firms worldwide based on their Environmental, Social and Governance performance. ESG scores can be categorized as compliance-based ratings and news-based ratings, this study follows the first category. These compliance based ratings depend on the compliance of a company with pre-defined regulations, for instance; presence of external auditors, disclosure of business ethics code, CO2 emissions (Sahut & Pasquini-Descomps, 2015). The quality of sustainability disclosure (SUSTAIN) will be measured by using the ratings found in the ASSET4 database, which is a commonly used proxy to measure the quality of ESG disclosure (Siew, 2015).

3.4.2 IR quality

The IIRC (2013) defines that ‘the aim of an integrated report is to provide a concise and holistic account of company value and performance’ by reporting about financial, social, human, intellectual and environmental factors on a short-, medium-, and long-term focus for a firm’s capacity to create value. The moderating effect of IR will be measured by testing the quality of IR, following the South-African oriented research of Zhou et al. (2017), based on alignment with the IIRC framework on IR.

Zhou et al. (2017) conducted research based on the 8 content elements to create a framework for scoring the IR quality of a firm’s report. To ensure heterogeneity between integrated reports Zhou et al. (2017) employed 2 controls in designing the coding framework. First they have used the input of high ranked IIRC employees to develop a framework that covers all IR topics. Secondly Zhou et al. (2017) used an independent double coding process to ensure objectivity.

Based on the 8 IR content elements, 31 subcategories were developed, where a value of minimum 0 (not present) and maximum 1 (present) per subcategory was possible. An advantage of this method is that it covers most topics of the IR framework, a disadvantage is that Zhou et al. (2017) only looked whether a subcategory was present. Their research did not determine the quality of the disclosed information per information subcategory.

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The literature uses various methods to determine IR quality, among which several proxy measures such as a Big Four report (Barth et al., 2017), a consulting and external research report (Lee & Yeo) or a self-developed framework (Zhou et al., 2017; García-Sanchez & Noguera-Gamez, 2017; Pistoni et al., 2018). This research will follow the determination of IR quality based on a framework in line with the IR principles. Researchers’ approach towards the development of a quality measurement framework however varies.

Pistoni et al. (2018) use content analysis to determine IR quality. This research is based on an IR scoreboard with 4 pillars, background, content, assurance and form. Grounded on these pillars, 23 subcategories were established which were scored a minimum of 0 (not present) to a maximum of 5 (excellent). This content analysis is thereby very sensitive which is a plus but also subjective to an individual’s interpretation. Since it is important to prevent subjectivity in determining the extent or quality of a certain variable (Eccles & Krzus, 2010), the research of Pistoni et al. (2018) is not suitable to follow.

García-Sanchez & Noguera-Gamez (2017) measure IR quality by using a variable dummy. Based on the description of the IIRC of which elements should be included in an integrated report and whether the content was presented in a holistic way, reports were valued with 1 when the firm discloses an integrated report and 0 when a firm does not disclose an integrated report. A pro of this method is that García-Sanchez & Noguera-Gamez (2017) were able to collect a lot of data, so their conclusion are based on a substantive dataset. The downside is however that this dummy variable does not catch the differences in quality of IR, and is therefore not sophisticated.

Next to these self-established frameworks, database ASSET4 also provides a balanced rating on IR quality, based on a company’s performance in the economic, environmental, social and corporate governance area. This score ranges from a minimum value of 0 to a maximum value of 100. It is however not possible to specify the score for one of the areas or IR framework pillars, and is therefore not sufficiently sophisticated to cover the research topics of this study. For this research the framework of Zhou et al. (2017) will be followed, since this enables a more refined content analysis and is best aligned with the IIRC IR framework. The used coding framework is included in Appendix 1.

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3.5 Control Variables

Based on prior research, several control variables will be included in this research to control for other factors that may be correlated with firm value. Data used to measure these control variables will be subtracted from the Datastream database.

