*Corresponding author: [email protected]
Determinants of Integrated Reporting Quality of Financial Firms
YASHINI PILLAI KESHAV SEETAH*
University of Mauritius, Mauritius
Abstract: Despite existing studies on the determinants of integrated reporting quality, such studies are rare in the financial sector. This study aims to investigate the determinants of the integrated reporting quality of financial firms. More specifically, the influence of firm size, firm age, profitability, auditor size, length of an integrated report, institutional quality, and economic development on integrated reporting quality.
The data for this study was obtained from a sample of 18 financial firms across 18 countries for the period 2013 to 2019, with a total of 106 firm-year observations. Using content analysis, an integrated reporting index was developed for this research which was then used to measure integrated reporting quality for each firm year. The research findings reveal that the integrated reporting quality of financial firms is positively influenced by firm age, length of an integrated report, and institutional quality.
However, this study reveals that firm size, profitability, leverage, auditor size, and economic development have no significant influence on the integrated reporting quality of financial firms. This study contributes to the scarce literature on the determinants of integrated reporting quality in the financial sector.
Keywords: Integrated Reporting Quality, Determinants, and Financial Firms.
Abstrak: Meskipun studi tentang determinan kualitas pelaporan terintegrasi telah dilakukan, studi semacam itu jarang dilakukan di sektor keuangan. Tujuan dari penelitian ini adalah untuk mengetahui faktor-faktor penentu kualitas pelaporan terintegrasi perusahaan keuangan. Lebih khusus lagi, pengaruh ukuran perusahaan, usia perusahaan, profitabilitas, ukuran auditor, panjang laporan terintegrasi, kualitas kelembagaan dan perkembangan ekonomi, terhadap kualitas pelaporan terintegrasi.
Data untuk penelitian ini diperoleh dari sampel 18 perusahaan keuangan di 18 negara untuk periode 2013 hingga 2019 dengan total 106 perusahaan tahun observasi.
Menggunakan analisis konten, indeks pelaporan terintegrasi dikembangkan untuk tujuan penelitian ini yang kemudian digunakan untuk mengukur kualitas pelaporan terintegrasi untuk setiap tahun perusahaan. Temuan penelitian mengungkapkan bahwa kualitas pelaporan terintegrasi perusahaan keuangan dipengaruhi secara positif oleh usia perusahaan, panjang laporan terintegrasi dan kualitas kelembagaan. Namun, penelitian ini mengungkapkan bahwa ukuran perusahaan, profitabilitas, leverage, ukuran auditor dan perkembangan ekonomi tidak memiliki pengaruh yang signifikan terhadap kualitas pelaporan terintegrasi perusahaan keuangan. Studi ini berkontribusi
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pada literatur yang langka tentang faktor-faktor penentu kualitas pelaporan terintegrasi di sektor keuangan.
Kata Kunci: Integrated Reporting Quality, Determinants, Financial Firms.
1. Introduction
Over time, the amount of information requested from companies has accelerated, leading to the preparation of various reports such as Corporate Social Responsibility (CSR) reports, Corporate Governance (CG), and remuneration reports, amongst others, alongside traditional financial statements. Despite their contribution towards an increased disclosure of company news to the market, the traditional reporting system was widely criticized as being confusing and fragmented, which consequently triggered more dissatisfaction. Setia et al. (2015) characterized the individual reports as disconnected and difficult to merge, thereby undermining the faithfulness of the disclosures and hampering stakeholders' decision-making process due to information gaps. Similarly, Krzus (2011) stressed the failure of stand -alone sustainability reports in linking issues concerning the environment, society, and governance to business strategy and financial performance. As such, businesses felt the need for an improvement in the traditional reporting system, where both financial and non-financial data can be integrated into one report, thus leading to the emergence of Integrated Reports.
Since the emergence of integrated reporting, studies focused mostly on its role and objectives, the value relevance of integrated reporting, the main issues encountered with the implementation of integrated reporting, and the link between integrated reporting, sustainability, and CSR reporting. More recently, the literature has been supplied with several studies on the explanatory factors as to why companies are adopting integrated reporting practices. In contrast, some studies even criticized this new reporting tool.
Some of the studies that focused on the deterministic factors affecting integrated reporting quality are Garcìa-Sánchez et al. (2013), Fasan et al. (2016), Barth et al.
283 (2017), Raimo et al. (2019), Vitolla et al. (2019a), Vitolla et al. (2019b) and Raimo et al. (2021), Chouaibi and Hichri (2020) and Songini et al. (2021).
