THE VALUE RELEVANCE OF GHG DISCLOSURE AND INTEGRATED REPORTING.

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THE VALUE RELEVANCE OF GHG DISCLOSURE AND

INTEGRATED REPORTING.

Master thesis, MSc Accountancy

University of Groningen, Faculty of Economics and Business

June 19th ₂₀₁₈ ANGELA BRAND S2729393 Mr. Boldewijnlaan 3 7951 AC Staphorst tel: +31 6 11 50 55 07 e-mail: a.brand.6@student.rug.nl Word count: 11 901 Supervisor university: Dr. T.A. Marra Supervisor field of study: Gerrit-Jan Kreeftenberg MSc

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Page 1 | Abstract Angela Brand

The value relevance of GHG disclosure and integrated reporting

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BSTRACT

Abstract: This study investigates the value relevance of GHG disclosure and integrated reporting among firms worldwide. Accordingly, the sample consists of worldwide data from 937 firms in 40 countries for the period 2013-2016. Panel data regression model with fixed effects are used to investigate the value relevance of the extent of GHG disclosure, integrated reporting and the moderating effect of the use of integrated reporting for GHG disclosure. Using a modified Ohlson model, this study was unable to provide significant results for the relationship between GHG disclosure and firm value. However, the extent of integrated reporting is proved to be significantly influencing firm value. Furthermore, the study provides evidence for the enhancing effect of the use of integrated reporting for GHG disclosure. The investigation of this moderating effect is the main contribution of this study, since this study provides the first empirical analysis for this value-enhancing effect and it therefore provides additional evidence to the existing literature. The evidence of the value relevance of integrated reporting and the use of integrated reporting for GHG disclosure is relevant for practitioners since it can help them in value creating decision-making about reporting and regulations.

Keywords: GHG disclosure, integrated reporting, firm value, value relevance, Ohlson model, agency theory, stakeholder theory, legitimacy theory

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University of Groningen Table of content | Page 2

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ABLE OF CONTENT

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1. INTRODUCTION ... 3

SCIENTIFIC CONTRIBUTION AND PRACTICAL RELEVANCE ... 4

2. THEORY ... 4 2.1THEORETICAL FRAMEWORK ... 5 2.1.1 Agency theory ... 5 2.1.2 Stakeholder theory ... 6 2.1.3 Legitimacy theory ... 7 2.1.4 Integration of theories ... 7

2.2BACKGROUND LITERATURE AND HYPOTHESES DEVELOPMENT ... 9

2.2.1 Firm value ... 9

2.2.2 GHG disclosure and firm value ... 10

2.2.3 Integrated reporting and firm value ... 11

2.2.4 Moderating effect of GHG disclosure and integrated reporting ... 12

2.2.5 Conceptual model... 13

3. RESEARCH METHODOLOGY... 14

3.1SAMPLE ... 14

3.2DATA COLLECTION OF VARIABLES ... 14

3.3DEPENDENT VARIABLE ... 15 3.4INDEPENDENT VARIABLES... 16 3.4.1 Test variables ... 16 3.4.2 Control variables ... 17 3.5RESEARCH DESIGN ... 18 3.5.1 Fixed effects ... 18 3.5.2 Lagged variables ... 18

3.5.3 Robust standard errors ... 19

3.5.4 Data adjustments ... 20 4. RESULTS ... 20 4.1DESCRIPTIVE STATISTICS ... 20 4.2MAIN FINDINGS ... 21 4.3ADDITIONAL ANALYSES ... 23 4.3.1 Endogeneity concerns ... 23

4.3.2 Checking multicollinearity issues ... 24

4.3.3 Sample robustness check ... 24

4.3.4 Additional test reporting scope ... 25

4.3.5 Additional test differences between countries ... 25

5. CONCLUSION AND DISCUSSION ... 26

5.1FINDINGS ... 26

5.2THEORETICAL AND PRACTICAL IMPLICATIONS ... 27

5.3RESEARCH LIMITATIONS AND FURTHER RESEARCH ... 27

REFERENCES ... 29

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Page 3 | Introduction Angela Brand

1. I

NTRODUCTION

Climate change issues have been a considerable debated topic during the last years (Borghei, Leung & Guthrie, 2016). One of the major contributing factors to climate changes is the emission of greenhouse gases (GHG), hence stakeholders increasingly request absolute data and transparency about GHG (Liesen, Hoepner, Patten & Figge, 2015). The increased awareness and stakeholders’ demands resulted in more voluntary disclosure about GHG and other sustainability topics, which enables stakeholders to judge the performances of firms towards climate changes (Ghomi & Leung, 2013; Liesen et al., 2015). Clarkson, Fang, Li & Richardson (2013) state that GHG disclosure will enhance firm value, because the information facilitates investors in predicting expected future financial performances. The investors can enhance a firm’s stock price based on the disclosed information and strategy. This is confirmed by Plumlee, Brown, Hayes & Marshall (2015), their study shows that environmental disclosure, such as GHG disclosure, is positively associated with firm value, because of reduced information asymmetry and increased transparency.

GHG information can be disclosed in mandatory financial reports and in sustainability reports, which are becoming more common due to increased stakeholder demands (Depoers, Jeanjean & Jérome, 2016; Zhou, Simnet & Green, 2017). Another emerging style of reporting of non-financial information is the use of integrated reports. Integrated reporting is a relatively new concept, which is introduced because of criticism on separate reports, due to difficulties in understanding and combining these reports (García-Sánchez & Noguera-Gámez, 2017). Integrated reporting provides a combination of different types of financial and non-financial information about creating value and firm performances in a single, concise report (Maroun, 2017). It connects financial information with previously disconnected sustainability information, which increases the relevance of information and improves the investors’ assessments of firm performances and risks (Baboukardos & Rimmel, 2016). Integrated reporting can reduce information asymmetry and improve transparency, which subsequently improves the investors’ ability to allocate the capital more efficiently and productively (Zhou et al., 2017; IIRC, 2013). The study of Lee & Yeo (2016) shows that integrated reporting is positively associated with firm valuation, because of the improved information quality available to investors.

As follows, the studies show that GHG disclosure is positively associated with firm value, because of reduced information asymmetry and increased transparency (Plumlee et al., 2015; Clarkson, et al., 2013). Integrated reporting also has the benefits of reduced information asymmetry and increased transparency (Burke & Clarke, 2016). Additionally, integrated reporting has the benefit of improving the information quality by connecting information, which can subsequently increase firm value (Lee & Yeo, 2016). However, despite these benefits it is unclear whether the use of integrated reporting for the content of GHG disclosure will enhance the effect on firm value. The purpose of this study is to investigate to what extent this moderating effect is value-enhancing. Therefore, this study investigates to what extent GHG disclosure and integrated reporting influences firm value and to what extent the use of integrated reporting for GHG disclosure results in an enhanced effect on firm value. The research question is:

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University of Groningen Theory | Page 4

To what extent is firm value influenced by the extent of GHG disclosure and integrated reporting and to what extent is the influence on firm value enhanced by the use of integrated reporting for GHG disclosure?

