Abstract
In this chapter, the association of integrated reporting (IR) to corporate reporting informativeness is investigated in the South African context, the pioneer in the IR adoption. IR is deemed to help assess risk metrics and improve risk management by means of integrated thinking. Based on this premise, we hypothesize mandatory IR adoption helps mitigate credit risk resulting in lower cost of debt. The hypothesis is tested by comparing the cost of debt of companies listed on the Johannesburg Stock Exchange before and after its mandatory IR regime (i.e., 2011). Overall, the study documents a reduction in the cost of debt for firms following IR adoption. In additional tests, we also document that the reduction in the cost of debt is higher for those entities which do not have an enterprise risk management system in place, thus suggesting that debtholders perceive that IR promotes a more structured risk management approach. The exploratory study extends prior literature on the IR effects to capital markets participants and to internal decision-making suggesting the potential of IR to encourage the practice and reporting of a holistic risk management approach, which helps decrease credit risk and, thus, resulting in a lower cost of debt.
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Notes
- 1.
We recognize cost of debt may be affected by fluctuations in interest rates due to changes in macro-economic conditions. In this regard, the South-African Reserve Bank (SARB) monetary policy is implemented by setting the repo rate used to maintain the price stability between 3% and 6%. The repo rate is the price at which the SARB lends cash to the banking sector and is a significant indicator of short-term interest rates. The repo rate is also the primary instrument for managing liquidity in the money market. This affects the borrowing costs of the financial sector which in turn affect the broader economy. Owing to sluggish growth, weak external conditions, and a fall in inflation to below 6%, the SARB trimmed the repo rate gradually in the period of analysis (2008–2014). More specifically, in 2011, the repo rate stood at 5.5% down from 6.4% at the end 2010. The prime overdraft rate is the predominant lending rate, and it is typically fixed at 3.5 percentage points above the repo rate. At the end of 2011, the prime lending rate stood at 9.0%, compared with 9.2% at the end of 2010. Our study shows that the average cost of debt for sampled companies is significantly lower after 2011 than the lending rates, thus supporting the beneficial effect of the IR adoption on credit risk.
- 2.
Listed companies on 31st March 2020.
- 3.
Credit rating is often used in the literature as a proxy for cost of debt. However, this is not applicable in emerging markets because many companies do not issue capital market debt and, therefore, are not rated.
- 4.
Untabulated results on the other considered periods confirm the findings shown in Table 5. Untabulated results are available on request.
- 5.
Untabulated results are available on request.
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Panfilo, S., Adhikari, A., Ionici, O. (2022). Integrated Report and Credit Risk: Empirical Evidence from a Mandatory Integrated Reporting Setting. In: Florio, C., Wieczorek-Kosmala, M., Linsley, P.M., Shrives, P. (eds) Risk Management. Risk, Governance and Society, vol 20. Springer, Cham. https://doi.org/10.1007/978-3-030-88374-4_11
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