Despite existing studies on the determinants of integrated reporting quality, there is a significant dearth in this area of study in the financial sector. This study emphasizes the financial industry for several reasons. Firstly, limited attention was given to the financial sector as they indirectly impact the environment through financial intermediaries instead of direct production processes (Andrikopoulos et al., 2014).
Secondly, since the 2007-2008 global financial crises, growth in the attention received from regulators and the public has been observed towards the social implications, legitimacy, and accountability across the financial sector. Thirdly, due to considerable discrepancies in their corporate structures and wealth as compared to other sectors, financial institutions were excluded from the samples of several studies. Lastly, to date, very few studies have investigated both firm-level and country-level determinants of integrated reporting quality in the financial sector. Hence to contribute to the limited literature in this field, the objective of this research is to examine the determinants of the integrated reporting quality of financial firms.
2. Theoretical Framework and Hypothesis Development
The quality of an integrated report is influenced by numerous factors, which can be classified into firm-level and country-level determinants. The firm-level determinants of integrated reporting quality consist of firm size, profitability, leverage, firm age, auditor size, and the length of the integrated report. In contrast, country -level determinants include the institutional quality and level of economic development of the firms' countries.
2.1 Firm Size and Integrated Reporting Quality
Larger firms disclose more information as they have more resources and incur lower information production costs (Buzby, 1975). Larger firms resort to more disclosures to enhance their competitiveness in financial markets, thereby attracting prospective investors and lowering their finance costs through reduced information asymmetry (Buzby, 1975; Hossain et al., 1995). From the agency theory standpoint, larger firms
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have more widespread shareholders and consequently incur higher agency costs. To reduce these costs in terms of information asymmetries, they voluntarily disclose more information. According to the legitimacy theory, big firms are incentivized to provide both financial and non-financial information to be portrayed as good corporate citizens and to legitimize their existence in society (El-Bannany, 2007). Following the theories mentioned above, it may be inferred that the integrated reporting quality of larger financial firms is higher. Contrarily, the political cost theory posits that smaller firms readily disclose more information to enhance their public visibility. Big companies, on the other hand, disclose less information to curb unnecessary governmental interventions such as higher taxation, price controls, and other restrictive policies (Watts and Zimmerman, 1990; Jensen and Meckling, 1976).
Existing studies such as Belkaoui and Karpik (1989), Gangi and Trotta (2013), Hamid (2004), El-Bannany (2007), Uyar and Kilic (2012), and Vitolla et al. (2020) documented a positive association between firm size and disclosure quality. In contrast, Takhtaei and Mousavi (2012) documented a negative association between firm size and disclosure quality. Aljifri and Hussainey (2007) and Mahboub (2017) revealed no significant association between the two variables. Except for the political-cost theory, agency theory and legitimacy theory advocate a positive association between firm size and disclosure quality. In addition, many existing studies have revealed a positive link between firm size and disclosure quality. In this regard, it is expected that the size of financial firms is positively related to the quality of their integrated reports. Hence the following hypothesis is made.
H1: The size of financial firms is positively associated with their integrated reporting quality.
2.2. Profitability and Integrated Reporting Quality
The signaling theory advocates that well-performing companies are more likely to signal their attributes to investors through higher disclosure levels (Inchausti, 1997).
The degree of disclosure by well-performing companies is higher to demarcate themselves from the poor-performing ones and to raise finance at a lower cost.
285 However, consistent profits by firms induce competitors to enter the market, such that their competitive costs escalate, and they subsequently disclose less information (Frias- Aceituno et al., 2014).
Empirical evidence is varied and conflicting, whereby some found positive, negative, or even no connection between profitability and disclosure quality. Wallace and Naser (1995), Khanna et al. (2004), El-Bannany (2007), Frias-Aceituno et al.
(2014), and Vitolla et al. (2020) concluded that a firm’s profitability positively influences its corporate disclosure levels while Larran and Ginner (2002), Oyelere et al.
(2003), Marston and Polei (2004) and Uyar and Kilic (2012) found no significant relationship between the variables concerned. Contrarily Wagenhofer (1990) concluded that weak-performing companies disclose more to justify their 'bad news', and Higgins and Diffenbach (1985) inferred that less successful and financially unstable firms find greater usefulness in disclosing more information.
As per signaling theory, financial firms that are more profitable are more likely to have higher integrated reporting quality. Based on the signaling theory and on the existing studies that revealed a positive link between profitability and disclosure quality, this research makes the following hypothesis.
