E-ISSN 2281-4612 Academic Journal of Interdisciplinary Studies Vol 10 No 5

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Research Article
© 2021 Pratama et al.
This is an open access article licensed under the Creative Commons
Attribution-NonCommercial 4.0 International License
(https://creativecommons.org/licenses/by-nc/4.0/)

Received: 28 April 2021 / Accepted: 15 July 2021 / Published: 5 September 2021

Integrated Reporting in Southeast Asia: Does Value Creation Work?

1
Arie Pratama

Winwin Yadiati1

Nanny Dewi Tanzil1

Jadi Suprijadi2
1
Department of Accounting, Faculty of Economics and Business,
Padjadjaran University, Kabupaten Sumedang,
Jawa Barat 45363, Indonesia
2
Department of Statistics, Faculty of Mathematics and Natural Science,
Padjadjaran University, Kabupaten Sumedang,
Jawa Barat 45363, Indonesia

DOI: https://doi.org/10.36941/ajis-2021-0123

Abstract

This study describes the factors affecting the quality of integrated reporting (IR) disclosure and how the
disclosures affect firm value. This study employed quantitative methods with secondary data. This study
sample includes 1,900 firms from 2016 to 2018. Descriptive statistics, cluster analysis, and structural equation
modeling path analysis were used to describe the development. This study showed that the IR
implementation in five countries currently has an adequate score. Hypothesis testing showed that three
factors influenced the size of IR disclosures and the disclosures influence the firm value. This study implies
that although IR in the current and future will be a role model for corporate reporting, Southeast Asian firms
still need to strengthen the quality of IR. This study contributes to the current development and description
of IR, which is limited because of its recent introduction, in five countries: Indonesia, Malaysia, Philippines,
Singapore, and Thailand.

Keywords: integrated reporting, firm characteristics, corporate governance, media exposure, firm value

1. Introduction

Stakeholders acquire information through reporting. Historical reporting has several weaknesses,
such as it still oriented toward historical data (Kulkarni, 2014; Pratama, 2018a); it is partial and only
combines various nonfinancial information that does not explain the overall condition of the
organization (Palenberg et al., 2006); and it does not explain the inputs and processes in the business
and emphasizes more outputs and outcomes (Association of Chartered Certified Accountants
(ACCA), 2012).
Studies on IR show that IR affects firm performance. Bernardi and Stark (2018) concluded that
the implementation of IR in South Africa resulted in a strong disclosure relationship between

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environmental, social, and governance aspects and accurate financial performance forecasting. Before
implementing IR, there was no strong correlation between these variables. A 2015 study by KPMG and
the National University of Singapore showed that 80 firms in the Asia Pacific that implemented IR
had a better risk-adjusted return than those that did not implement IR. Yeo et al. (2014) showed that
a firm that widely discloses IR has a greater Tobin-Q value.
Wang (2017) explained that firm characteristics reflect the diversity of the firm's business
activities, which may vary owing to differences in resources or current conditions in the firm. Studies
have also shown that corporate governance (CG) factors can affect the extent of IR disclosures. Firms
with good CG are more oriented to accountability and transparency of information; therefore, the
information presented in the report becomes detailed and comprehensive (Forker, 1992; Haniffa and
Cooke, 2002). Previous studies have shown CG on the structure or governance organ in the firm
(Dodd and Warner, 1983; Hart, 1995; Adams et al., 2010). Studies have also stated that information
media can determine the quality of disclosure. Lodhia (2004) stated that wider reporting media lead
to demands for broader stakeholder transparency. Studies on the type of reporting media and its
links to the extent of disclosure of the information are still limited, whereas IR is not only limited to
hard copy media but can also be delivered through various media (Rivera-Arrublo and Zorio-Grima,
2016).
Research on the disclosure quality of IR items is still rarely found because IR has just been
launched. Southeast Asia was chosen for this study because information disclosure practices and
characteristics of the enterprise and governance structures are varied. This study analyzes the factors
that influence the extent of disclosure of items in IR in the annual reports of firms in Southeast Asia.
It also further links the extent of disclosure items in IR with firm value. In the following sections,
Section 2 explains the relevant literature review, Section 3 describes the research methods used,
Section 4 explains the results and discussions, and Section 5 presents the conclusion.