Scientific contribution and practical relevance

The main contribution of this study is the investigation of the moderating effect of the use of integrated reporting for GHG disclosure. To the best of my knowledge, this study provides the first empirical analysis of this moderating effect. Through GHG disclosure and integrated reporting firms provide more transparency and reduced information asymmetry, which favourably contributes to value creation (Li, Yang & Tang, 2015; Lee & Yeo, 2016). Furthermore, integrated reporting increases the information relevance by connecting previously disconnected pieces of information (Baboukardos & Rimmel, 2016). This study investigates to what extent the use of integrated reporting for the GHG disclosure will enhance the positive effect on firm value. Therefore, the findings of this study provide additional evidence for the existing literature that tries to understand the consequences of GHG disclosure and integrated reporting.

Moreover, this study uses a worldwide sample of 1,822 observations from 937 firms in 40 countries. Because integrated reporting is a relatively new and upcoming phenomenon, studies about this subject are not very common. Most studies have focused on integrated reporting in South-Africa, because this country first mandated integrated reporting (Serafeim, 2015). However, because of the focus on a single country, these studies have limited generalizability. Therefore, a worldwide sample is the major task for future research (Velte & Stawinoga, 2017). This study addresses this task by using a worldwide sample, which provides additional international evidence. The chosen sample provides a broad representation of GHG disclosure and integrated reporting worldwide, which results in a higher generalizability of this study (Velte & Stawinoga, 2017).

This study is also practically relevant, because it provides practitioners insights into the extent to which GHG disclosure and integrated reporting have effect on firm value. This evidence can help firms in deciding about their way of reporting and it can help regulators in decisions regarding regulations, since the study shows which reporting practices are value-relevant. This practical relevance is confirmed by De Villiers, Venter & Hsiao (2017), who states that insights into the association between integrated reporting and firm value could be of interest to firms and regulators.

The remainder of this paper proceeds as follows. Section two provides an outline of the theoretical background information related to the research question, resulting in the development of three hypotheses. In the third section the research methodology is described, followed by the results in section four. The fifth section concludes and discusses the findings, implications and limitations.

2. T

HEORY

This section is divided into two paragraphs. The first paragraph provides a theoretical framework, which considers three theories contributing to this study. In the second paragraph, background literature is provided, resulting in the development of three hypotheses.

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Page 5 | Theory Angela Brand

2.1 Theoretical framework

Despite the increasing attention, multiple studies, and proven benefits, GHG disclosure and integrated reporting is still voluntary for most firms (Luo, Lan & Tang, 2012; Zhou et al., 2017). Benefits such as reduced information asymmetry and decreased cost of capital could be reasons for firms’ decisions regarding GHG disclosure and integrated reporting (Clarkson et al., 2013; García-Sánchez & Nuguera-Gámez, 2017). According to Cormier, Magnan & Van Velthoven (2005), voluntarily providing more transparency can only be explained using a multi-tiered theoretical framework instead of a single theory, because the decision for providing voluntary transparency is a reaction to different levels of influence. In order to include these different levels of influence the agency theory, stakeholder theory and legitimacy theory will be considered, as suggested by Cormier et al. (2005). Velte & Stawinoga (2017) also state that these theories are the main theories explaining integrated reporting on a market level analysis. The agency theory will explain shareholders’ demand for more relevant information, while the latter two will provide insights into the external reasons for the reporting practices. Other theories explaining the internal motives for GHG disclosure and integrated reporting are out of scope, since this study focuses on the external motives and consequences of GHG disclosure and integrated reporting.

2.1.1 Agency theory. The agency theory will provide insights into the reasons why shareholders are demanding more relevant information. This demand can be fulfilled through GHG disclosure and integrated reporting.

Overview. Agency theory mainly relates to the relationship between the principal and agent (An, Davey & Eggleton, 2011). Jensen & Meckling (1976, p. 308) define this principal-agent relationship as: ‘a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent’. The relationship between the shareholders and managers of a firm is mostly considered as such principal-agent relationship, due to the separation of ownership and control (Jensen & Meckling, 1976). Because both parties have their own interests, specifically maximization of their own returns, it is likely that conflicts between them will arise, the so-called agency problem (An et al., 2011).

Information asymmetry is a key concept of the agency theory, which arises when one party has an information advantage over the other party (An et al., 2011). Managers have superior information in relation to outsiders of the firm, such as shareholders and investors (Ghomi & Leung, 2013). Jensen & Meckling (1976) argue that managers could make decisions in their own interests, due to this information advantage. Because shareholders want the managers to maximise their wealth and interest, they want to monitor and control the managers. Furthermore, the managers have contractual incentives to show to the shareholders that they are operating in their interests (Jensen & Mackling, 1976). This monitoring and bonding could be executed using GHG disclosure and integrated reporting.

Agency theory applied. Because of the information asymmetry and increased attention for climate changes, increased demand for GHG information exists (Ghomi & Leung, 2013). An et al. (2011) argue that voluntary disclosure can reduce information asymmetry, which improves the principal-agent

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relationship. Beyer, Cohen, Lys, & Walther (2010) also argue that GHG disclosure can be an important mechanism, since it reduces information asymmetry and it could limit the managers to act in their own interests. Integrated reporting also provides more transparency and it reduces the information asymmetry (García-Sánchez & Noguera-Gámez, 2017). Because of the combination of various information sources and the emphasis on the connection between information, integrated reporting results in a reduction of information asymmetry among managers and stakeholders, which subsequently reduces the agency problem and related agency costs (Pavlopoulus, Magnix & Iatridis, 2017). Hence, according to the agency theory, GHG disclosure and integrated reporting can be explained because of reduced information asymmetry and improved principal-agent relationship. The increased information quality and connection between information can be helpful in getting more insights and knowledge of the performance of a firm, which reduces the agency problem and related agency costs (Pavlopoulus et al., 2017). This can subsequently lead to an increase in firm value.

2.1.2 Stakeholder theory. The stakeholder theory is one of the theories that can explain external reasons for GHG disclosure and integrated reporting.

Overview.Following the stakeholder theory, firms have a responsibility to all their stakeholders instead of just their shareholders (Barsky, Hussein & Joblonsky, 1999). Freeman (1984) defines stakeholders as ‘any group or individual who can affect or is affected by the achievement of the organization objectives’. Studies based on the stakeholder theory often refer to accountability, which entails that firms have a responsibility towards their stakeholders to protect their rights and help them in making right decisions (An et al., 2011). Maltby (1997) argues that stakeholders control the resources of a firm, which results in a certain influence on the firm’s existence. She also argues that firms who consider their stakeholders more, perform better. Hence, following the stakeholder theory, a firm should take account of the interest of all its stakeholders (Freeman, 1984).

