Does integrated reporting enhance the value relevance of organizational capital? Evidence from the South African context
| Pages | 642-661 |
| DOI | https://doi.org/10.1108/JIC-02-2019-0034 |
| Date | 24 September 2019 |
| Published date | 24 September 2019 |
| Author | Maroua Tlili,Hakim Ben Othman,Khaled Hussainey |
| Subject Matter | Information & knowledge management |
Does integrated reporting
enhance the value relevance of
organizational capital? Evidence
from the South African context
Maroua Tlili
ISCAE, University of Manouba, Manouba, Tunisia
Hakim Ben Othman
Prince Sultan University, Riyadh, Saudi Arabia and
LIGUE, Université de la Manouba, Manouba, Tunisia, and
Khaled Hussainey
Business School, University of Portsmouth, Portsmouth, UK
Abstract
Purpose –Despitethe growing literatureon integrated reporting (IR) adoption and the emphasis on integrated
thinkingcapitals, prior research works onlyfocused on the financialand non-financialreporting rather thanthe
cornerstones of IR. In order to fill this gap, the purpose of this paper is to investigate the value relevance of
organizational capital(OC) after the mandatory adoption of IR in South Africa overthe period 2006–2015.
Design/methodology/approach –The authors have used quantitative methods to test the hypotheses.
The South African context is unique since the Johannesburg Stock Exchange is the first to mandate listed
firms to adopt IR following King III report in March 2010.
Findings –The findings provide the first evidence, to the best of the authors’knowledge, on the positive and
significant impact of IR adoption on the value relevance of OC.
Originality/value –The authors contribute to IR literature by providing new insight on the value relevance
of one capital from a new perspective addressing the importance of resources as inputsto the business model
highlighted by integrated thinking in the IR framework. The findings derive various implications for the
International Integrated Reporting Council, managers, decision makers and the research community.
Keywords South Africa, Integrated reporting, Value relevance, Organizational capital
Paper type Research paper
1. Introduction
Our research is strived by the emergence of integrated reporting (IR hereafter) in response to
the increasing demand of different stakeholders that rapidly becomes a debated reporting
trend. The traditional reporting relying on financial information no longer provides enough
information to different users (Lev and Zarowin, 1999; Reimsbach et al., 2018). Previous
research argues that non-financial information is considerably more useful to investors
(Eli and Lev, 1996). Consequently, additional information has gathered bigger attention by
different stakeholders because of the increasing importance of environmental, social and
governance issues (Cahan et al., 2016; Martínez-Ferrero and Frías-Aceituno, 2015; Stewart,
2015). Interlinking both financial and non-financial information in an integrated fashion
leads to a better understanding, and thus improves assessment of the firm’s business
performance (Eccles et al., 2010).
To respond to the growing needs of different stakeholders, the International Integrated
ReportingCouncil (IIRC hereafter)released the IR frameworkthat emphasizes linkingfinancial
and non-financial information in the integrated report. The international integratedreporting
framework(2013) defines IR as “concisecommunication about howan organization’sstrategy,
governance,performance and prospects, in the contextof its external environment, lead to the
creation of valueover the short, medium and long term”and proposes “to explain to providers
Journal of Intellectual Capital
Vol. 20 No. 5, 2019
pp. 642-661
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-02-2019-0034
Received 21 February 2019
Revised 13 June 2019
Accepted 1 August 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
642
JIC
20,5
of financial capital how an organization creates value over time”(IIRC, 2013, p. 7). Similarly,
King III report in South Africa defines IR as “a holistic and integrated representation of the
company’s performance in terms of both its finance and sustainability”(IDSA, 2009, p. 108).
As a result, a combined report became a tool to improve the quality of information
communicated to capital providers (IIRC, 2013; Serafeim, 2015 ). In addition, it also improves
the firm’s ability to meet strategic goals (Churet and Eccles, 2014). Consequently, regulators
and capital markets authorities start to recommend and require IR adoption.
Beyond the connectivity of information,IR focuses on resources that the organization use,
defined as capitals and identified as “stocks of value that are increased, decreased or
transformed through the activities and outputs of the organization”(IIRC, 2013, p. 11). The
cornerstone of this emphasis is integrated thinking, considered as the process of IR (IIRC,
2013). Hence, IR differs in taking into consideration the different capitals and their ability to
generate value. The framework classifies the capitals in six categories: financial,
manufactured, human, natural, social and relational and intellectual. The IR framework
classifies organizational capital (OC hereafter) as a component of intellectual capital.
Moreover, OC is highly based on information technology converted to knowledge through
human capital. Asa consequence, the importance of OC relies on the knowledge accumulated
that has to be constantly updated to avoid organizational shock in a rapidly changing
technology environment (Samaniego, 2006).
Due to the increasing importance of OC, a significant stream of literature focused on the
importance of OC in improving business and financial performance. In fact, research proves
that OC has a direct and positive impact on organizational performance and business value
creation (Andreeva and Garanina, 2016; Díez et al., 2010). Furthermore, OC enhances
business performance, competitive advantage and innovativeness ability (Lev et al., 2009;
Carmona-Lavado et al., 2010; Martín‐de‐Castro et al., 2006; Chen et al., 2004). Lev et al. (2016)
argue that despite the macro and micro levels benefits driven from OC, an important portion
of the investment in OC is not tracked. More specifically, a small stream of research assessed
the value relevance of OC using monetary measure. Lev et al. (2016) argue that measuring
OC is important for managers to make strategic decisions that affect both internal and
external operations. In addition, valuing OC allows investors to assess its performance in
terms of return on investment (Lev et al., 2016). Researchers attempted to assess the value
relevance of OC investment to the capital providers. The limited evidence provided in the
literature provides evidence that OC is value relevant to investors (Lev et al., 2009; Eisfeldt
and Papanikolaou, 2013). Hence, investigating OC within a highly developing reporting
environment is as interesting as useful for both practitioners and academicians.
In reviewing IR literature, one finds a large stream of researches focusing on IR adoption,
its determinants and consequences on firm valuation (García-Sánchez et al., 2013;
Frías-Aceituno et al., 2013; Jensen and Berg, 2012). Although the IR framework underlines
capitals as the fundamental components of integrated thinking and reporting, prior research
works focused mainly on the financial and non-financial reporting. Hence, recent calls urge
to investigate the advocates of IR about the six capitals (De Villiers et al., 2014; Velte and
Stawinoga, 2017; Dumay et al., 2016). In particular, OC is not investigated under the IR
approach in spite of the prior evidence on its impact on firm performance. In order to fill the
gap, we intend to answer the following research question:
RQ1. Does the mandatory IR adoption enhance the value relevance of OC?
Hence, the present study contributes to the literature by providing new insight about the
value relevance of one capital. Indeed, we examine the issue from a new perspective
addressing the importance of resources as inputs to the business model highlighted by
integrated thinking in the IR framework. We investigate whether the usefulness of OC
investment is enhanced after the IR adoption. To the best of our knowledge, this is the first
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Value
relevance of
OC
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