The value relevance of integrated reporting in South Africa and the United Kingdom

Abstract

In 2013, the International Integrated Reporting Council (IIRC) had a long-term vision that firms across the world would adopt integrated reporting, which would ultimately become a corporate reporting norm. However, nine years later, integrated reporting is still voluntary in most countries, with South Africa being an exception. This study examined the value relevance of integrated reporting in a country which has been considered a leader in integrated reporting, South Africa, and a country that is the home base of IIRC, the United Kingdom. Integrated reporting would be value relevant if it has a predicted association with firm value. The study also investigated whether integrated reports with a high level of integrated reporting in line with the International Integrated Reporting Framework (International <IR> Framework) have a different association with firm value, compared to integrated reports with a low level of integrated reporting in each country. The study also tested whether the value relevance of integrated reporting in South Africa is statistically different compared to the value relevance of integrated reporting in the United Kingdom. Agency theory, signalling theory and voluntary disclosure theory formed the theoretical framework that served as a basis to develop testable hypotheses and guide the methodology which was adopted to achieve the research objectives of the study. In this study, a quantitative research method was applied. Ohlson’s (1995) valuation model and Tobin’s Q valuation model were used to test the value relevance of integrated reporting. The measures of firm value used in the study were the market value of equity and Tobin’s Q. The sample of the study consisted of two groups. The first group consisted of the Top 100 firms listed on the Johannesburg Stock Exchange (JSE). Financial and market data for these firms were collected from the JSE and IRESS Research Domain, and other disclosure information was hand-collected from the sources available. The second group consisted of Top 100 firms listed on the London Stock Exchange (LSE) – in other words, the Financial Times Stock Exchange (FTSE) 100 firms. Financial data for these firms were collected from the Refinitiv database; other disclosure information was hand-collected from the sources available. The sample period for both groups ran from 2011 to 2018. An integrated reporting disclosure index based on the guiding principles and content elements of the International <IR> Framework was developed in the study and was used to measure the level of integrated reporting. The overall findings for the South African sample showed that integrated reporting was not positively associated with firm value, except for the sample during the King III reporting periods, where a positive association between integrated reporting and firm value was obtained when firm value was proxied by Tobin’s Q. The findings also showed that capital markets in South Africa did not differentiate between integrated reports with a high level of integrated reporting and those with a low level of integrated reporting. For the United Kingdom, the main findings showed that integrated reporting was not positively associated with firm value when firm value was proxied by either the market value of equity or Tobin’s Q. The findings also showed that integrated reports with a low level of integrated reporting in the United Kingdom were negatively associated with firm value when Tobin’s Q was used as a proxy for firm value. The overall results also showed that the association between integrated reporting and firm value in South Africa was not statistically different from the association between integrated reporting and firm value in the United Kingdom. This study extended the literature by examining the value relevance of integrated reporting in the United Kingdom, which is the home base of the IIRC, but which still has voluntary integrated reporting, as well as in South Africa, which has been termed a leader in integrated reporting and has mandatory integrated reporting. In addition, this study also contributes to the body of knowledge by examining whether the regime change from King III to King IV in South Africa had any significant impact on the value relevance of integrated reporting.