Stakeholder theory applied. A possibility to discharge accountability and consider all stakeholders is through the disclosure of sustainability reports (An et al., 2011; Comyns, 2016). Because stakeholders are affected by the consequences of climate changes, they impose pressure on firms to disclose environmental information (Ghomi & Leung, 2013). Especially absolute levels on GHG emissions are required by stakeholders, because it enables them to judge a firms’ performances on climate changes (Liesen et al., 2015). Firms respond to this pressure by increased GHG disclosure, which results in increased transparency (Freedman & Jaggi, 2005). Integrated reporting is also introduced because of stakeholders demand for continuous transparency (Pavlopoulus et al., 2017). Integrated reporting addresses this demand by providing a better connection between a firm’s strategy, business model and value creation (Lee & Yeo, 2016). This is especially beneficial for the shareholders and investors, since it allows them to better understand the firm’s risk, which can result in better investment decisions (García-Sánchez & Noguera-Gámez, 2017). Hence, through GHG disclosure and integrated reporting firms show accountability to a wider group of stakeholders, instead of just shareholders (Emesh & Songi, 2014). These reporting practices provide more transparency and improve the stakeholder relationships, which can lead to improved

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investment decisions and subsequently an increase in firm value (Lee & Yeo, 2016; Barth, Cahan, Chen & Venter, 2016).

2.1.3 Legitimacy theory. The stakeholder and legitimacy theory overlap to a certain extent, both can explain GHG disclosure and integrated reporting using firms’ positions in the broader societal system. Following the stakeholder theory, firms should be accountable to their stakeholder groups, the legitimacy theory extends this view by looking at the society as a whole.

Overview. Legitimacy theory suggests there is a social contract between the firm and 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 (Suchman, 1995; Tilling, 2004). Firms should show their operations are ‘desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions’, as a way of legitimisation (Suchman, 1995, p. 574). The ability to legitimise operations is important for the long-term existence of a firm (Cormier et al., 2005). Lack of legitimacy can result in irreversible economic effects and it can inhibits a firm’s ability to attract important resources (Mäkelä & Näsi, 2010; Tilling, 2004). Legitimacy is a dynamic concept because the expectations of society can change, so that what was once acceptable behaviour, could be no longer deemed acceptable (Deegan, 2002). Because it is difficult to continually achieve congruence between the expectations of society and the operations of a firm, a legitimacy gap often exists (An et al., 2011).

Legitimacy theory applied. One way to mitigate the legitimacy gap is by providing transparency through disclosure, as suggested by Lindblom (1994). GHG disclosure and integrated reporting can be used to provide this transparency. It can show that the firm operates in congruence with the society expectations, through which legitimacy can be gained (Suchman, 1995). Given the latest attention on GHG issues, it is reasonable that firms try to legitimise their operations related to GHG through GHG disclosure (Ghomi & Leung, 2013). Furthermore, society is increasingly demanding integrated reporting about financial, environmental and social topics (Stewart, 2015). Therefore, integrated reporting can also be an effective tool to gain legitimacy (Velte & Stawinoga, 2017). Through GHG disclosure, especially when this is disclosed using integrated reporting, firms try to show that they are meeting the society expectations about environmental and social goals, and accordingly legitimising their performances (Lindblom, 1994). Through the disclosed and connected information the society and stakeholders can analyse if the firm operates in congruence with their expectations (Velte & Stawinoga, 2017). When it is in congruence, legitimacy can be gained (Suchman, 1995). This legitimacy is important for the long-term existence of a firm and the ability to attract resources (Cormier et al., 2005; Tilling, 2004) and subsequently for the firm value.

2.1.4 Integration of theories. As argued by Cormier et al. (2005), voluntary disclosure can only be explained using several theories, because it is a reaction to different levels of influence. In this study the agency theory, stakeholder theory and legitimacy theory are used to explain the motivations for GHG disclosure and integrated reporting. In this section the interrelation between the concepts of these theories will be described, followed by the resulting model showing these interrelations.

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Agency theory and stakeholder theory. Agency theory is mainly concerned with the principal-agent relationship, which often includes information asymmetry between both parties. Stakeholder theory expands the agency theory by also considering other stakeholder groups. When integrating the agency theory and stakeholder theory, it can be argued that GHG disclosure and integrated reporting reduces information asymmetry between the firm and all its stakeholders. This can improve the information environment, which can subsequently improve the firm’s relationship with various stakeholder groups, leading to an increase in firm value.

Stakeholder theory and legitimacy theory. The stakeholder theory considers firms’ stakeholder groups, while legitimacy theory has a broader context and considers the society as a whole. Integrating those two theories results in understanding the interaction between the firm and the societal system in which it operates. Through GHG disclosure and integrated firms show their accountability to their stakeholder groups and the society as a whole, which is also a manner to gain and maintain their legitimacy.

Agency theory and legitimacy theory. Agency theory argues that a firm should act in congruence with the shareholders interest, and the legitimacy theory argues that a firm should operate in congruence with society’s expectations, therefore both theories are about congruence and considering other parties. GHG disclosure and integrated reporting can reduce the information asymmetry and it can gain and maintain the legitimacy of a firm, which is needed for the continuity of a firm. This continuity can enable the firm to maximize the wealth and return of its shareholders within the borders established by other stakeholders and society. Hence, the integration of agency theory and legitimacy theory shows that legitimization of a firm’s operations is needed to exist and continue as a firm. This continual continuation is needed to be able to act in the best interest of shareholders.

Integrated model of theories. Because the theories are interrelated, they support each other in explaining the motivations for GHG disclosure and integrated reporting, as argued by Cormier et al. (2005). These motivations for GHG disclosure and integrated reporting can be summarized in three premises (An et al., 2011):

1. It can reduce the information asymmetry between the firm and its various stakeholders. 2. It can discharge the accountability the firm has towards its various stakeholders.

3. It can gain and maintain legitimacy through showing its operations are in congruence with society’s expectations.

Based on the described relationships between the theories, an integrated theoretical model can be established, as shown in figure 1. This model describes the key concepts of the theories and the interrelated concepts between theories. This established model is based on, but not similar to, the model of An et al. (2011). The model of An et al. (2011) uses an additional theory, describes some other key concepts, and provides some different interrelated concepts, since it is not related to GHG disclosure and integrated reporting.

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Figure 1: Integrated model of theoretical framework

2.2 Background literature and hypotheses development

2.2.1 Firm value. The purpose of this study is to investigate the value relevance of GHG disclosure, integrated reporting and the use of integrated reporting for GHG disclosure. Therefore, the concept of firm value will be described first.

