Board characteristics and integrated reporting quality: an agency theory perspective

Abstract

Integrated reporting is the latest novelty in the corporate reporting field. It is a tool capable of better representing the capacity of companies to create value over time. In recent years, attention to this new reporting tool has grown in both professional and academic fields. However, despite past research that has analysed many aspects of integrated reporting, the integrated reporting quality and its determinants are still little explored. This study aims to fill this gap by analysing the effect of board characteristics on integrated reporting quality according to an agency theory approach. The findings, based on a sample of 134 international firms, show a positive relationship between the size, independence, diversity, and activity of a board with integrated reporting quality. This study contributes to enriching literature in this area in various ways. First, it broadens the scope of application of agency theory; second, it identifies further internal determinants of integrated reporting quality. This is the first study that analyses the impact of the characteristics of a board as a determining factor of integrated reporting quality.

The role of board of directors in intellectual capital disclosure after the advent of integrated reporting

“…Previous studies on the relationship between boards of directors and disclosure are based on agency theory (Barako, Hancock, & Izan, 2006; Donnelly & Mulcahy, 2008; Frias‐Aceituno, Rodriguez‐Ariza, & Garcia‐Sanchez, 2013; Vitolla, Raimo, & Rubino, 2020). This study is also based on agency theory, due to its ability to explain the dynamics underlying voluntary corporate disclosure choices (Chow & Cooke, 1989; Hossain, Perera, & Rahman, 1995).…”

“…Together, these three cost types make up agency costs (Jensen & Meckling, 1976), which are caused by information asymmetry between managers and shareholders (Barako et al, 2006). In fact, managers have a significant information advantage over shareholders (Barako et al, 2006), making shareholders unable to accurately evaluate the work of managers (Vitolla, Raimo, & Rubino, 2020). Information asymmetry allows managers to act contrary to the interests of the shareholders (Donnelly & Mulcahy, 2008).…”

“…Formal contracts represent a possible means of reducing agency costs (Vitolla, Raimo, & Rubino, 2020), as they are designed to align the interests of managers and shareholders (Barako et al, 2006; Healy & Palepu, 2001). Unfortunately, this solution is rarely used because the contracts are often incomplete.…”

“…In light of this, it is clear that the control and monitoring activities of the board of directors represent a means of increasing disclosure quality and, consequently, reducing information asymmetry and agency costs. However, the control and monitoring capacity of the board is influenced by some characteristics of this body (Vitolla, Raimo, & Rubino, 2020). