Does environmental, social and governance performance influence intellectual capital disclosure tone in integrated reporting?
| Pages | 100-124 |
| DOI | https://doi.org/10.1108/JIC-02-2018-0049 |
| Date | 07 December 2018 |
| Published date | 07 December 2018 |
| Author | Valentina Beretta,Chiara Demartini,Sara Trucco |
| Subject Matter | Behavioural accounting,Accounting/accountancy,Accounting & Finance,Information & knowledge management,Organizational structure/dynamics,HR & organizational behaviour |
Does environmental, social and
governance performance
influence intellectual
capital disclosure tone in
integrated reporting?
Valentina Beretta and Chiara Demartini
Department of Economics and Management, University of Pavia, Pavia, Italy, and
Sara Trucco
Università degli Studi Internazionali di Roma, Rome, Italy
Abstract
Purpose –The integrated reporting framework seeks to connect a firm’s financial and non-financial
performance in a single report by displaying how different forms of capital contribute to the firm’s value
creation. Drawing on impression management and incremental information approaches, the purpose of this
paper is to examine how the content and semantic properties of intellectual capital disclosure (ICD) found in
integrated reports is associated with firms’performance.
Design/methodology/approach –All reports by European listed firms from 2011 to 2016 available via the
integrated reporting emerging practice examples database are analysed. Content analysis is used to assesses
the quality of ICDs, whereas a regression analysis tests the variation in semantic properties of ICDs according
to firms’performance.
Findings –ICDs in integrated reports are mainly discursive, with a backward looking orientation and a
limited focus on human capital. On average, more than half of each ICD is conveyed in a positive tone. As the
optimistic tone in firms’ICDs increases, so too does their non-financial performance measured in terms of
environmental, social and governance aspects. This finding supports the incremental information approach.
Originality/value –This paper contributes to the current literature on ICDs by introducing new evidence on
firms’motivations for non-financial disclosures in integrated reports. By taking a more comprehensive
theoretical approach, namely, testing both impression management and incremental information hypotheses,
this research extends on prior studies which tested similar relationships in integrated reports but focussed
only on the impression management hypothesis.
Keywords Financial performance, Integrated reporting, Intellectual capital, Content analysis,
Non-financial performance, Tone analysis
Paper type Research paper
Introduction
In terms of both mandatory and voluntary disclosures by firms, the accounting literature
continues to look beyond quantitative elements contained therein towards the narrative
analysis of text (Beattie et al., 2004; Li, 2010b). In this respect,narrative statements in annual
reports, analyst reports and recommendations, management speech, corporate social
responsibility(CSR) reports, intellectual capital statements andenvironmental reports are the
most analysed typesof documents (Merkley, 2013; Adams, 2015; Abhayawansa and Guthrie,
2016a, b; Druz et al., 2017; Hummel et al., 2017). With the growing literature on, and
professional attention towards, the integrated reporting initiative, there has been greater
attention to content analysis of such reports to assess how firms’report their performance.
Journal of Intellectual Capital
Vol. 20 No. 1, 2019
pp. 100-124
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-02-2018-0049
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
The authors would like to thank the anonymous reviewers, the Guest Editors, Subhash Abhayawansa,
James Guthrie and Cristiana Bernardi, for their useful comments. The authors are also responsible for
the findings, recommendations and errors of the manuscript.
100
JIC
20,1
Following the integrated thinking approach, integrated reports should disclose the value
creation processof firms by highlighting the interconnections between the three components
of intellectualcapital: human capital, structural capital and relational capital, alongwith other
forms of capital such as natural, financial and manufactured capital (IIRC, 2013). Outsiders
use information contained in these reports to make important decisions (e.g. investment
vs disinvestment) affecting firms (IIRC, 2013). Thus, the verifiability of voluntary disclosures
is pivotal for increasing the accuracy of analysts’forecasts about firms’future performance
(Hussainey and Walker, 2009). Moreover, not only the content but also the tone of narrative
disclosures has an effect on market decision-making activities (Li, 2010b; Merkley, 2013;
Arena et al., 2015; Druz et al., 2017; Hummelet al., 2017). Different theoreticalapproaches have
been proffered to explore and understand the tone adopted by those responsible for writing
voluntary disclosures. One of the emergent and most discussed approaches is impression
management (Hooghiemstra, 2000; Clatworthy and Jones, 2001; Merkl-Davies and Brennan,
2007), which contends that managers present their firm’s performance in a more favourable
light to manipulate stakeholder decisions. This social psychological theory is in stark
contrast to the incremental information approach (Merkl-Daviesand Brennan, 2007), which is
based on agencytheory and argues that firmsproviding more informationreduce information
asymmetries between management and the market. Thus far, the empirical literature
testing these two theoretical approaches in the context of voluntary disclosures has yielded
contradictory findings. To elaborate, studies testing the impression management hypothesis
have found that managers manipulate the tone of voluntary non-financial disclosures
(Abhayawansa, 2011; Melloni, 2015; Abhayawansa and Guthrie, 2016a,b). However, other
studies investi gating the tone o f non-financial v oluntary discl osures by testing b oth the
impression management and increasing information hypotheses have reported empirical
findings in line with the increasing information approach (Merkley, 2013; Arena et al., 2015;
Hummel et al., 2017). This equivocality in the extant literature calls for more research
on this topic to better illuminate the value relevance of non-financial voluntary disclosures
(e.g. Cahan et al., 2016; Hummel et al., 2017).
Accordingly, this study aims to answer the following research question:
RQ1. Does non-financial performance affect the tone of intellectual capital disclosures
(ICDs) in integrated reports?
According to previous literature, there is a dearth of research exploring the association
between non-financial performance, more specifically environmental, social and governance
(ESG) performance, and the tone of ICDs in integrated reports (Beattie et al., 2004; Li, 2010b).
One of the few studies testing this relationship yielded non-significant results (Melloni et al.,
2017). To address the research question, data are taken from all available integrated reports
issued by European listed firms from 2011 to 2016 that can be downloaded from the IIRC
database (n¼102). This sample is then subjected, first, to a content and tone analysis before
regression analysis is used to quantify the relationship between financial and non-financial
performance, on the one hand, and the tone of ICDs on the other.
The empirical findings generated herein could contribute to the literature in several
ways. This study extends collective understanding on the value relevance of ICDs, because
it assesses whether ICDs directly reflect the non-fin ancial performance of firms
(Abhayawansa, 2011; Abhayawansa and Guthrie, 2016a, b). A tone consistent with the
firm’s performance will provide higher value for investors and society as a whole (IIRC,
2013; Adams, 2015). Furthermore, results from this study could help augment the theory of
voluntary disclosure (Verrecchia, 2001; Beattie et al., 2004) and better optimise its use in
practice. Moreover, the study contributes to the debate on motivations for issuing voluntary
disclosures (i.e. voluntary disclosure strategies) and provides a test of the impression
management vs the incremental information approach in the context of ICDs. Prior research
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Intellectual
capital
disclosure tone
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