The semi-strong form of the Efficient Market Hypothesis assumes that investors process all information that is publicly known, needed for their investment decision. When new information will become available, investors will revise their beliefs about future performances of the firm, so that prices fully reflect all information that is publicly known about the firm (Fama, 1970). According to the IASB/IFRS Conceptual Framework1_{(2018), one objective of financial reporting is to provide information that can be useful for the} decisions of investors, in their capacity as capital providers. Information is decision useful when it is relevant and it faithfully represents what it wants to represent (IASB/IFRS, 2018). This study aims to investigate whether the information provided by GHG disclosure and integrated reporting is value-relevant for firms. Value relevance can be defined as ‘the ability of accounting or non-accounting measures to capture or summarize information that affects equity value’ (Hassel, Nilsson & Nyquist, 2005, p. 45). The value relevance of information can be estimated by testing the relationship between stock market values and disclosed information, because the stock market values represent the investor’s use of information (Holthousen & Watts, 2001). In this study the valuation model of Ohlson will be used to measure the firm value, which considers the relation between the market value, book value, income and other non-financial information (Ohlson, 1995). This model is often used in value relevance studies (Leccadito & Veltri, 2014), because the required variables are available in financial statements, and therefore capital market information is not required for the estimation of the firm value.

1_{International Accounting Standards Board (IASB) and International Financial Reporting Council (IFRS) developed a conceptual} framework based on IFRS standards which can assist in developing and interpreting accounting policies and standards.

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2.2.2 GHG disclosure and firm value. In this section the relationship between the extent of GHG disclosure and firm value is described. First, background information about GHG disclosure is provided, including a link to the described theories. Secondly, literature about the relationship between GHG disclosure and firm value is described, resulting in hypothesis 1.

GHG disclosure. Global warming is indisputable and many climate changes are unavoidable (IPCC, 2014) 2_{. According to Liesen et al. (2015) and GRI}3_{(2016a), scientific evidence shows that GHG emissions} are a major contributor to climate changes and global warming. GHG are the atmospheric concentrations of carbon dioxide, methane and nitrous oxide (IPPC, 2014). The GHG levels have been increasing since the pre-industrial era, and reached record highs in 2017 (IPCC, 2014; Cheng & Zhu, 2018). Despite these alarming climate changes, GHG emissions are largely unregulated and GHG disclosure is not mandated in many countries. However, many firms choose to voluntarily disclose GHG information (Luo, Lan & Tang, 2012). Voluntary disclosure can be defined as ‘reporting that are not required by accounting standards’ (Ghomi & Leung, 2013, p. 114). Ghomi & Leung (2013) used the GRI guidelines as basis for the measurement of GHG disclosure, since it presents detailed principles for sustainability disclosure. Moreover, these guidelines are the most widely used guidelines for non-financial reporting (de Klerk & de Villiers, 2012). Therefore, this study measures GHG disclosure using a scoring index, based on one of the GRI guidelines. GRI 305 explicitly presents reporting requirements on the topic of emissions, including requirements for GHG disclosure (GRI, 2016b). The first three topic-specific disclosures from GRI 305 are used for the scoring index of this study, as shown in appendix I. These disclosures consider the reporting about Scope 1, Scope 2, and Scope 3 GHG emissions, including the amount of emissions, gases, base year, methodology, and consolidation.

Based on the previous described theories, GHG disclosure can be explained: GHG disclosure reduces information asymmetry and agency costs (agency theory), it is a way of showing accountability to all relevant stakeholders and responding to stakeholder pressure (stakeholder theory), and it is a way of gaining legitimacy from society (legitimacy theory). These benefits can all contribute to an increase in firm value.

Development of hypothesis 1.The study of Li, Liu, Tang & Xiong (2017) shows that GHG disclosure is beneficial for a firm, because the disclosed information decreases the cost of equity financing. Furthermore, Fosu, Sanso, Ahmad & Coffie (2016) argue that information asymmetry negatively impacts firm value, accordingly, when information asymmetry is reduced, firm value could increase. The findings of Plumlee et al. (2015) support this by showing that environmental disclosure is positively associated with firm value, because of reduced information asymmetry and risk. The study of Clarkson et al. (2013) also shows that voluntary environmental disclosure improves the prediction of financial performances. The disclosed information enhances the credibility for investors of a firm, which subsequently increases the

2_{Intergovernmental Panel on Climate Change (IPCC) is a scientific and intergovernmental body providing an objective, scientific} view on climate changes and the impacts.

3_{The Global Reporting Initiative (known as GRI) is a global organization providing international independent guidelines for} sustainability reporting. These guidelines represent the global best practices for reporting on a range of economic, environmental and social impacts. Furthermore, the GRI guidelines supports companies to protect the environment and improve society.

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firm value. The results of Clarkson et al. (2013) reveal that disclosure reduces information asymmetry about environmental performances, which subsequently lowers the cost of capital. Beyer et al. (2010) complement to these findings by stating that firms can reduce estimation risks related to investments by providing more disclosure, which will subsequently reduce the cost of capital. Griffin, Lont & Sun (2017) examined the responses of shareholders to voluntary GHG disclosure, their results show that a significant positive stock market response occurs when a firm discloses GHG related information. Thus, their study also demonstrates the positive relation between GHG disclosure and value.

To summarize, risks related to investments will decrease through GHG disclosure, because of the increased transparency and reduced information asymmetry. Furthermore, GHG disclosure will help in predicting the financial and environmental performances, which can subsequently increase firm value. Based on the before mentioned studies and findings, the following hypothesis can be developed:

Hypothesis 1: The extent of GHG disclosure has a positive influence on firm value.

2.2.3 Integrated reporting and firm value. In this section the relationship between the extent of integrated reporting and firm value is described. First, background information on integrated reporting is presented, including a link to the described theories. Secondly, prior literature is provided about the relationship between integrated reporting and firm value, resulting in hypothesis 2.

Integrated reporting. Gaining a clear holistic picture of firms is difficult for stakeholders when firms use separate reports, which do not connect the financial and non-financial aspects (Jensen & Berg, 2012). To ease these difficulties and improve the abilities to analyse and use information, integrated reporting is introduced (García-Sánchez & Nuguera-Gámez, 2017). In 2013, the International Integrated Reporting Council (IIRC)4_{released an integrated reporting framework to guide integrated reporting practices} worldwide. According to the IIRC (2013, p. 33), integrated reporting can be defined as ‘a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation’ . This integrated report provides concise information about the strategy and performances of a firm in the context of its external environment. (IIRC, 2013). Integrated reporting increases the use of non-financial information by users, which could be ignored when it would be reported separately (Zhou et al., 2017). Furthermore, it increases the information relevance by connecting previously disconnected pieces of information (Baboukardos & Rimmel, 2016). Through integrated reporting a firm aims to ‘improve the quality of information available to providers of financial capital’ (IIRC, 2013, p. 2). Integrated reporting is supported by an increasing amount of academics (i.e. Serafeim, 2015; Zhou et al., 2017), auditing firms (PwC, 2014; KPMG, 2013), interest groups (GRI, 2016a; IIRC, 2013) and firms (e.g. Philips, ING, NovoNordisk), which endorses the additional value of using integrated reporting.

