Voluntary adoption of integrated reporting, effective legal system and the cost of equity

Abstract

Purpose

Integrated reporting (IR) provides integrated financial and nonfinancial information about companies based on the integrated thinking principle. This study aims to investigate how the cost of equity relates to IR disclosure and the impact of an effective legal system on this relationship. Effective legal system (“enforcement”) represents the strength of the legal system of a country. Although voluntary initiatives are essentially not based on regulations, the authors expect that the effective legal system will influence the implementation of such.

Design/methodology/approach

To test the study’s hypotheses, linear regressions were applied using the Thomson Reuters database to analyze 20,463 firm-year observations between 2010 and 2017. The treatment group comprised companies that adopted IR; using propensity score matching, the authors defined the control group. The authors adopted a research design based on difference-in-differences to compare the cost of the capital of treatment with the control group for the periods before and after the IR adoption.

Findings

The results indicate that IR disclosure is negatively related to the cost of equity, and this negative effect is more prevalent for companies operating in high-enforcement environments.

Research limitations/implications

Cost of equity is not a directly observable variable, implying that the results are sensitive to changes in the parameters that are used to compute this term. The results can help companies looking for evidence of potential effective gains of adopting IR. They also help understand that discussions related to environment, social, and governance information are somehow incorporated by analysts and investors, and reflected in the cost of raising funds.

Originality/value

This study demonstrates how IR relates to the cost of equity considering a global sample of voluntary adopters. It also analyzes the impact of institutional factors on this relationship by using a robust method of analysis. The results support the argument that companies in a strong legal system are more likely to behave sustainably and to disclose this attitude. Additionally, they are pressured to implement proposals rather than just adopting an initiative as a label.

Citation

Zaro, E., Flores, E., Fasan, M., Murcia, F.D.-R. and Zaro, C.S. (2022), "Voluntary adoption of integrated reporting, effective legal system and the cost of equity", Corporate Governance, Vol. 22 No. 6, pp. 1197-1221. https://doi.org/10.1108/CG-03-2021-0096