The effect of Integrated Reporting Information Content on the Cost of Equity Capital under Agency Conflicts

Document Type : Original Article

Authors

1 Department of Accounting & Auditing, Faculty of Management, NT.C., Islamic Azad University, Tehran, Iran

2 Department of Accounting, Faculty of Management, NT.C., Islamic Azad University, Tehran, Iran

Abstract

Objective: Integrated reporting is considered one of the new developments in corporate reporting that seeks to eliminate the shortcomings of current reporting. Since the issuance of the integrated reporting framework, the global desire to follow integrated reporting has been growing steadily and risen increasingly on the agenda of regulatory bodies. Following an integrated reporting approach improves transparency, information disclosure, accountability for shareholders and stakeholders; Despite the importance of assessing integrated reporting approach consequences in capital market to improve the information environment through the integration of financial and non-financial information, the impact of content elements disclosure related to integrated reporting framework on the cost of equity capital under interest conflicts has not been given much attention. This research investigated the impact of potential transition in reporting process by moving towards an integrated reporting framework on cost of equity capital under agency conflicts.
Methods: The index of reporting convergence towards an integrated reporting framework has been assessed based on the checklist designed according to content elements of the international integrated reporting framework. The shareholders’ expected rate of return is used to measure the cost of equity capital which is derived from the capital assets pricing model. Also, the interest conflict caused by agency problems has been measured using the operating expenses to operating revenues ratio as an agency cost proxy. The research population includes 144 firms listed in the Tehran Securities & Exchange over 7 years period during March 2016 till March 2023. The multivariable panel regression models based on firm-year observations were used to test research hypotheses.
Results: The findings indicate that moving towards an integrated reporting framework has a reducing impact on the cost of equity capital. Integrated reporting reduces the cost of equity capital by providing a higher level of information quality, reducing information asymmetry, and sending a positive signal to the market about the firm's performance and outlook. On the other hand, agency costs increase the cost of equity capital. However, disclosing information following the integrated reporting approach under agency conflicts weakens this effect and leads to a reduction in the cost of equity capital. Integrated reporting reduces the agency costs by focusing on long-term perspective, integrated thinking, limiting the manager’s opportunistic behaviors, improving information quality and increasing transparency through effective monitoring. Also, following the integrated reporting framework reduces the cost of equity capital by reducing information asymmetry due to agency conflicts.
Conclusion: According to the findings, although agency conflicts can increase the cost of equity capital, but the information disclosure improvement resulting from moving towards integrated reporting, while limiting agency conflicts, modulates the shareholders’ expectations and lead to decrease the cost of equity capital. The findings showed that improving transparency, reducing information asymmetry, controlling agency conflicts, and reducing financing costs are the potential benefits of information disclosure using integrated reporting framework in capital market. This result is consistent with signaling theory in rationalization the importance of integrated reporting.
Innovation: The effectiveness of integrated reporting as a perspective of new reporting developments varies across firms, and therefore, it is important to assess the implications of moving towards the adoption and implementation of this reporting approach. Detailed and transparent disclosure of information under integrated reporting provides better information quality for decision-making. Although some empirical studies, relying on theoretical foundations, have provided documented evidence of the integrated reporting role in improving the information transparency of reporting environment, the role of the integrated reporting approach on the decisions of capital providers and agency problems between information providers and users has received less attention. This study contributes to the understanding of investors' reactions to integrated reporting. This issue has been assessed by focusing on signaling theory.

Keywords

References

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History

  • Receive Date: 21 July 2024
  • Revise Date: 27 August 2024
  • Accept Date: 26 October 2024
  • First Publish Date: 23 August 2025
  • Publish Date: 23 August 2025

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