4_{The IIRC was founded in 2010 to set the framework for integrated reporting guiding integrated practices worldwide. The IIRC is} a global coalition of regulators, investors, companies, standards setters, the accounting profession and NGOs. The framework provides principle-based guidance for firms who want to use integrated reporting. It provides seven guiding principles and eight content elements an integrated report should contain. (IIRC, 2013)

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In this study the extent of integrated reporting will be tested by examining the extent to which a firm shows and communicates that it integrates economic, environmental, social, and governance dimensions. Integrated reporting can be explained using the previously described theories: it can reduce information asymmetry and the agency problem (agency theory), it provides benefits for all stakeholders (stakeholder theory), and it can be used to show the firm’s operations are in congruence with society’s expectations (legitimacy theory). These benefits can all contribute to an increase in firm value.

Development of hypothesis 2. Zhou et al. (2017) argue that investors and capital market providers rely on the provision of high-quality and value-relevant information from firms, to ensure efficient allocation of resources. Their results show that integrated reporting is relevant to investors, since it can help investors in explaining the connection between financial and financial information, and it increases the use of non-financial information from which the non-financial effect could be ignored when it was reported separately. Through integrated reporting firms can simplify their message to the stakeholders, resulting in more transparency (Eccles & Krzus, 2010). Pavlopoulus et al. (2017) show that firms using integrated reporting have lower agency costs and reduced information asymmetry. Due to the improved quality of information available, investors can allocate their capital more efficiently and productively. Additionally, García-Sánchez & Noguera-Gámez (2017) argued that integrated reporting reduces information asymmetry and improves the information environment. The more accurate information allows investors to better predict and estimate firms’ risks, resulting in better investment decisions.

Moreover, Baboukardos & Rimmel (2016) argue that integrated reporting improves investors’ assessments of firm performances and risks. Lee & Yeo (2016) demonstrated that integrated reporting is positively associated with firm valuation, because of the improved quality of information enabling better allocation of capital. Furthermore, the study of Barth et al. (2016) show that firm value increases as a result of investors’ better understanding of a firm’s strategy and future performances. Integrated reporting helps investors in estimating the firm’s performances, which can lead to improved investment decisions, which can subsequently result in increased firm value.

Concluding, integrated reporting can be beneficial for firms, because it improves the information quality and transparency to stakeholders. This subsequently improves the investors’ assessment of firms’ performances. Moreover, the studies confirm that integrated reporting is decision useful for investors, since it helps them in allocating their resources and making investment decisions more efficiently. Based on the before mentioned studies, findings and benefits, the following hypothesis can be developed:

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

2.2.4 Moderating effect of GHG disclosure and integrated reporting. In addition to the expected direct influence of GHG disclosure and integrated reporting on firm value, integrated reporting can moderate the effect of GHG disclosure on firm value. A moderating variable can be defined as ‘one which systematically modifies either the form and/or strength of the relationship between a predictor and a criterion variable’ (Sharma, Durand & Gur-Arie, 1981, p. 281). When using integrated reporting as a moderating variable, the

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influence of GHG disclosure on firm value can be enhanced when the firm uses integrated reporting for GHG disclosure.

Development of hypothesis 3. The study of Li et al. (2017) shows that investors believe that information asymmetry will be lower for firms with more GHG disclosure. Furthermore, the investors assume that the transparency obtained by GHG disclosure can provide decision-making basis for their investments. Clarkson et al. (2013) also show that GHG disclosure can be decision-relevant, because it increases transparency and it can help them in predicting future financial performances.

Studies advocating integrated reporting argue that it improves the quality and relevance of disclosed information. Integrated reporting provides more value-relevant information and information that was not previously public knowledge, which could improve the corporate relations and reduce information asymmetry (Burke & Clarke, 2016). García-Sánchez & Noguera-Gámez (2017) suggest that integrated reporting is valued by investors when making investment decisions, since it reduces information asymmetry and improves the information value. Their results confirm the decisions usefulness of integrated reporting for investors. As argued by Zhou et al. (2017), integrated reporting facilitates in reducing information asymmetry, because it provides more information on firms’ performances, it expands and connects information available and it reduces uncertainty in assessing firms’ performances. Therefore, integrated reporting can be additional value-relevant since it connects information with previously disconnected information, this subsequently improves the investors’ assessments of firm performances and risks (Baboukardos & Rimmel, 2016).

All abovementioned studies show GHG disclosure and integrated reporting can be beneficial for investors, since it reduces information asymmetry and it increases transparency. When a firm uses integrated reporting for its GHG disclosure, this can further improve transparency and the quality and relevance of the information, which can consequently enhance the influence on firm value. If the disclosed information is connected to other information, it can help investors in better assessing a firm’s performances (Zhou et al., 2017). Therefore, investors can better assess the firm’s risk, which could enable them to allocate their resources more effectively (Baboukardos & Rimmel, 2016). This could subsequently enhance the influence on firm value. Based on the before mentioned studies, the following hypothesis can be developed:

Hypothesis 3: The use of integrated reporting for GHG disclosure enhances the positive effect of GHG disclosure on firm value.

2.2.5 Conceptual model. Based on the developed hypotheses, this study is graphically displayed in a conceptual model, as shown in figure 2.

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Figure 2: Conceptual model

3. R

ESEARCH METHODOLOGY

This section is divided into five paragraphs. In paragraph 3.1 the sample is described, followed by a description of the data collection in paragraph 3.2. Paragraph 3.3 describes the dependent variable, and paragraph 3.4 describes the independent variables, divided in test variables and control variables. The last paragraph provides the research design, including the statistical model that is used.

3.1 Sample

As argued in the relevance section of this paper, this study uses a worldwide sample, because this sample provides additional insights into the consequences of GHG disclosure and integrated reporting. Furthermore, this sample has a high generalizability (Velte & Stawinoga, 2017). The study considers data from 2013 – 2016, because this data provides insights in the extent of integrated reporting since the increased attention for integrated reporting and the release of the integrated reporting framework (IIRC, 2013). This framework provides principle based guidance for firms who want to use integrated reporting, therefore it resulted in more acceptance, understanding and similarity in integrated reporting. Furthermore, the database Datastream provides sufficient and appropriate data until 2016, more recent information is often not completely available in this database. Therefore, four years of data (2013-2016) will be considered in this study.

From the collected data, observations with incomplete data are deleted. Furthermore, firms in the financial sector, such as banks and insurance companies, are excluded from the sample because those firms are often subject to different regulations and disclosure requirements (Gul & Leung, 2004). Moreover, some observations are deleted because of the use of lagged variables. The final sample consists of 1,822 observations from 937 firms in 40 countries, as shown in table 1. This sample provides a broad representation of GHG disclosure and integrated reporting worldwide.