H2: The profitability of financial firms is positively linked to their integrated reporting quality
2.3 Leverage and Integrated Reporting Quality
As per the agency theory, firms with higher financial leverage have more information discrepancies and increased agency and monitoring costs, which can be lowered through improved disclosure quality (Inchausti, 1997). Moreover, the capital needs theory suggests that organizations seeking external financing tend to enhance their disclosure quality to portray a good image in the eyes of capital providers (Sharif
& Rashid, 2014). As per Lee and Yeo (2015) and Zhou et al. (2017), the comprehensive, holistic and succinct approach of integrated reports improves information quality and lowers information asymmetry among creditors. It may be inferred that financial firms that are highly geared are more likely to have higher integrated reporting quality.
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There is mixed empirical evidence regarding the influence of leverage on disclosure quality. For instance, highly geared firms were found to be positively related to disclosure quality in studies conducted by Hossain et al. (1994), O’Sullivan et al. (2008), Aljifri and Hussainey (2007), Wang and Hussainey (2013), Lai et al. (2016) and Vitolla et al. (2020). On the other hand, Raffournier (1995), Alsaeed (2006), and Uyar and Kilic (2012) found no significant relationship between leverage and disclosure quality. Eng and Mak (2003), Elfeky (2017), and Kilic and Kuzey (2018) documented that leverage negatively influences integrated reporting quality. According to the agency theory and the capital needs theory, financial firms that are highly geared are more likely to have higher integrated reporting quality. Grounded on the agency theory, the capital needs theory, and existing studies that revealed a positive link between leverage and disclosure quality, this study makes the following hypothesis.
H3: The leverage of financial firms is positively linked to their integrated reporting quality.
2.4 Firm Age and Integrated Reporting Quality
The age of a firm is a measure of its perceived stability, whereby the older a firm is, the more stable it is. Choi (2000) adds that the reputational value and involvement in social activities tend to be higher in mature firms, such that any irresponsible social act could be significantly costly for them. From the legitimacy theory perspective, an organization's age acts as a driving factor for engaging in social and environmental acts and for providing considerable disclosure of non-financial information alongside financial ones to enhance its reputation and further consolidate its legitimacy. Hence based on legitimacy theory, older financial firms are more likely to have better- integrated reporting quality. Moreover, older firms are more familiar with industry trends, voluntarily adopt new policies and provide more information to stakeholders to maintain their existence in the industry. Owusu-Ansah (1998) emphasized that older firms are subject to lower risks of facing competitive disadvantages due to the release of information. Studies such by Hamid (2004), Choi (2000), and Owusu-Ansah (1998) demonstrated a positive relationship between disclosure quality and firm age, while El-
287 Bannany (2007), Raimo et al. (2019) and Vitolla et al. (2020) found no significant link between these variables. Grounded on the legitimacy theory and existing studies that revealed a positive link between firm age and disclosure quality, this study makes the following hypothesis.
H4: The age of financial firms is positively associated with their integrated reporting quality.
2.5. Auditor Size and Integrated Reporting Quality
Audit firm size can be classified into two categories: Big-4 (large) firms and non- Big-4 firms. The performance and reputation of the big-4 audit firms are determined by the quality of accounts and reports they audit (Wallace et al., 1994). Big-4 audit firms avoid association with clients having bad reporting quality and prefer those with good accounting practices and more environmental disclosures. According to the signaling theory, information disclosed by clients is used by big-4 auditors as a means of signaling their quality (Inchausti, 1997). De Angelo (1981) and Wallace et al. (1994) argued that large auditors are less dependent upon a few clients, unlike smaller auditors, who tend to surrender themselves to be retained by clients. Hence, big-4 auditors have the power of suggesting and compelling their clients to increase and enhance their financial, social, and environmental disclosures in their annual reports (Wallace et al., 1994). Therefore, it may be inferred that financial firms that use Big-4 audit firms are more likely to have higher integrated reporting quality.
Empirical evidence provides inconsistent results regarding the influence of audit firm size on disclosure quality. Big-4 auditors were found to be positively associated with their clients' disclosure quality in studies such as Crasswell and Taylor (1992), Mahmood (1999), Becker et al. (1998), Naser et al. (2002), Romero et al. (2010), Uyar and Kilic (2012) and Barros et al. (2013). However, Wallace and Naser (1995) and Mock et al. (2013) found reporting quality to be negatively related to audit firm size.