2. Literature Review and Hypotheses Development

2.1 Firm Characteristics and IR

Buitendag et al. (2017) explained that the quality of IR increases along with the increase in resources
needed to prepare an integrated report. Girella et al. (2019) explained that IR is also part of the
management strategy to report business as a whole, and considering that the characteristics of IR are still
voluntary, various indicators of firm characteristics are needed to test its effect on the extent of disclosure.
This study uses firm characteristics variables from the framework proposed by Kogan and Tian
(2012). Studies have included the variables of firm size, profitability, and leverage. This study adds the
variables of firm age, ownership concentration, industry type, and auditor reputation. Large firms
have complex activities, a greater impact on society, more shareholders, and receive additional
attention from the public; therefore, large firms are under more pressure to express social
responsibility. The firm’s age shows how long the firm can last and it is generally interpreted as a
manifestation of the theory of legitimacy. Ownership indicates the existing governance in a firm, the
higher the concentration, the lower the quality of the disclosures. The firm's ability to generate
profits attracts investors to invest their funds for business expansion; however, low profitability leads
to investors withdrawing their funds. Leverage outlines the capital structure of the firm to show the
level of uncollectible risk of debt. Scott (2009) explained that the higher the leverage the more likely
the firm experiences a violation of the debt contract, then the manager reports higher current profits
than future profits. Industries are divided into two types: high profile and low profile. Roberts (1992)
described a high-profile industry as a firm that has a high level of sensitivity to the environment,
political risk, or intense competition. DeAngelo (1981) stated that large-sized auditors have more
incentives to avoid the criticism of reputation damage than small-sized auditors. The following
hypothesis is proposed:
H1: There is an influence of firm characteristics on the quality of IR.

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2.2 CG and IR

This study discusses the relationship between IR and CG by focusing on the firm’s governance organs.
CG is proxied by an independent commissioner, audit committee, gender diversity, and the number
of board meetings. Adams (2015) explained that implementing integrated thinking depends on the
readiness of various organs in the firm. The activities of the governance organs are also important
because implementing IR requires a mature action plan and detailed supervision from the firm's
management (Maroun, 2018).
Frías-Aceituno et al. (2013) explained that the board of commissioners assumes a supervisory
function to ensure that IR contains all essential information about creating corporate value.
Makiwane and Padia (2013) explained that the independence of the board of directors is key to
implementing IR because independence can prevent biased information about the firm and increase
firm transparency. Adhariani and de Villiers (2019) explained that as an organ of the board of
commissioners, the audit committee strengthened the quality of IR because the audit committee was
specialized in accounting and reporting, which was the key to IR information. Srinidhi et al. (2011)
stated that women directors have higher social traits and feelings, making it easier to adopt social
and environmental reporting needs in IR. García-Sánchez and Noguera-Gámez (2018) explained that
the more complex activities of the board of directors in undertaking planning, implementation, and
supervision affect better governance and business management that would improve the quality of IR.
The following hypothesis was proposed:
H2: There is an influence of CG on the quality of IR.

2.3 Media Exposure and IR

Picard (2005) explained that the development of publication media is a convergence of the
information demanded by stakeholders with that offered in the form of media publications (supply of
corporations). This diverse information media has created a market for digital media, which is the
current trend in media reporting. Hodinka et al. (2012) explained that publication media have
different approaches at different times. Reports in publication media historically were in the form of
oral media. The media for writing publications also developed from handwritten media, typed, to be
published via the internet (internet reporting). Siew (2015) explained that reporting media is a tool
that has a framework, standards, and regulations, which create standardized information. Uyar (2016)
explained that corporate reporting has changed in various aspects, including (1) the contents of the
report, (2) reporting media, (3) target audience, (4) type of report, and (5) reporting design. The
following hypothesis was proposed:
H3: There is an influence of media exposure on the quality of IR.

