Informational Content and Assurance of Textual Disclosures: Evidence on Integrated Reporting

Posted by GAIA MELLONI - Dec 02, 2019

In a recent study, published in the European Accounting Review (EAR) Special Issue on Textual Analysis Research in Accounting, Ariela Caglio, Paolo Perego and I, examine the economic consequences in terms of market value, stock liquidity and the analysts’ forecast accuracy, associated with textual attributes and the external assurance of integrated reporting (IR), an innovative form of corporate disclosure.

According to the International Integrated Reporting Council (IIRC) Framework (2013), the primary purpose of IR is to explain to providers of financial capital in one clear and concise document how an organization creates value over time. In so doing, IR merges together financial and non-financial disclosures to promote a more cohesive and efficient approach to corporate reporting that, in turn, should help investors to overcome the potential disconnect in processing different types of information.

The IIRC Framework (2013) represents a relevant shift from existing reporting practices, which generally involve the production of financial statements in accordance with accounting standards and a separate, mostly voluntary stand-alone sustainability reports. By connecting disjointed pieces of financial and non-financial information, IR may tackle a number of problems associated with conventional, stand-alone sustainability reports, such as the failure to clearly communicate a company’s business model and represent the complex interconnections among all resources (financial as well as human, intellectual, environmental, social and relational) that a company uses to create value.

Our paper examines the empirical setting of South Africa, where since 2010, for firms listed at the Johannesburg Stock Exchange (JSE), the disclosure of an integrated report (IR) has been mandatory according to an ‘apply or explain’ approach. This new reporting approach is growing in importance because the disclosure of non-financial information is currently mandatory in several countries (e.g., in Europe, UK, Japan, and India) and companies see the adoption of IR as an opportunity for greater alignment with existing regulations as well as one for setting up an innovative reporting system that enhances transparency.

We examine the association of low-quality textual attributes, i.e., reading difficulty, verbosity and biased tone, with a set of potential economic consequences and capital markets effects, including a firm’s market value, stock liquidity and the analysts’ forecast accuracy. We also analyse the role of third-party assurance in improving the credibility of IR disclosures, and the effects of the interplay of assurance and IR textual characteristics in terms of their potential economic consequences.

Results show that IR readability is associated with a higher market valuation, IR conciseness is linked with higher stock liquidity and IR tone bias is associated with less dispersed analysts’ estimates suggesting that capital market participants appreciate reports that are readable, short and focused. Moreover, our findings hint at a possible use of impression management strategies that are based on tone management and that target ‘expert’ readers of corporate reports.

Interestingly, we also demonstrate that IR assurance (in terms of both the presence of an assurance statement and the quality of the assurance provided) moderates the negative associations among low-quality textual attributes of IR and the firms’ economic consequences: if firms publish IRs that are difficult to read but assure the reports, this will compensate for the negative influence of reading difficulty on a firm’s market value; if firms provide long reports but assure the reports, this will dampen the negative effect of disclosure verbosity on stock liquidity; if firms assure their IRs, the analysts’ forecast dispersion is lower, suggesting that assurance not only moderates the negative impact of specific low-quality IR textual attributes but also acts as a credibility-enhancing mechanism for financial analysts.

Through an in-depth textual investigation of a novel type of corporate disclosure that integrates financial and non-financial information, we add to the literature on the informativeness of qualitative, textual

attributes of corporate reporting and on the credibility enhancing role of independent assurance in an IR setting. Our findings reveal practical regulatory implications for jurisdictions such as the European Union where firms are increasingly required to include non-financial information in corporate reporting.

Discover more about our study at

To cite this article: Ariela Caglio, Gaia Melloni & Paolo Perego (2019): Informational Content and Assurance of Textual Disclosures: Evidence on Integrated Reporting, European Accounting Review.


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