Raffournier (1995), Courtis (1999), Alsaeed (2006), Ahmed and Aljifri and Hussainey (2007), and Chouaibi and Hichri (2020) found an insignificant relationship between auditor size and disclosure quality. Based on the theoretical studies which support a
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positive link between auditor size and integrated reporting quality and existing empirical studies which documented such a link, this research makes the following hypothesis.
H5: Auditor size of financial firms is positively associated with their integrated reporting quality.
2.6 Length of Integrated Report and Integrated Reporting Quality
It is usually anticipated that the lengthier the report, the better its quality is.
According to Iredele (2019), lengthier reports accommodate more material disclosures and satisfy the information needs of a broader range of stakeholders. However, this is not always the case since lengthy reports might be burdensome and obscure, with 'boiler-plate' disclosures making it difficult to identify valuable and interesting information (Coyle, 2015). Instead, shorter reports could be more concise and specific to the needs of relevant stakeholders. Irredele (2019) and Loew et al. (2019) documented a positive relationship between disclosure quality and the report's length. However, Rivera-Arrubla et al. (2017) found no significant link between integrated reporting quality and the report's length. Lengthier reports have been flattered for their ability to include more material information and satisfy the needs of a range of stakeholders.
However, it has also been pointed out that lengthy reports can be cumbersome and make it difficult to spot relevant information. This research anticipates a significant association between 'Length of Integrated Report and Integrated Reporting Quality'. The hypothesis is non-directional because existing research work documented mixed findings on the association between 'Length of Integrated Report and Integrated Reporting Quality'. Hence the possible direction of the association between 'Length of Integrated Report and Integrated Reporting Quality' is not clear in the context of the study, and the following hypothesis is made.
H6: There is a significant association between the length of the report and the integrated reporting quality of financial firms.
2.7 Institutional Quality and Integrated Reporting Quality
The presence of more robust regulations and legal systems are good drivers for better corporate reporting quality (La Porta et al., 1998). Campbell (2006) claimed that
289 responsible organizations which sufficiently report on their behavior are usually domiciled in institutional contexts with strong coercive and legislative pressure and a well-developed legal system for stakeholder protection. In addition, Vitolla et al. (2019), Liu and Anbumozhi (2009), and Huang and Kung (2010) found stakeholder pressure to influence integrated reporting quality positively. Moreover, Fasan et al. (2016) found integrated reporting quality to be higher in countries with higher stakeholder protection where relevance is given to all stakeholders and not to capital providers only. However, in the context of strong regulatory systems and enforcement mechanisms, only the minimum standards requested by law may be adopted by firms to remain in line with the regulatory obligation without aiming toward best practices. Corporate reporting might be reduced to a mere box-ticking exercise, which may even impair reporting quality. Coluccia et al. (2018) documented that a strong and mandatory regulatory system for CSR reporting was negatively influencing disclosure quality. Following a review of the literature, most studies advocate that higher institutional quality leads to higher integrated reporting quality. Hence this research makes the following hypothesis.
H7: There is a positive association between institutional quality and integrated reporting quality of financial firms.
2.8 Economic Development and Integrated Reporting Quality
A country's economic environment is considered an essential contributor to the development of accounting practices in general and disclosure and reporting behaviors in particular (Belkaoui, 1983). According to Choi et al. (2002), a country's level of economic development is closely reflected in the development of its accounting system, which, in turn, significantly influences the development of its disclosure system.
Therefore, disclosure practices are expected to vary with a country's different stages of economic development. Developed countries are subject to more public pressure, are more concerned about their stakeholders, and are characterized as having higher disclosure quality (Wilmshurst and Frost, 2000). On the other hand, developing countries are characterized by poor disclosure quality, which can be attributed to high compliance costs, low non-compliance, a scarcity of qualified accountants and auditors,
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the absence of developed stock exchanges, and financial constraints (Abayo et al., 1993). Studies such as Salter (1998), Isidro and Raonic (2012), and Fasan et al. (2016) observed better financial and non-financial reporting quality in companies domiciled in developed countries. In addition, Abayo et al. (1993), Belal (2000), and Azim et al.
(2009) deduced that developing countries are distinguished by their poor disclosure quality. Based on the review of the literature, it can be observed that most studies advocate that countries with better economic development have higher disclosure quality. Hence this study makes the following hypothesis.
H8: Economic development is positively associated with integrated reporting quality of financial firms.