Firm size: This research will be controlled for firm size, since prior research showed that firm size is an indicator for a lower cost of capital, which leads to a higher firm value (Lee & Yeo, 2016; Plumlee et al., 2015). Marcia et al. (2015) and García-Sanchez & Noguera-Gamez (2017) support this positive relationship, indicating that larger firms will in general have a higher firm value. Following Plumlee et al. (2015) and Dhaliwal et al. (2011) firm size (SIZE) will be calculated as the natural logarithm of the firm’s total assets at the beginning of the year.

Return on assets: Frias-Aceituno et al. (2014), Lee & Yeo (2015) and Barth et al. (2017) include profitability, measured by the return on assets (ROA), because disclosure is expected to increase with firm performance.

Leverage: Leverage (LEV) is defined as the ratio of total debt divided by total assets. Following prior research leverage has a significant positive effect on firm value (Dhaliwal et al., 2011; Plumlee et al., 2015; Lee & Yeo, 2015; Zhou et al., 2017). García-Sanchez & Noguera-Gamez (2017) agree with this positive relation and explain that because the agency costs are higher for companies that use outside funding compared with firms that use debt financing.

Loss: A loss dummy (LOSS) equal to one if the return on assets is negative, and zero if the return on assets is positive is also included. Baboukardos (2016), Bernardi & Stark (2016) and Zou et al. (2017) add this control variable since prior literature has shown that loss-making firms are valued differently than profit-making firms.

CSR performance: García-Sanchez & Noguera-Gamez (2017) and de Villiers et al. (2017) note that when measuring the effect of IR (quality) it is important to control for CSR performance. De Villiers et al. (2017) argue that in order to make sure whether a research is really about disclosure and not a proxy for already known information, one must control for CSR performance. It is important to also take notion of the possibility that the reporting differs from the actual CSR performance, often referred to as greenwashing. Barth et al. (2017) discuss that

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firms can selectively disclose positive CSR performance, but are reluctant to report negative information. This is another argument why CSR performance (CSR) should be included as a control variable.

Year: This research includes an analysis of the years 2010-2017, which results in differences between years. To control for the time effects, a year dummy is included (YEAR). (Baboukardos & Rimmel, 2016)

Industry: This research includes an analysis of firms active in different industries. To control for industry specific effects, an industry dummy is included (INDUSTR) (Baboukardos & Rimmel, 2016).

Country: This research includes an analysis of firms active in three different countries. To control for country specific effects, a country dummy is included (COUNTRY).

According to Eccles & Krzus (2010), the explanation for a weak relation between IR and financial performance is time lag. There is a significant time lag before better ESG performance result in enhanced financial performance since the benefits are not immediate. On top of this, there is also a time lag between implementing IR and getting the benefit from it. The variables sustainability performance (SUSTAIN), IR quality (HIR) and CSR performance (CSR) will therefore be lagged with one year.

3.6 Research Design

The following statistical model is used to conduct the research:

MVi,t = β0 + β1BVi,t + β2NI i,t + β3SUSTAIN t-1 + β4HIR t-1+ β5( SUSTAIN t-1 * HIRt-1 )

+ β6CSR t-1 + β7SIZE i,t + β8LEV i,t + β9ROA i,t + β10LOSS i,t + β11YEAR i,t +

β12INDUSTRYi,t + β13COUNTRYi,t +

ε

Subscript i refers to a specific firm, subscript t refers to a specific year and

ε

represents the error term. The used variables including their description and measurement are included in Appendix 2. In the following subsections of this paragraph, several regression technique are described which are used to obtain reliable results.