2.4 Firm Value and IR

Healy and Palepu (2001) stated that if the information conveyed is transparent and truthful, then the
firm’s value, which is proxied through the stock market price, will be precise. Popova et al. (2013)
showed that firms that disclose information under legal provisions are considered to meet legal
requirements and are a low risk so that the firm value increases from the investors' perspectives.
Iatridis (2013) also stated that if the disclosures in the report are good, investors have a clear
perception of the firm's operations, which increases the relevance of the firm's value. The following
hypothesis was proposed:
H4: There is an influence of IR quality on firm value.

3. Methodology

The study population includes all issuers that publish annual reports and listed on five stock exchanges:
Indonesia, Malaysia, Singapore, Thailand, and the Philippines. The study considered 2016–2018 as the

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sample period. The study population included 1,900 firms or 5,700 observations over 3 years.
The operationalization of variables can be stated in the following matrix (Table I).

Table 1: Operationalization of Variables

VARIABLE FORMULA
Firm Size (X1) LN Total Asset
Financial Leverage (X2) (Total Debt/Total Capital)
(Total outstanding shares are owned by ultimate shareholders/total
Ownership Concentration (X3)
outstanding shares)
Firm Age (X4) The age of the firm since it was founded
Profitability (X5) Net income/Total Asset
4 = environment based manufacturing firms
3 = environment based non-manufacturing firms
Industry type (X6)
2 = non-environment based manufacturing firms
1 = non-environment based non-manufacturing firms
3 = if audited by a Big 4 affiliated public accounting firm
Size of the Public Accounting Firm (X7) 2 = if audited by a non-big 4 foreign-affiliated public accounting firm
1 = if audited by a not foreign-affiliated public accounting firm
Composition of Independent
(Total independent commissioners / Total commissioners)
Commissioners (X8)
(Total audit committee with accounting background / Total of audit
Audit Committee Composition (X9)
committees)
Gender on the Board of Directors (X10) (Total female directors / Total directors)
Number of Board of Directors Meetings
Number of board meetings in one year
(X11)
Media Exposure (X12) Number of media publications on annual reports
Disclosure of IR Items (Y) Use the IR matrix as disclosed in Pratama et al. (2019)
The value of the firm (Z) Share price / Book value of the share

The value of the firm's IR quality is compared by country and type of industry, and clusterized using
cluster analysis. The path analysis approach is used to test the research hypotheses. The path analysis
model can be provided as follows: Z = PZYY + ε (1) ; Y = PYX1X1 + PYX2X2 + PYX3X3 + PYX4X4 + PYX5X5 +
PYX6X6 + PYX7X7 + PYX8X8 + PYX9X9 + PYX10X10 + PYX11X11+ PYX12X12+ PYX13X13 + ε (2)

4. Results and Discussion

4.1 Results

Table II describes research variables in general, and Table III explains the disclosure quality score of
IR items by industry type.

Table 2: Description of Research Variables

Description X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 X11 X12 Y Z
Average 19.61 1.42 0.39 33.92 0.00 1.98 2.76 0.51 0.57 0.15 6.43 1.72 104.87 1.34
Std. Deviation 2.76 7.80 0.21 21.94 0.03 0.91 0.88 0.20 0.38 0.19 5.67 0.45 20.80 1.44

Table 3: IR Score as Per Industry Type

Basic Miscellaneous Consumer Trade and
Description Agriculture Mining Infrastructure Property Finance Total
Industry Industry Goods Industry Service
Average 116.13 103.46 98.96 99.68 103.59 107.69 107.64 109.51 103 104.87
Standard
21.52 22.72 19.92 17.73 18.41 20.07 21.17 23.92 18.70 20.58
Deviation

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Per Table III, the average score on the disclosure of IR items is 104.87 or 67.22%, which is still low. If
we assess nine industries, only four industries have disclosure scores above the average, namely,
agriculture, infrastructure, property, and finance.
Table IV illustrates the results for each IR component score.