3.2 Data collection of variables

This study is based on archival data, since this is the most appropriate data method because of the large amount of information available over a multiple years. Moreover, because this study focuses on GHG disclosure and integrated reporting on a market level, archival data will provide the most suitable information for the analysis (Velte & Stawinoga, 2017). The needed information for firm value is extracted

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from Datastream5_{, integrated reporting information is extracted from ASSET4}6_{, and GHG data is hand} collected from firms’ annual reports. Using databases enables generating a large sample, which enables the possibility to gain high validity. According to Fogarty (2006), at least one variable should be hand collected as a point of differentiation of the study, to increase the reliability of the study, therefore data for the GHG disclosure variable is hand collected. In the following paragraphs, a description of the dependent and independent variables is provided, including the method of data collection for these variables.

3.3 Dependent variable

The objective of this study is to investigate the value relevance of GHG disclosure and integrated reporting for firms worldwide. To assess the firm value, a modified Ohlson model (Ohlson, 1995) is used, in accordance with the study of Hassel et al. (2005).

The Ohlson model is often used in value relevance studies, because it aims to formalise the relationship between the firm’s market value and accounting values (Leccadito & Veltri, 2014). The Ohlson model shows the relation between the market value, book value, income and other non-financial information (Ohlson, 1995). The Ohlson model has the advantage that the required variables are available in financial statements, therefore capital market information is not needed for the estimation of economic values. The data required for the Ohlson model is extracted from Datastream, which provides financial time series data.

Using the Ohlson model, real income is often measured as residual income (i.e. abnormal earnings), however, this can result in valuation errors deriving from estimations necessary to calculate the residual income. Therefore, the regression models in value relevance studies often substitute residual income with net income (Leccadito & Veltri, 2014). Following this argument, this study will also use the net income as

5_{DataStream is a division of Thomson Reuters, which provides powerful financial time series data. It covers key economic} indicators for 175 countries and 60 markets.

6_{ASSET4 is another division of Thomson Reuters which collects environmental, social and corporate governance data for over} 6,000 firms globally. It collects data about 750 individual items, divided in four pillars: economic, environmental, social & corporate governance.

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measurement of the income component in the Ohlson model, consistent with Hassel et al. (2005). To test whether this choice influences the findings, an additional analyses estimates the model without net income, as described in 4.3.2. Regarding the other non-financial information component, Leccadito & Veltri (2014) argue that this variable is omitted in many studies, because it is regularly unobservable. This variable is any event or news besides the financial information which could be relevant for valuation. In the study of Hassel et al. (2005) environmental performance is used as a proxy for this other information, because some of this relevant non-financial information consists of environmental information. In addition to the environmental information, there is many other information which could be relevant for the valuation, but the intercept of the regression model ‘allows for non-zero mean valuation effects of other valuation relevant information’ (Hassel et al., 2005, p. 61). Based on the explanation of Hassel et al. (2005), this study will use the extent of GHG disclosure and integrated reporting as a proxy for the other non-financial information component. Hence, in this study firm value is measured as market value of a firm, calculated with the book value, the net income and the extent of GHG disclosure and integrated reporting. This results in the following Ohlson regression model:

Where 𝑴𝑽𝒊,𝒕 = the market value at the end of the fiscal year;

𝑩𝑽𝒊,𝒕 = book value per share at the end of the fiscal year; 𝑵𝑰𝒊,𝒕 = net income at the end of the fiscal year; and

𝝂𝒊,𝒕 = the extent of GHG disclosure and integrated reporting.

3.4 Independent variables

3.4.1 Test variables.

GHG disclosure. To assess the level of GHG disclosure, content analysis is used. This analytical method is most widely used in social and sustainability research, especially for assessing the extent of disclosure (Krippendorff, 1980). The needed data is hand collected by multiple Bachelor students of the University of Groningen, who analysed the reports of the 937 selected firms. The data is collected using a scoring index, which is based on the GRI-guidelines, since these guidelines are most widely used for non-financial reporting (de Klerk & de Villiers, 2012). The index (appendix I) consists of 23 items which quantitates the extent of disclosure about GHG emissions. Every item is analysed and scored for every report, based on a 1 for disclosure, and 0 for no disclosure. This total score is expressed as a percentage, whereby a higher score reflects a higher extent of disclosure.

Because the data is hand collected by multiple Bachelor students, the reliability of the data is checked using a test-retest of analysing the reports, based on the study of Borghei et al. (2016). A randomly selected sample of firms is retested at a different time. The correlation between the first time collected data and the data collected by the retest shows the reliability of the measurement of GHG disclosure. The intraclass correlation coefficient (ICC) is used to calculate the reliability. Weir (2005) defines reliability as the consistency of measurement. He argues that the ICC is a better method for the test-retest than the often used Pearson correlation, since the ICC can detect systematic errors, which Pearson correlation cannot. He also

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argues that a possible measurement error becomes minimal when the ICC increases above 0.80 (Weir, 2005). The ICC of this study shows an average ICC of 0.83 with a confidence level of 95%, which indicates that the reliability of the GHG data is sufficient.

Integrated reporting. Following the study of Serafeim (2015) and Maniora (2017), data from ASSET4 is used for the measurement of integrated reporting. De Villiers et al. (2017) argue that assessing the extent of integrated reporting can only be done using ‘experienced coders with a solid understanding of the objectives of integrated reporting’ (p. 17). ASSET4 provides accurate, comparable and high quality data, since it is collected and analysed by experienced analysts. Moreover, Serafeim (2015) argues that ASSET4 provides reliable data, since this data is used by investors representing more than $3 trillion of assets. ASSET4 is divided into eighteen categories within four pillars. In this study integrated reporting is measured by data from one of these categories, described as: ‘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’. This measure is a score for a firm’s extent of integrated reporting ranging from 0 to 100, whereby a higher score reflects a higher extent of integrated reporting.

3.4.2 Control variables. Based on prior literature, several control variables will be included to control for the confounding effects of these variables on the dependent variable. Data used for these variables is extracted from the before mentioned databases ASSET4 and Datastream.

ESG performances: Clarkson et al. (2013) argue that environmental performances capture firms’ risks that matters to investors, therefore ESG performances is used as a control variable. Furthermore, ESG performances has an incremental explanatory power of firm value, as shown by Hassel et al. (2005), which underpins the use of ESG performances as control variable. Moreover, it is important to be aware of the fact that the disclosure and reporting can differ from the real performances, which is called greenwashing. Firms can selectively disclose positive information about the ESG performances, but avoid reporting negative information (Kitzmueller & Shimshack, 2012). That is another reason why ESG performances is a variable that should be controlled for when testing the influence on firm value.

Firm size: Another control variable used in this study is firm SIZE, consistent with most value relevance studies (Plumlee et al., 2015; Clarkson et al., 2013; Baboukardos & Rimmel, 2016). This study uses the log of the total assets as proxy for firm size, consistent with the study of Baboukardos & Rimmel (2016). Their results show a positive relation between size and firm value, meaning that larger firms will generally have a higher firm value.