3. Research Methodology
The study's objective is to examine the determinants of the integrated reporting quality of financial firms. Based on the availability of integrated reports, data was collected from integrated reports over the period 2013 to 2019 for 18 financial firms from 18 different countries, namely Australia, Bangladesh, Brazil, Canada, France, India, Italy, Japan, Mauritius, Netherlands, Saudi Arabia, Singapore, South Africa, Spain, Sri Lanka, Sweden, Turkey, and the UK. The study stopped in 2019 because integrated reports for the year 2020 for most firms in the sample were not yet published when data collection stopped for this study. An unbalanced data of 106 firm-year observations was constructed for this study, given that there were a few missing data.
The study has used the following regression model, which has been adapted from prior studies such as Hamid (2004), El-Bannany (2007), Uyar and Kilic (2012), Andrikopoulos et al. (2014), Sethi et al. (2015), Fasan et al. (2016), Rivera-Arrubla et al. (2017), Ghani et al. (2018) and Vitolla et al. (2020).
IRQ = β0 + β1SIZE + β2ROE + β3LEV + β4AGE+ β5AUDITOR + β6LENGTH + β7IQ +β8GROWTH + β9HDI + β10EXPORTS + εjt
IRQ refers to the integrated reporting quality score for each firm year.
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SIZE refers to firm size for each firm year and is measured by the natural logarithm of the company’s total assets.
ROE refers to Return on Equity for each firm year. It is a measure of profitability.
LEV refers to the leverage of each firm year. It is measured as the ratio of the book value of debt to the book value of equity.
AGE refers to the number of years from the establishment of a firm for each firm year.
AUDITOR refers to auditor size. It is measured using a dummy variable whereby a score of one is attributed to a firm in a particular year if in that year the auditor of the firm is a member of BIG-4 audit firms. Otherwise, a score of zero is attributed.
LENGTH refers to the length of the integrated report for a firm for a particular year. It is measured by the number of pages of the integrated report.
IQ refers to the institutional quality score of a country for a particular year.
Institutional quality is measured using the Institutional Quality Index, a composite index constituting five key elements of Kaufmann and Kraay’s World Governance Indicator (WGI), made in 2007. The index is computed by aggregating the values for each component of the WGI: voice and accountability, the rule of law, regulatory quality, government effectiveness, and control of corruption. Data on the institutional quality score has been collected from the World Bank database.
GROWTH refers to the economic growth of a country for a particular year and is measured using the annual growth rate of per capita GDP. This data has been collected from the World Bank database.
HDI refers to Human Development Index. Socioeconomic wealth is measured using the HDI, published by the United Nations Development Programme (UNDP). It is a composite index of educational level, life expectancy, and GNI per capita. Data on HDI has been collected from the UNDP database.
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Exportation level (EXPORTS) is a proxy for the importance of export activities in a country’s economy and is measured using the export ratio (exports as a percentage of GDP). Data on exportation levels have been collected from the World Bank database.
This research has measured economic development using three proxies: economic growth, socioeconomic wealth, and exportation level. Economic development has a multi-dimensional facet that depends on the type of economic system, the income level and growth rate, the degree of governmental intervention and expenses, and the exportation level (Riahi-Belkaoui, 2002). Therefore, economic development is measured using three main proxies: economic growth, socioeconomic wealth, and exportation. This is because economic development is a process of social change and cannot be measured solely by economic wealth (GDP or GNP). An increase in economic development for a year would imply that the values of all three proxies increase simultaneously in that same year, and a decrease would be the opposite.
Integrated Reporting Quality Index
This research has developed an index to measure the integrated reporting quality of financial firms. The index is computed by content analyzing the annual reports of each company using an evaluation scorecard. The scorecard model used in this study consists of 49 items, and it has been adapted from the International Integrated Reporting Framework and the <IR> Banking Network (2015). Some items from the International Integrated Reporting Framework did not apply to the financial firms and were therefore not included in the scorecard model of this study. The scoring model used in this study is an extension of that used in Kiliç and Kuzey (2018) which adopted a dichotomous rating for each component of a category. Either a score of 1 was awarded for disclosure of a particular component or 0 for no disclosure at all. For a more in-depth analysis, this study utilizes a trichotomous rating model such that the quality of disclosure for each component of the scorecard is based on three levels. A score of zero was attributed if an item was not disclosed at all. A score of one was attributed if an item was disclosed without a detailed explanation, and a score of two was attributed if an item was disclosed with a detailed explanation. The integrated quality score for a firm year can range from
293 zero to a maximum of 98 since there is a total of 49 items spread across eight categories.