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4. Results

4.1 Descriptive statistics

The mean, standard deviation, and Pearson correlation between variables are presented in table 2 down below. The average firm in the used sample has a market value (MV) of 9.015 billion euros and a book value (BV) of 7.02 billion euros, the average net income (NI) is 12.464 billion euros. The average sustainability disclosure score (SUSTAIN) for a firm is 68.32, where a maximum score of 100 is possible. The obtained average integrated reporting score (IR) is 56.06, this score is significantly lower than the sustainability disclosure score. This might be explained by the fact that IR is a relatively new form of disclosure, and that firms therefore have to become more familiar with the IR guidelines which will eventually result in better performances. Since this research includes data from different countries, years and industries, a summary of the test variable per country, year and industry is included in appendix 3.

The correlation statistics show that market value is positively associated with book value, net income, sustainability disclosure, integrated reporting, firm size (SIZE), leverage (LEV) and CSR performance (CSR). The correlation with return on assets (ROA) is negative and non-significant, this control variable will however be included in this research since prior research have shown the influence of return on assets on firm value (Lee & Yeo, 2015; Barth et al., 2017).

According to Gujarati (1995), the maximum accepted threshold concerning multicollinearity is 0.7. All variables have a correlation coefficient below 0.7, the maximum

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value is 0.580. One can therefore conclude that there exist no issues concerning multicollinearity in this research. As an addition to the Pearson correlation matrix presented in table 2, a VIF-score test was also conducted. This is another way to check for multicollinearity. As shown in table 3, all VIF-scores are below 10, multicollinearity problems are therefore not applicable.

4.2 Main findings

Table 3 presents the results of the regression models used to test the hypotheses. Model 1 includes book value, net income and the control variables, this model is used to test the Ohlson model for this research. In model 2 sustainability disclosure is added to test hypothesis 1. Model 3 includes IR in order to test hypothesis 2. Model 4 includes the interaction between sustainability disclosure and IR to test hypothesis 3. Model 5 looks at the effect of mandatory or voluntary IR, and tests thereby hypothesis 4. All models include year, country, industry and loss dummies to control for year, country, industry and loss effects.

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Model 1 shows the results of the regression using book value, net income and the applicable control variables. The findings are consistent with the Ohlson model (1995), book value and net income are positively significant associated with market value (β=0.134 p<0.01; β=0.117 p<0.01). Firm size is also positively significant related to market value (β=0.158 p<0.01), this finding is in line with existing literature (Plumlee et al., 2015; Lee & Yeo, 2016). This indicates that larger firms on average have a higher firm value than smaller firms. Return

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on assets has a significant positive effect on firm value at 1% level (β=0.021 p<0.1), demonstrating that firms which have a higher return on assets, and are thereby implying to be more profitable, have on average a higher firm value. Leverage has a slight positive but unexpected not significant effect on firm value. Since prior research has proven an effect between leverage and firm value, leverage will be included as control variable since it could have a compound effect (Zhou et al., 2017; García-Sanchez & Noguera-Gamez, 2017). CSR performance unexpectedly has a significant negative effect on firm value (β=0.005 p<0.1).

Model 2 tests hypothesis 1, which predicts a positive causal relation between sustainability reporting and firm value. The results show that sustainability reporting is positive and significant at a 10% level (β=0.004, p<0.1), indicating that a higher quality of sustainability disclosure leads to higher firm value. The influence and significance of the control variables did not change in this model. However return on assets and CSR performance lost their significance, though they still indicate the same relation. Model 2 thereby provides support for hypothesis 1.

Model 3 tests hypothesis 2, which predicts a positive causal relation between IR and firm value. The regression results show that IR is positively and significantly related to firm value at a 10% level (β=0.005, p<0.1). This demonstrates that higher IR quality leads to higher firm value, this is in line with expectations based on prior literature (Setia et al., 2015; de Villiers et al., 2017). The control variables have not changed in their influence and significance. The high value of R2 (0.705) is in line with previous research on the value relevance of IR by Baboukardos (2016) and Barth et al. (2017). The measured effect of IR on firm value is slightly larger than the effect sustainability disclosure has on firm value, though this difference is very limited. Model 3 thereby provides support for hypothesis 2.