Leverage: Plumlee et al. (2015) and Baboukardos & Rimmel (2016) also use LEVERAGE as a control variable, both studies show a significant positive relation between leverage and firm value. This positive relation means that firms with more debt, thus a higher leverage, have a higher firm value. Cheng & Tzeng (2011) investigated the influence of leverage on firm value and also found a positive relation. They explain this relation with the tax shield benefit which is generated with debt financing.

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Year dummy: Analysis of the years 2013-2016 shows differences between years, as shown in appendix III.b. To control for these time effects, a YEAR dummy is included.

Since this study uses fixed effects, country and industry dummies are not included in the models, as explained in subsection 3.5.1. However, appendix III also provides a summary of the test variables per country and industry.

3.5 Research design

A linear panel data regression with fixed effects is used to investigate whether firm value is influenced by GHG disclosure, integrated reporting and the moderating effect of the use of integrated reporting for GHG disclosure. The statistical model used is:

Where subscript i refers to firm, subscript t refers to year, ϴ are the fixed effects and ε is the error term. The variables in the statistical model are described in table 2. Appendix II provides the description of the variable provided by the database from which the variable was extracted, including the database source and related code. In the following subsections of this paragraph, several regression techniques are described which are used to get reliable results.

3.5.1 Fixed effects. In this study a panel data analysis is used, which entails that data is gathered and analysed of firms over multiple time periods. Because every individual firm has its own individual characteristics which could impact the influence on the dependent variable, controlling for this impact is necessary. The Hausman test can help in deciding which method should be used for controlling for these firm effects. The outcome of the conducted Hausman test shows evidence in favour of the fixed effects model and against the random effects model (p<0.01), hence fixed effects regression models are used. This technique enables controlling for time constant variables which could impact the influence on the dependent variable.

As argued by Nikolaev & van Lent (2005), fixed effects models also partially control for endogeneity. Some variables which are unobservable or not included in the regression model may influence the effect on the dependent variable, therefore correlation can exist between these omitted variables and variables included in the model. The fixed effects model reduces this type of endogeneity, because it deals with time-invariant omitted variables. This panel data technique removes all cross-sectional variation, because it assumes that the changes within each firm drives the influence on the dependent variable. Thus, this technique partly controls for endogeneity, by considering the time-invariant omitted variables which are not included in the model (Nikolaev & van Lent, 2005).

3.5.2 Lagged variables. Another way this study controls for endogeneity is through the use of lagged variables, consistent with the study of Zhou et al. (2017). In the regression models the independent test and control variables are lagged with one year, whereby the change in firm value is caused by the independent variables of one year earlier. This means that an increase in GHG disclosure and integrated reporting could

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result in an increase in firm value a year later, for example a higher extent of GHG disclosure and integrated reporting in 2015 could result in an increased firm value in 2016. The book value and net income are not lagged with one year, since the Ohlson model (Ohlson, 1995) assumes that the market value is directly influenced by these variables. Thus, the variables of the Ohlson model are directly related and therefore contemporaneous, while the other independent variables are indirectly related and therefore lagged with one year.

3.5.3 Robust standard errors. Because of the use of panel data, heteroscedasticity can occur, which entails that errors are not independent and identically distributed. This possible bias can influence the reliability of hypotheses testing. To avoid heteroscedasticity in errors, robust standard errors are used in the regression

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models, consistent with the study of Baboukardos & Rimmel (2016). This technique only influences the significance of the results. The not tabulated results show that the findings are not influenced by the choice for this control for heteroscedasticity.

3.5.4 Data adjustments. Prior to the analyses and regressions, some data is adjusted. First, the variables with accounting numbers are subject to the process of winsorizing, to reduce the effect of outliers. The lower and upper bounds of the variables are calculated using the mean plus/minus three times the standard deviation. Outliers higher and lower than these bounds, are given these corresponding values. Furthermore, the GHG data is adjusted following the requirements of the index, since the students who collected the data could have interpreted these requirements wrong. The requirements of the index require that the total emissions should only be scored when the report does not contain information about GHG emissions divided in scopes (appendix I). Using excel functions, the data is checked and adjusted to make sure these requirements are followed.

To calculate the moderating influence, the GHG disclosure and integrated reporting variables are centred. Centring refers to the process of ‘subtracting the sample mean from […] input variable values’ (Schielzeth, 2010, p. 104). Centring these variables improves the interpretability of the regression coefficient, because the interpretation of these main effects is meaningless otherwise7_{(Schielzeth, 2010).} Furthermore, centring reduces the multicollinearity between the variables involved in the interaction. To check whether multicollinearity is a problem, the VIF can be calculated. Without centring the highest VIF is 35.84, while with centring the highest VIF is 3.13, therefore the centred variables are used in the main analyses. The results of the regression model without centring are shown in appendix IV.c2.

4. R

ESULTS

This section is divided into three paragraphs. In the first paragraph the descriptive statistics and correlations are described. In the second paragraph the main findings are described, which provides the outcomes related to the hypotheses. The last paragraph provides some additional analyses, divided in endogeneity concerns, multicollinearity issues, sample robustness tests, an additional test for the influence of the reporting scope, and an additional test for the differences across countries.

4.1 Descriptive statistics

The mean, standard deviation, and Pearson correlation between variables are presented in table 3. The average firm in the sample has a market and book value of 18.41 and 8.75 billion US dollars respectively, and the average net income is 1.47 billion US dollars. These statistics show that on average 55% of the market value is explained by the financial components of the Ohlson model. The remaining portion can be explained by other non-financial relevant information, part of this information can be GHG disclosure provided by integrated reporting. The statistics show that on average the extent of GHG disclosure is

7_{Without centering, these coefficients are conditional effects. The displayed coefficient measures the effect of GHG disclosure} when integrated reporting is zero and vice versa. This is very occasional in the data, therefore this interpretation is meaningless.

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26.42% of the GHG-index, while the average extent of integrated reporting is 78.85%. Appendix III provides a summary of the test variable per country, year and industry.

The correlation statistics show that market value is positively associated with book value, net income, GHG disclosure, integrated reporting, ESG performances and firm size. The correlation with leverage is negative and non-significant, nonetheless this control variable will be included in the regression model since other studies showed the influence of this variable on firm value (Baboukardos & Rimmel, 2016; Cheng & Tzeng, 2011). Noteworthy correlations are the correlation between book value and net income and between book value and size, because these correlations are above the accepted threshold of 0.7. Since the Ohlson model (Ohlson, 1985) also includes book value and income, both variables will be used in the model of this study. Furthermore, size is used as a control variable in most value relevance studies, therefore size will also be used as control variable in this study. Nevertheless, an additional analysis also includes models without net income and size, to show that this high correlation does not influence the results of this study. Another way to check the multicollinearity is through the use of VIFs. As shown in table 4, all VIFs8 of the models used are below 10, and therefore the multicollinearity is not considered problematic.