The items of the scorecard are reflected in table 2 in the appendix.
4. Results and Discussion
In the first instance, the regression model was processed using the Pooled cross- sectional OLS. However, the core issue with Pooled cross-sectional OLS is that the heterogeneity and uniqueness of data sets are completely disregarded. To overcome this problem, the Hausman test was performed to determine whether to use the fixed or the random effect. At a 10% significance level, the Hausman test revealed that the Fixed Effect was appropriate for this study, given that the p-value of the Hausman test was 0.000, which was lower than 10%. The results of the fixed effect are shown in the table 1.
Table 1.
Results of Fixed Effect model
***signifies significance at a 10% level
Variable Coefficient t-Statistic Probability
INTERCEPT 0.911948 0.646316 0.5200
SIZE -0.055010 -1.013165 0.3141
ROE -0.000358 -0.440253 0.6610
LEV -0.002380 -1.235362 0.2204
AGE 0.041313 7.256317 0.0000
AUDITOR 0.090192 1.428587 0.1571
LENGTH 0.000677 3.634607 0.0005
IQ 0.054436 2.455739 0.0163
GROWTH -0.008885 -1.923804 0.0580
HDI 1.196275 0.616624 0.5393
EXPORTS -0.001683 -0.748540 0.4564
Adjusted R-squared 0.887794
F-statistic 31.76962***
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4.1 Firm Size and Integrated Reporting Quality
The findings of this study reveal a non-significant association between the size of financial firms and their integrated reporting quality at a 10% significance level because the p-value of the variable SIZE is 0.3141, which is higher than 10%. Therefore, the hypothesis that the size of financial firms is positively associated with their integrated reporting quality is rejected. Nevertheless, the results corroborate those of Mahboub (2017) and Aljifri and Hussainey (2007), who also found a non-significant relationship between firm size and disclosure quality. This insignificant association might be explained by the political cost theory, which suggests that large financial institutions might not be motivated to disclose more information to reduce their visibility to the public and government in order to avoid political costs.
4.2. Profitability and Integrated Reporting Quality
According to the results of this research, the p-value of the variable ROE is 0.6610, which is higher than 10%. Hence this study reveals a non-significant relationship between the profitability of financial firms and their integrated reporting quality at a 10% significance level. Hence the hypothesis that the profitability of financial firms is positively linked to their integrated reporting quality is rejected. However, this finding of the study is consistent with Larran and Ginner (2002), Oyelere et al. (2003), Marston and Polei (2004), and Uyar and Kilic (2012) who also found such an insignificant relationship. It may be argued that profitable financial firms are reluctant to disclose more information because of the fear that this can hamper their competitive position in the market, such that the profitability of these firms has no significant influence on the quality of their integrated reports.
4.3. Leverage and Integrated Reporting Quality
The findings of this study show that the p-value of the variable LEV is 0.2204, which is above 10%, which implies a non-significant link between leverage and integrated reporting quality of financial firms at a 10% significance level. Therefore, the hypothesis that the leverage of financial firms is positively linked to their integrated reporting quality is rejected. However, this finding of the study is consistent with Raffournier (1995), Alsaeed (2006), and Uyar and Kilic (2012), who also documented
295 such a non-significant link. It may be argued that financial firms may prefer less information-sensitive debt financing, such that higher debt financing may not motivate financial firms to improve their integrated reporting quality. Consequently, leverage may have a non-significant influence on the integrated reporting quality of financial firms.
4.4. Firm Age and Integrated Reporting Quality
This research reveals a significant positive relationship between the age a nd integrated reporting quality of financial firms at a 10% significance level. This is because the coefficient of the variable AGE is positive 0.041313, and its p-value is less than 10% (p=0.0000). Hence the hypothesis that the age of financial firms is positively associated with their integrated reporting quality is accepted. This result of the study is consistent with Hamid (2004), Choi (2000), and Owusu- Ansah (1998). However, this finding of the study is not congruent with El-Bannany (2007), Raimo et al. (2019), and Vitolla et al. (2020), who documented a non-significant relationship between firm age and disclosure quality. The significant positive link between the age of financial firms and their integrated reporting quality can be explained through the legitimacy theory.
Mature financial firms are more willing to disclose non-financial information (on social and environmental acts) alongside financial ones to portray a favorable image of their firms among stakeholders and preserve their legitimacy in society. Furthermore, older financial firms are more familiar with the industrial norms and practices, hence placing them in a better position to meet stakeholders' increasing information demands through enhanced reporting tools.
