Band 15
Stefan Hannen – Integrated Reporting – Useful for Investors?
For decades, corporate annual reports have been failing to meet their purpose to provide a comprehensive information basis for investors and thus to gain and enhance investor confidence. A lack of understandability and a too narrow focus on merely financial and backward-looking information are two substantial weaknesses. With a holistic reporting approach, Integrated Reporting (IR) intends to tackle these shortcomings. To this end, the International Integrated Reporting Council (IIRC) has been formed in 2010. In December 2013, this council released a framework that provides a basis for preparing integrated reports.
This study examines the new reporting approach of IR both conceptually and empirically in terms of its usefulness for investors. The conceptual analysis finds the International <IR> Framework to be a coherent and relevant basis to prepare integrated reports, albeit with substantial discretion for national regulators and reporting entities.
A descriptive empirical study investigates the question in how far the principles conveyed in the IR framework were already present in existing corporate reporting. Using content analysis, the study analyses annual reports of US firms for financial years 2006 and 2012 and compares them with reports from South Africa, which is considered a pioneer country in terms of IR since about 2010. The results show that the principles had already been implemented to a considerable degree, even though there was remarkable room for improvement in terms of the degree of IR in the examined reports. Comparing the two countries, the South African reports show a higher degree of IR than US reports in both years. The degree of IR has increased significantly between 2006 and 2012 in South Africa, while remaining unchanged in the USA.
Subsequently, the study looks at potential consequences of IR for the capital market. It analyzes if and in how far IR may moderate the so-called “investor underreaction”, a delay in the market reaction to news, e.g. from annual reports. In line with the expectations, the results from different models and over various time frames show a negative association of the IR scores and investor underreaction.
These results have several implications not only for investors, but also for preparers, regulators, enforcement institutions as well as academia. The study elaborates and discusses these implications.