Table 4: IR Component Score

Description Org_Ovw Gov Bus_Mod Risk_Op Strat&RA Performance Outlook Basis
Average 21.99 17.76 19.02 4.85 10.36 10.12 7.89 12.87
Standard Deviation 4.50 4.39 4.81 1.28 2.25 2.19 1.84 3.35
Percentage 68.73% 63.44% 67.91% 60.62% 64.75% 63.28% 65.76% 80.47%

Table IV shows that the average score of disclosure per component is still approximately 60%, except
for the basis for the presentation of 80%.
Table V presents the disclosure score of each integrated report disclosure item by country.

Table 5: IR scores as per country

Description Indonesia Malaysia Philippine Singapore Thailand Total
Average 102.15 114.97 81.90 97.35 97.99 104.87
Standard Deviation 20.84 18.56 11.24 19.69 8.79 20.58
Percentage 65.48% 73.70% 52.50% 62.40% 62.81% 67.23%

Table V shows that only Malaysia has an IR disclosure score exceeding the average. The Philippines
has the lowest IR disclosure score.

4.2 Cluster Analysis

The following is a description of the average value of the cluster (Table VI)

Table 6: General Cluster Description

Description Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5 Cluster 6
Org_Ovw 28.77 24.47 22.65 20.22 16.97 13.42
Gov 24.99 20.44 17.7 15.74 13.24 9.75
Bus_Mod 25.73 23.03 16.29 19.24 13.75 10.76
Risk_Op 6.86 5.14 4.92 4.23 3.95 3.14
Strat&RA 13.87 10.83 10.68 9.52 8.32 7.1
Performance 13.85 10.78 10.09 9.1 8.33 7.2
Outlook 10.33 8.86 7.37 7.95 6.05 4.61
Basis 15.02 14.91 9.36 15.67 10.35 8.58

The data were described for each type of industry and each country of the research subject. Tables VII
and VIII present descriptions as follows:

Table 7: Number of General Cluster Firms per Country

Description Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5 Cluster 6
Indonesia 78 67 170 8 89 31
Malaysia 172 256 8 307 41 7
Philippine 0 0 38 0 78 7
Singapore 27 46 14 127 97 28
Thailand 0 2 180 0 19 3
Total 277 371 410 442 324 76

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Table 8: General Cluster Members by Industry Type

Description Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5 Cluster 6

Agriculture 30 24 4 23 11 1
Mining 19 26 27 12 28 5
Basic Industry 18 27 55 48 49 11
Miscellaneous Industry 15 41 49 91 55 15
Consumer Goods Industry 14 24 34 38 21 4
Property 56 83 46 89 48 11
Infrastructure 36 53 47 39 27 11
Finance 51 16 69 15 25 5
Trade and Service 38 77 79 87 60 13
Total 277 371 410 442 324 76

The tables show that profiling can be made from each cluster as follows.
1. Cluster 1 is one with the highest average score of eight components compared with other
clusters. Firms from Malaysia dominated Cluster 1. In terms of the type of industry, financial
industry, infrastructure, and property are the three biggest industries that have the highest
number of members in Cluster 1.
2. Cluster 2 consists of the second-highest average component score after Cluster 1.
Characteristics per country of Cluster 2 are similar to that of Cluster 1, Regarding the type of
industry, Cluster 2 is dominated by firms from the infrastructure, trade and services, and
property industry.
3. The third is a cluster with the third-highest average component score among the clusters.
However, when viewed in detail, Cluster 3 has a lower level of disclosure in the Business
Model, Outlook, and Basis for Presentation components compared with Cluster 4.
4. Cluster 4 has the fourth-highest average component score and the highest number of
members, that is, 442 firms.
5. Cluster 5 has the fifth-highest average component score overall. Firms from Singapore and
the Philippines dominate this cluster. Firms from the trade and service, basic, and
miscellaneous industries dominate the number of members in this cluster.
6. Cluster 6 is the lowest score among the other clusters. In terms of the type of industry, the
number of members of the nine industries is fairly evenly distributed.
Based on the Cluster profiling above, it can be said that the six Clusters can be identified as
follows:
1. First Cluster: Excellent IR Quality
2. Second Cluster: Good IR Quality
3. Third Cluster: Adequately IR Quality
4. Fourth Cluster: Fair IR Quality
5. Fifth Cluster: Marginal IR Quality
6. Sixth Cluster: Poor IR Quality