4.5 Auditor Size and Integrated Reporting Quality
At a 10% significance level, the results of this study reveal a non-significant association between auditor size and integrated reporting quality of financial firms because the p-value of the variable AUDITOR is 0.1571, which is higher than 10%.
Hence the hypothesis that auditor size of financial firms is positively associated with their integrated reporting quality is rejected. This result of the study is consistent with Hossain et al. (1995), Raffournier (1995), Ahmed and Courtis (1999), Alsaeed (2006), Aljifri and Hussainey (2007), and Chouaibi and Hichri (2020). They also documented
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such a non-significant association. It may be argued that auditors are only bounded by mandatory information and do not require clients to report information beyond accounting standards requirements. Consequently, even if a financial firm is audited by an auditor of a larger size (BIG-4), the latter does not significantly influence the integrated reporting quality of the firm.
4.6 Length of Integrated Report and Integrated Reporting Quality
According to the results of this research, the p-value of the variable LENGTH is 0.0005, which implies that the length of the integrated report of a financial firm has a significant influence on its integrated reporting quality at a 10% significance level.
Hence the hypothesis that there is a significant association between the length of the report and the integrated reporting quality of financial firms is accepted. In addition, the coefficient of the variable LENGTH is positive 0.000677. Therefore, this study reveals a significant positive association between the length of the integrated report and the integrated reporting quality of financial firms. This study's finding is consistent with Irredele (2019) and Loew et al. (2019), who also documented such an association.
According to the stakeholder theory, it is fundamental for companies to create value and report to all key stakeholders. It may therefore be argued that financial firms who attempt to meet the maximum information needs of all stakeholders by providing relevant material information in their integrated reports have longer integrated reports leading to higher integrated reporting quality.
4.7 Institutional Quality and Integrated Reporting Quality
According to the findings of this research, there is a significant positive relationship between the institutional quality of the country in which a financial firm operates and the integrated reporting quality of the firm at a 10% significance level. This is because the p-value of the variable IQ is 0.0163, and its coefficient is positive 0.054436.
Therefore, the hypothesis that there is a positive association between institutional quality and integrated reporting quality of financial firms is accepted. This finding is consistent with Campbell (2006), Liu and Anbumozhi (2009), Huang and Kung (2010), Fasan et al. (2016), and Vitolla et al. (2019), who also documented such an association.
It may be argued that as the institutional quality of a country increases, financial firms
297 react to institutional pressures. Consequently, these firms generate enhanced integrated reports in which they explain their corporate actions and performance regarding financial, societal, and environmental matters to the relevant regulatory bodies. In addition, as institutional pressure increases, these firms generate a higher quality of integrated reports to avoid enhanced scrutiny from the regulatory bodies and to avoid risks of penalties and lawsuits.
4.8 Economic Development and Integrated Reporting Quality
The results of the study reveal a significant negative association between the economic growth of the country in which a financial firm operates and its integrated reporting quality at a 10% significance level. This is because the p-value of the variable GROWTH is 0.0580, and its coefficient is negative 0.008885. However, the findings of this research revealed no significant association between human development index and integrated reporting quality and also no significant association between export level and integrated reporting quality at a 10% significance level. This is because the p-values of the variables HDI and EXPORTS are 0.5393 and 0.4564, respectively. Economic development is being measured using three proxies, namely GDP per capita growth, HDI, and exports level, as per Riahi-Belkaoui (2002).
Given that economic development is a process of social change, it cannot be measured solely by economic wealth (GDP or GNP). Hence an increase in economic development for a year would imply that the values of all three proxies increase simultaneously in that same year, and a decrease would be the opposite. Hence hypothesis that economic development is positively associated with integrated reporting quality of financial firms is rejected. This is because despite that this study reveals a significant negative association between economic growth and integrated reporting quality, non-significant associations were found: between HDI and integrated reporting quality and between exports level and integrated reporting quality. It may be concluded that there is no significant association between the economic development of a country in which a financial firm operates and its integrated reporting quality.
