Authors: Athanasios Pavlopoulos, Chris Magnis, George Iatridis

Title: INTEGRATED REPORTING: EVIDENCE ON FIRM’S PERFORMANCE, VALUE RELEVANCE AND MULTIPLE-BASED VALUATION MODELS.

Abstract

This paper illustrates the relation between the integrated reporting (IR) disclosure quality and firm market valuation. First, it is examined the relation between firm performance and IR disclosure quality. Second, we illustrate the way in which the quality of IR disclosure improves the value relevance of summary accounting information (i.e., the market value of equity), and third, we try to investigate how the use of integrated analysis can create value, testing the behavior of a multiple-based valuation model (P/E). Our sample consisted of 82 international firms and examined the period from 2011 to 2015. We created an IR disclosure score index based on a checklist, with weighting being assigned to the respective chapters of the King III report and the King III code, and we interpreted the IR disclosure quality by applying two different estimated indexes. It is found a positive and statistically significant association between the IR disclosure quality index (DS and DDS) and Tobin’s Q after controlling for various firm characteristics such as firm size, sales growth, and leverage, and corporate governance mechanisms such as the number of directors on the board, the ratio of number of shares owned by institutional shareholders to total outstanding common shares, and the board independence ratio, which is measured as the number of independent directors divided by total board size. We predict that the positive relation between the firm performance, as measured using Tobin’s Q index, and IR disclosure quality is stronger in firms with a high percentage of institutional shareholders, suggesting that IR improves the information environment in complex firms such as firms with low leverage levels and in which the CEO is not simultaneously chairman of the board. It is found that firms with a high IR disclosure quality tend to display high market value per share. The findings suggest that higher market valuation appears in firms with high levels of leverage, profitability and liquidity. More valid and effective valuation occurs in large firms with a high proportion of fixed assets to total assets, in firms with a large number of employees, and in firms that establish audit committees. The findings also suggest a change in value relevance with permanent characteristics, which supports the long-term goal of the IIRC by clarifying a company’s approach to its long-term strategic opportunities and risks, securing long-term funding. These integrated approaches not only enable a complete estimation of fair value but also improve valuation models. Considering that IR is intended to link King III report principles and financial performance, it is theorized that if there is any effect, it will be higher for firms that do not diverge with the King III report principles and apply the principles strictly. Investigating the impact of IR on a multiple valuation model, we demonstrate that a high level of IR disclosure information tends to prompt a higher valuation P/E index for firms compared to a lower level of IR disclosure quality. Moreover, we test the relation between a multiple-based valuation model and earnings management. Our models test two different proxies that capture a range of earnings management activities (discretionary accruals and earnings smoothness), implying that firms with high earnings quality display high value. This study concludes that from the point when the IR framework was introduced, firms disclosed more than only financial information and began to outperform.