Bridge over ocean
1 February 2016 CFA Institute Journal Review

Integrated Reporting and Investor Clientele (Digest Summary)

  1. Clifford S. Ang, CFA

Examining the relationship between integrated reporting (IR) and long-term value creation, the author finds that IR attracts a longer-term investor base and lowers the number of transient investors. This relationship is stronger for companies with high growth opportunities, companies with very limited ownership by the founding family, companies that are subject to strong social criticism, and companies with a consistent IR practice.

What’s Inside?

Integrated reporting (IR) is a relatively new phenomenon in the world of corporate reporting, and it aims to provide concise communication about how an organization’s strategy, governance, performance, and prospects lead to the creation of value. The author studies the relationship between IR and long-term value creation given the presumption that long-term investors are more likely to buy and hold shares in companies that provide more information about their long-term prospects. His main finding is that companies that produce IR tend to have more long-term investors and fewer transient investors. Through a series of tests, the author demonstrates the robustness of his results and the determinants of the relationship between IR and the investor base.

How Is This Research Useful to Practitioners?

This research is useful for practitioners in several ways. First, IR is a relatively recent innovation, and the author provides useful insights into the benefits of IR. For example, by mid-2015, the International Integrated Reporting Council’s pilot program included about 140 large multinational companies, such as Pfizer, American Electric Power, Clorox, and Southwest Airlines. Therefore, to the extent that IR gains sustainable traction, it is critical for practitioners to understand its impact on value creation.

Second, the author provides support for firms that want to attract longer-term investors. Previous researchers have suggested that investor type can affect managerial decision making in predictable ways and, by doing so, affect firm value. The author cites Bushee and Noe (Journal of Accounting Research 2000), who demonstrated that only 10% of US institutions have characteristics that can classify them as “dedicated holders”—that is, investors holding relatively few stocks for long periods of time—and as much as 50% of institutions are classified as “transients,” which are investors that hold a lot of stocks with high turnover and short holding periods. The researchers found that managers with a larger percentage of transient investors are significantly more likely to manage earnings.

Finally, the author finds that certain factors affect the strength of the relationship between IR and the long-term investor base. In particular, the relationship between IR and the investor base is stronger for companies with high growth opportunities, companies with very limited ownership by the founding family, companies that are subject to strong social criticism (e.g., alcohol and tobacco companies), and companies with a consistent IR practice.

How Did the Author Conduct This Research?

The author constructs the sample using data collected on IR and governance practices from ASSET4, a division of Thomson Reuters that is used by investors with more than $3 trillion in assets under management. This database includes economic and environmental, social, and governance data for every firm covered, where all the primary data must be objective and publicly available. ASSET4 then uses those data to produce a composite score for its IR program that ranges from 0 to 100 for every firm. The composite score is meant to represent the firm’s capacity to convincingly show and communicate that it integrates economic (financial), social, and environmental dimensions into its day-to-day decision-making process. In addition, information is collected on (1) whether the firm’s board is classified or staggered, (2) the percentage of quantitative sustainability metrics disclosed by a firm out of the 121 measures collected by ASSET4, and (3) whether a firm issues a separate sustainability report and follows the GRI (Global Reporting Initiative) guidelines. The author also uses an alternative source of IR data from the asset management firm Sustainable Asset Management.

Then, data on different types of institutional investors are collected from the Institutional Holdings division of Thomson Reuters, which predominantly contains data on US-listed firms. The author also obtains a variety of accounting and stock market data that serve as control variables, including controls for firm size (sales), differences in leverage (total debt over total assets), earnings yield, book-to-market ratio, dividend yield, past one-year sales growth, equity beta, stock return volatility, and past one-year stock returns. All these variables have been shown to be associated with the investor base of a firm.

The author’s final sample includes 1,114 different companies and a total of 5,726 annual observations between 2002 (the earliest year ASSET4 provides data) and 2010. In analyses where firm-fixed effects are included, the author requires at least four years of data for each firm in the sample, which reduces the sample to 649 companies and 4,684 observations.

Abstractor’s Viewpoint

The effect of IR on value creation is an interesting area of research. The author shows that the presence of IR is linked to more longer-term investors in the United States, but more work has to be done to connect IR to actual increases in value. What value-relevant information does IR provide that investors cannot simply piece together from other public information already available to them?

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