4.3 Path Analysis

The goodness of fit test showed that the model is fit to be interpreted. Table IX shows that only
leverage, gender diversity, and media exposure have a different coefficient sign. All the hypotheses
were accepted.

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Table 9: Path Analysis Result

Path Coefficient Standardized Estimates Expected Sign

PYX1 0.1288 +
PYX2 −0.0011 +/−
PYX3 −0.1340 −
PYX4 0.0789 +
PYX5 0.0212 +
PYX6 −0.0318 +/−
PYX7 0.1841 +
PYX8 0.2776 +
PYX9 0.1179 +
PYX10 −0.0170 +
PYX11 0.1334 +
PYX12 −0.0182 +/−
PZY 0.0431 +/−

4.4 Discussion

The results showed a positive influence of firm size on the extent of disclosure of IR items. The firm
eventually makes more disclosures to satisfy stakeholders’ demands. Various studies on the
implementation of IR show that large firms can better implement IR because all levels of the
organization understand how their firms create value (Buitendag et al. 2017; Dilling and Caykoylu,
2019) and can afford the high reporting costs (Steyn, 2014; Haji and Hossain, 2016).
The results showed that financial leverage negatively affected the coverage of IR items. Studies
have focused on the political cost theory, where large debts lead to higher political costs for a firm,
which in turn results in firms disclosing information extensively (Benyasrisawat and Basiruddin, 2012;
Alzoubi, 2017).
The results showed that widespread ownership increases the extent of disclosure of IR items.
Regarding its implications for IR, concentrated ownership leads to fewer needs for information
conveyed by IR (Hope et al. 2011). Majority shareholders who have concentrated ownership are not
broad-minded and tend to be secretive regarding the firm’s processes, especially regarding the
business environment, strategy, and the risks or opportunities that exist in the organization, because
(1) strategy and business can be emulated by competing firms (Chernykh, 2008); (2) capital loss
because it reveals the risks or negative impacts that exist in the firm (Grosman, 2016).
The results showed that older firms demonstrated wider disclosure of IR items. The firm can
survive because it has a long-lasting value-creation process (Busco et al., 2013). A bankrupt firm fails
to develop and execute a strategy and does not earn trust from the stakeholders (Beattie and Smith,
2013). Mature firms have the prerequisites to promptly respond to the stakeholders’ changing needs,
such as reporting the value-creation process through IR (Dumay et al., 2017; Feng et al., 2017).
The results showed that the higher the profitability of the firm, the wider the disclosure of IR.
Investors perceive that the information generated must be positive, and they tend to panic when
negative information is received (Trang and Phuong, 2015). Another perspective is related to the
firm's focus, loss-making firms focus on improving their strategy and operations and ignoring
administrative aspects, such as reporting (Hahn and Lülfs, 2019). IR is still voluntary reporting that
may be ignored by poorly performing firms (Haji and Hossain, 2016).
The results showed that the type of industry affects extensive disclosure; specifically, non-
environment-based and non-manufacturing firms have more extensive IR disclosure. Various reasons
lead to this difference. First, the emergence of the concept of sustainability not just in extractive
sectors but also in other sectors as well, such as banking and finance (Jeucken, 2004; Sobhani et al.,
2012). Second, South East Asia is mostly dominated by non-manufacturing sectors, namely, industries

