Economic Value of Integrated Reporting Assurance: Managerial Investment Efficiency, Litigation Risks, and Environmental, Social and Governance Controversies

Abstract

Integrated Reporting (IR) is a recent reporting initiative to combine financial and nonfinancial information into a stand-alone corporate report. As the credibility of the qualitative and forwardlooking corporate information is a significant concern for the acceptability of IR, independent third-party assurance has gained traction as a critical credibility enhancing mechanism (CEM) for IR. While the notable empirical archival studies document the economic value of IR assurance in improving firm value (Caglio et al., 2019; Zhou et al., 2019) and reducing information asymmetry (Zhou et al., 2019), Maroun (2020) point out that there is not sufficient empirical evidence to date that can segregate the substantive assurance outcomes (such as reducing litigation risks, improving managerial decisions and building stakeholders’ confidence) from the symbolic outcomes (such as impression management). For that, I conducted three empirical studies on information and insurance value of IR assurance to reinforce the existing literature. My first study examines the economic effects of IR assurance on the efficiency of managerial investment decisions. The results of this study reveal that the implementation of the Combined Assurance (CA) model, an innovative IR assurance model, is reducing managerial under-investment decisions, suggesting the managers of the reporting firms that have implemented the CA model are less likely to forego the positive Net Present Value (NPV) investment projects. The study also finds that high-quality integrated reports moderate this negative association between the CA model and managerial under-investment decisions. My second study investigates the impacts of IR assurance on the reporting firms operating in high litigation risks industries. The main results reveal that adopting the CA model reduces the bid-ask spread and improves the firm value (Tobin's Q) for companies operating in high litigation risks industries. The results also illustrate that the high-quality integrated reports are moderating these economic benefits of the CA model. The additional tests reveal that adopting the CA model can provide additional information to financial analysts for firms facing financial difficulties, improve firm value, and reduce information asymmetry for firms operating in environmentally and socially sensitive industries. My final study examines the effects of IR quality and IR assurance on the investors' reactions following Environmental, Social and Governance (ESG) controversy news. This study finds that the high IR quality reduces the severity of investors' adverse reactions in the presence of ESG controversy events. The main results reveal that the investors react less severely to the firms that implemented the CA model. The results also indicate no significant association between traditional CSR assurance and the investors' reactions to negative ESG news events. The findings of these three empirical studies produce empirical evidence to support the substantive economic outcomes of the assurance services for nonfinancial information. The outcomes of this thesis are also generating contextual insights about the information and insurance value and risk management perspective of IR assurance.