298
5. Conclusion, Implications, and Limitations
Studies on the determinants of the integrated reporting quality of financial firms are rare. This research tries to address the gap in the literature by investigating the determinants of the integrated reporting quality of financial firms using a sample of 18 financial firms from 18 different countries over the period 2013 to 2019. This study reveals that financial firms that are more mature, that is, those having longer firm age demonstrate higher integrated reporting quality. This may be because these firms are more accustomed to the industrial norms and practices, hence placing them in a better position to meet stakeholders' increasing information demands through enhanced reporting tools. This paper also reveals that financial firms whose integrated reports are lengthier demonstrate higher integrated reporting quality. It may be argued that these firms provide the maximum material information that they can in order to meet the information needs of most of their stakeholders, resulting in lengthier integrated reports and higher integrated reporting quality. The results of the study also reveal that the institutional quality of a country in which a financial firm operates has a positive influence on the integrated reporting quality of the firm. Given that financial firms already face a high level of institutional scrutiny, these firms produce high-quality integrated reports as institutional pressure increases in order to avoid risks of lawsuits and legal penalties.
This research has several implications. Due to the absence of generally acceptable and enforceable integrated reporting guidelines, companies are currently free to declare themselves as integrated report publishers without understanding the fundamental concepts of integrated reporting. Therefore, the regulatory body of each country may require firms issuing integrated reports to follow the integrated reporting guidelines as per the International Integrated Reporting Framework. Furthermore, given the importance of financial firms in an economy, they must disclose the maximum possible financial and non-financial information to their stakeholders. In this regard, countries can consider the implementation of mandatory submission of integrated reports by financial firms. To enhance the quality and reliability of the integrated reports, countries can also consider implementing external assurance of these reports.
299 This study is limited by its relatively small sample size because data was extracted only from the integrated reports from 2013 to 2019. Data on integrated reporting prior to 2013 was not readily available for most firms in the sample, and data beyond 2019 was not available by the time data collection was completed for this study. In addition, only 18 financial firms throughout the study were investigated due to the unavailability of data on integrated reporting.
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Appendix
Table 2.
Items of the Scorecard
Content element group
Disclosure items Organizational
overview and External environment
1 Mission and vision statement
2 General explanations about the organization's culture, ethics, values, or principles
3 Ownership or operating structure
4 Competitive landscape/ market positioning (for example, strength, weakness, brands, ranks, awards, or accolades) 5 Key quantitative information (e.g., Number of employees,
revenue)
6 Countries/regions where the org operates
7 Legal factors (legislative or regulatory environment) 8 Political factors
9 Technological factors/issues 10 Social factors /issues
11 Micro and macro-economic conditions 12 Market forces
13 Environmental factors/challenges 14 Key stakeholders and their needs Governance 15 Board of Directors list
16 Board experience or skills, diversity
17 Culture, ethics, and values are reflected in the use of and effects on capital.
18 Actions were taken to monitor strategic decisions and risk management.
19 Remuneration policies
Business model 20 Key inputs (key elements of the business model) 21 Product differentiation
22 Delivery channels and marketing (branches, ATM, touchpoints)
307 Disclosure items
23 Innovation (investment in IT, development of new technologies, online platforms)
24 Employee training (training hours per employee, number of training courses)
25 Key products and services
26 GHG emissions (carbon footprints, CO2 emissions)
27 Waste water/Waste use, energy consumption, green investment 28 Employee morale (grievance, engagement score, productivity,
employee tenure, employee satisfaction, occupational health and safety statistics)
29 Organizational reputation (brand, brand value, affiliation, awards)
30 Revenue, cash flows (KPIs such as return on equity, efficiency ratio, earnings per share, market share, customer deposits)
31 Customer satisfaction (complaints mechanism, complaint response time,
customer growth rate)
32 Increase or decrease in capitals (create or diminish value) Risk and
opportunities and controls
33 Specific sources of internal or external risks and opportunities 34 Details on internal controls in place and risk management report
Strategy and resource allocation
35 Short, medium, and long-term strategic objectives (with and without time frames)
36 Strategies in place/intend to implement to achieve objectives
37 Measurement of achievements and target outcomes
38 Understanding of organization's ability to adapt to change to achieve goals
39 The link between strategies and key capital
308
Content element group
Disclosure items
Performance 40 Key Performance Indicators (KPIs) present financial measures 41 KPIs combining financial measures with other non-financial
components
42 The linkage between past and current performance 43 Comparison between regional/industry benchmarks 44 The financial implication of significant effects on capital or
other causal relationship
Outlook 45 Expectations about the future or explanations about uncertainties/challenges
46 Potential implications for future performance 47 Forecasts about KPIs and assumptions
48 The linkage between current performance and the organization's outlook
Basis of presentation 49 Determination of materiality and framework used for evaluation