4.2 Main findings

Table 4 presents the results of the five regression models used to test the hypotheses. In model (1) book value, net income and the control variables are included. Model (2) includes GHG disclosure and model (3) includes integrated reporting, to test hypotheses 1 and 2 respectively. Model (4) includes GHG disclosure and integrated reporting, and model (5) examines the interaction between these variables to test hypothesis 3. All models include fixed firm effects and year dummies to control for firm and year effects. The models are estimated using panel data regression with robust standard errors.

Model (1) shows the results of the regression using book value, net income and the control variables. Consistent with the Ohlson model (1995), book value and net income are significant and positive associated with market value. The coefficient of size is positive as predicted and significant at 5% level (β=3.880; p<0.05). This means that larger firms have generally a higher value than smaller firms. Leverage has

8_{The VIFs are calculated using OLS regressions with dummy variables, instead of the use of panel data regressions with fixed} effects, because VIFs cannot be calculated for these panel data regressions.

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unexpectedly a negative relationship (β=-12.136; p<0.05) with market value, indicating that firms with a higher leverage ratio have a lower firm value. ESG performances has unexpectedly not a significant relationship (β=-0.014; p = 0.337). However, because other studies (Clarkson et al., 2013; Maniora, 2017; Serafeim 2015) show the significance influence, this control variable is included in the models, since it could have a composite effect.

Model (2) tests hypothesis 1, which predicts a positive causal relation between GHG disclosure and firm value. Although the regression results show a positive coefficient for GHG disclosure, it is not statistically enough for inferences to be drawn (β=0.030; p = 0.251). The influence and significance of the control variables did not change compared to model (1). Given that the positive relationship is not statistically significant, hypothesis 1 is not found to be supported.

Model (3) tests hypothesis 2, demonstrating the causal relationship between integrated reporting and firm value. The results show that the coefficient of integrated reporting is positive and significant at 1% level (β=0.068; p<0.01), indicating that a higher extent of integrated reporting results in higher firm value. This result is also economic significant, for each additional percentage of the extent of integrated reporting,

6.644 * 6.439 * 2.402 2.297 7.471 ** 0.661 *** 0.655 *** 0.660 *** 0.654 *** 0.653 *** 0.740 *** 0.746 *** 0.738 *** 0.743 *** 0.739 *** Hyp. 1: GHG Lagged 0.014 0.013 0.004 Hyp. 2: IR Lagged 0.065 *** 0.063 *** 0.070 *** Hyp. 3: GHG * IR Lagged 0.001 * ESG Lagged -0.014 -0.014 -0.021 -0.021 -0.021 SIZE Lagged 3.880 ** 3.863 ** 3.716 ** 3.703 ** 3.731 ** LEVERAGE Lagged -12.136 ** -12.405 ** -11.845 ** -12.096 ** -12.382 ** 0.68 0.68 0.68 0.68 0.68 F-test 11.25 *** 10.03 *** 10.28 *** 9.28 *** 8.58 *** Highest VIF 3.12 3.13 3.12 3.13 3.13 Mean VIF 1.75 1.69 1.78 1.72 1.74 1,822 1,822 1,822 1,822 1,822 937 937 937 937 937

Firm fixed-effects Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes

TABLE 4

Linear panel regression model with fixed effects of firm value , GHG disclosure , extent of integrated reporting and control variables.

This table provides the coefficient estimates from the panel dataregression models estimated with the use of robust standard errors. All models include firm fixed effects and dummy variables for year effects (not tabulated). ***, ** and * coefficients are statistically significant at 1, 5, and 10 percent respectively (based on two-sided testing, except for hypotheses 1, 2 and 3). The GHG and IR variable are centred in model (5) to reduce multicollinearity and improve the interpretation of the main effects.

GHG (3) Hyp. 2 IR (4) GHG + IR (5) Hyp. 3 GHG x IR Year dummy N (observations) Number of firms R-squared BV NI constant (2) Hyp. 1 Model (1) Control

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the market value increases on average by $70 million. The influence and significance of the control variables did not change in this model. Thus, model (3) provides strong support for hypothesis 2.

Model (4) incorporates GHG disclosure and integrated reporting, but does not examine the moderating effect. The results are consistent with model (2) and (3): GHG disclosure has a positive but not statistically significant relationship (β=0.013, p=0.138), while integrated reporting has a positive and statistically significant relationship (β=0.063, p<0.01).

Model (5) tests hypothesis 3 regarding the moderating effect of the use of integrated reporting for GHG disclosure. As shown in this model, the interaction term (GHG x IR) is positive and significant at 10% level (β=0.001; p<0.1), indicating that the positive relation between firm valuation and GHG disclosure is stronger for firms who use a higher extent of integrated reporting. This result is also economic significant, when integrated reporting is used for GHG disclosure, the influence on market value is on average enhanced by $1 million. These results are consistent with the expectations, providing support for hypothesis 3: the use of integrated reporting for GHG disclosure enhances the influence of GHG disclosure on firm value.

4.3 Additional analyses

To test for the robustness of the main results, some additional analyses are conducted. First, endogeneity concerns are addressed and explained, all models are re-estimated without lagged independent variables and without using fixed effects. Thereafter, the potential multicollinearity issues are tested and described. In the third subsection, the models are re-estimated utilizing two alternative samples. In the fourth subsection, an additional analysis is executed to test the influence of reporting scope on firm value, utilizing one of the alternative samples. The last subsection provides an additional analysis in which the differences across countries are tested.

4.3.1 Endogeneity concerns. While the estimates in table 4 show a positive influence of integrated reporting and the moderating effect, the direction of causality could be reversed. The constructed hypotheses state that GHG disclosure and integrated reporting positively influence firm value. As argued in the theory section, both reporting practices result in reduced information asymmetry and improved information environment, which consequently leads to a better prediction of firm performances and therefore better allocation of resources. As stated in the theory section, this can result in an increase in firm value, thus both reporting practices are viewed as ‘causing’ a change in firm value. It can be possible, however, that the direction of causality is the opposite, whereby firm value causes the extent of GHG disclosure and integrated reporting (De Villiers et al., 2017). This is called reverse causality, which is a specific type of endogeneity (Nikoleav & van Lent, 2005).

Lagged variables. One way to ensure the results are not driven by this potential endogenous relation is through using lagged variables (Zhou et al., 2017). In the main analyses the independent test and control variables are lagged by one year, as described in paragraph 3.5. To check whether this choice influences the findings and conclusions, the models are re-estimated without the use of lagged variables. As displayed in appendix IV.a,these results are similar to the results of the main analysis, showing that my decision for lagging variables did not influence the conclusions of this study. The model without lagged variables also