Model 4 tests hypothesis 3 concerning the moderating effect of the use of IR for disclosing sustainability performance. As shown in table 3, both sustainability disclosure and IR are positively and significantly at 10% correlated with firm value (β=0.006, p<0.1; β=0.002, p<0.1). The positive interaction term of sustainability disclosure*IR is however not significant. One can therefore not conclude that the use of IR for sustainability disclosure increases the effect of sustainability disclosure on firm value. Additional tests further discussed in paragraph 4.2 do however show a positive significant moderating effect of IR on firm value.

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Model 5 tests hypothesis 4 concerning the comparison between mandatory and voluntary IR, and the possible different influence it might have on firm value. The average market value of a South African firm for which it is mandatory to disclose an integrated report is €5.672 billion, for a voluntary disclosing firm the average market value is €22.687 billion. This is a large difference which stresses the importance of including firm size as a control variable when inquiring the difference between mandatory and voluntary IR. The conducted research on South Africa finds that mandating IR adoption and its effect on firm value is negative and significant at 1 percent (β=-1.696, p<0.01). Concerning the moderating effect of

IR on the effect of sustainability disclosure on firm value, there exists a negative and significant relation as well (β=-2.642, p<0.01). Japan shows a significant positive relation at 1 percent

(β=1.013, p<0.01) for the effect of voluntary IR on firm value, and also a significant positive

effect at 1 percent (β=1.097, p<0.01) for the moderating effect of IR. Spain also shows a

significant positive relation (β=2.651, p<0.01) for the effect of voluntary IR on firm value and

for the moderating effect of IR on sustainability disclosure and firm value (β=1.153, p<0.05).

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voluntary IR and firm value. This effect is significant negative for mandatory IR and significant positive for voluntary IR.

4.3 Additional analyses

4.3.1 Endogeneity tests

Although the results in table 3 show the positive effect of IR and its positive moderating effect, the causality of this relation might be questioned and reversed. Therefore the below described additional analyses are performed.

Lagged variables

According to Zhou et al. (2017) one way to ascertain that the results are not driven by a potential endogenous relation is through the use of lagged variables. In the main analysis the independent variables sustainability performance, IR quality score and CSR performance are lagged with one year. To verify whether the found results were influenced by the use of these lagged variables, an additional test is performed without the use of lagged variables. Appendix 3 shows that the results without the use of lagged variables are similar to the results of the main research. This proves that the use of lagged variables did not influence the results of this study. The found results still support hypotheses 1 and 2, and do not find significant results to support hypothesis 3.

4.3.2 Additional sample Spain

The results presented in table 3 are based on research based in three countries; South Africa, Japan and Spain. Using different countries with different laws, regulations and economic conditions can lead to less clear results. Besides this, the main research was conducted by using a two-year sample. The year in which IR was introduced, or significant IR regulation was initiated, and the succeeding year to measure the effect of IR adoption and the effect the quality of the integrated report has on firm value. Interesting additional research might therefore be to test whether the quality of an integrated report increases overtime and whether this has an effect on firm value (Vaz et al., 2016).

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In addition to the already researched years of 2016 and 2017, this test also includes the prior years 2014 and 2015. The European Parliament directive on non-financial reporting2 became effective in 2014, which mandates EU member states to comply or explain with the mandated principles (Camilleri, 2018). This directive is seen as an important milestone concerning non-financial reporting in the EU, and 2014 was therefore determined as the first year of this additional test (de Villiers et al., 2016; Camilleri, 2018). All research conditions, control variables remain the same to the main research. The average IR score in 2014 was 43.74, this increased to 48.19 in 2015 and even to 51.74 in 2016, this proves that the quality of integrated reports disclosed by Spanish firms increases overtime.

Since this research is based on a sample of 4 succeeding years, a Hausman test is necessary in order to determine the correct research approach. The conducted Hausman test showed evidence in favor of the fixed-effects model instead of a random-effects model (p<0.01), therefore a fixed-effects regression model is used in this study.