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such as infrastructure, trade, services, and property industries are growing rapidly (Schwab, 2017; Li
and Hall, 2020).
The results showed that firms audited by the Big 4 public accounting firms have an extensive IR
disclosure item. In addition to performance, information such as risk and opportunity, as well as the
basis for presentations, is also related to the scope of the work by public accounting firms
(Abeysekera, 2013). Foreign-affiliated public accounting firms have a wider international network,
which allows access to more literature, personnel, and audit techniques (Lawrence et al., 2011). Public
firms are highly complex and can be audited appropriately if public accounting firms have good
resources (Keskinen et al., 2003; Campa, 2013; Pratama, 2018b).
The results showed that the extent of IR disclosure items can be increased by having more
independent directors on board. Independence guarantees that the firm has adopted good business
practices and not pervaded by the owners’ vested interests (Knyazeva et al., 2013; Masulis and Mobbs,
2013). In addition to awareness, independent supervision ensures that the firm discloses all
components in IR without choosing information that only has a positive impact (Stent and Dowler,
2015).
The results showed that the more members of the audit committee with accounting
background results in more extensive disclosure of IR items. Accounting teaches business analysis,
economics, and comprehensive reporting, which is the basis for understanding the IR concepts (Lary
and Taylor, 2012; Ghafran and O’Sullivan, 2013; Arismajayanti and Jati, 2017).
Women directors reduce the extent of IR disclosures. These results contradict studies that state
that the composition of female directors increases the extent of disclosure. In the five research
subject countries, the board of directors was still dominated by men. Southeast Asian countries still
have a large gender gap (Chang and England, 2011) and suffer much stigma in terms of tradition,
religion, or culture that place women in non-leader gender roles (Setyonaluri, 2014; Qian and Sayer,
2016).
The results showed that the IR disclosure items would increase if more directors' meetings were
held. The directors' meeting indicates a discussion of problems and their solutions (Johl et al., 2015;
Eluyela et al., 2018). Directors engaging in several meetings have more robust business processes
understanding (Vafeas, 1999), which in turn help in IR to convey information about the firm.
The results showed that a lower number of media publications lead to a reduction in the quality
of IR disclosure. In this study, data obtained showed that the five research subject countries had only
two maximum reporting media, namely, hard copy and internet. A lower number of items were
disclosed, and the data only presented a summary of the performance.
The results showed that the extent of IR disclosure items had a positive effect on firm value.
Firms have not only financial value, but also social, intellectual, and manufacturing values (IIRC, 2013;
Pratama et al., 2019). Investors have now begun to shift from the financial paradigm, from short-term
information to integrated, all-time sphere information (Dumay et al., 2017).

5. Conclusions

To conclude, first, the discussion related to firm characteristics is based on the political cost theory.
Political cost theory explains that to reduce political costs, firms should disclose better information
and satisfy stakeholder demands. Therefore, firms with certain characteristics will continue to adopt
various forms of corporate reporting in the future to satisfy the stakeholders' interests. Second, in the
discussion related to CG factors, supervisory and executive functions within the firm are important
for increasing the extent of disclosure of IR items. The supervisory and execution functions must have
sufficient composition in terms of quantity and quality. Third, although the IR disclosure items
increase the firm value, its implementation is still in the awareness stage and the momentum should
be maintained in the future, so the IR disclosure items have a greater effect on firm value. Fourth, the
disclosure of IR items largely falls under the category of "adequately good." There is still a need for
the great effort in the future to increase the quality of the IR.

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Suggestions can be made to several parties. IR can be adopted as a form of reporting in public
firms to increase firm value and information transparency. Regulators should consider
communicating the importance of IR because the new IR framework should be understood by all
stakeholders and the firm. Firms can consider infrastructure and procurement plans to implement
better IR. For professional associations and educational institutions, it is necessary to socialize the
concept of IR and assists in implementing it through education. Future researchers can analyze the
reporting infrastructure needed for implementing IR, and the cost-benefit analysis related to
compliance costs and the benefits of reporting by cross-comparison between countries if the five
subject countries firms have fully implemented IR in the future.

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