The results of the research are shown in table 4 below. The results are in line with the results of the main research, thereby also accepting hypothesis 1 and 2. Impeding that sustainability disclosure has a positive effect on firm value, and that also higher quality IR leads to higher firm value. An interesting addition to the main research is that this extended sample of Spanish firms also proves that IR is of additional value to sustainability disclosure. This analysis determines that the significant positive moderating effect (β=0.002, p<0.01) exists, and that IR does enhance the effect of sustainability disclosure on firm value.

2 The European Parliament mandated Directive 2014/95/EU on non-financial reporting, that was subsequently

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4.3.3 Sample robustness test

Alternative measurement IR quality

Since this research is based on hand collected data on IR quality, which can raise objectivity concerns in the determination of the quality of an integrated report. Although a significant part of the sample was double coded by two different persons with a background

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in accounting, and the used coding framework limits the effect of subjectivity one can not diminish these possible effects. In order to determine the robustness of the research, the hand collected data is replaced by database data.

Asset4 offers an IR score, which was used to check the robustness of the models 3 and 4, since those models included the hand collected IR score. The hand collected IR score was replaced with the Asset4 IR score, all other variables remained the same. As shown in appendix 3, the results of this research on models 3 and 4 are in line with the initial results based on the hand collected IR quality scores. There remains a positive and significant relation between IR and firm value ((β=0.002, p<0.04), one can therefore accept hypothesis 2. The found results are also in line with the previous results on hypothesis 3, although the IR quality score retrieved from Asset4 shows a more profound positive significant effect

(β=0.018, p<0.01). The variable SUSTAIN*IR indicating the moderating effect of IR on firm value is positive though not significant.

Larger sample

The use of hand collected data also restricts the amount of observations in the sample. A larger sample, consisting of only data from databases is used to check the models. The larger sample is based on the entire JSE, Nikkei 225 and BME index, not solely on the 75 biggest firms of each index. The sample consists of 1,093 observations, after deleting incomplete observations and adjustment to lag variables. The results of the re-estimated models are shown in appendix 5. The analyses show the same results as the main research, although the significance of some control variables increased. The findings of the main analyses are therefore robust for this larger sample.

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5. Conclusion and discussion

The aim of IR is to provide a better link between a firm’s strategy, business model and value creation and disclosing this information in a more relevant way to capital providers and other stakeholders (IIRC, 2013; de Villiers et al., 2017).

This chapter is divided into three paragraphs. The first paragraph will conclude and discuss the main findings of this study, and will thereby answer the research question. The second paragraph discusses the theoretical and practical implications of this research. The last paragraph describes limitations of this study and provides some recommendations for future research.

5.1 Findings

The aim of this study is to research the value relevance of sustainability disclosure and IR for the determination of firm value. The findings of this research are based on 150 hand collected observations from firms based in three countries, South Africa, Japan and Spain, spanning a time period of 2010-2016. The formulated hypotheses were tested by using various regression models.

The first hypothesis focuses on the relation between the quality of sustainability disclosure and firm value. The results show a positive and significant relation, indicating that sustainability disclosure of higher quality leads to higher firm value. The first hypothesis can thereby be accepted. These findings are in line with existing literature of Plumlee et al. (2015) and Lee et al. (2015). This positive relation can be explained by the agency theory. By disclosing more information, firms decrease the information asymmetry between investors and the management of the firm. This reduces the agency problem and related agency costs, which eventually leads to an increase in firm value (García-Sanchez & Noguera-Gamez, 2017)

The second hypothesis focuses on the causal relation between the quality of an integrated report and firm value. The results show a positive significant relation, in line with the second hypothesis. The quality of integrated reporting has a positive effect on firm value, this is in accordance with studies of Setia el al. (2015) and Barth et al. (2017). These results are

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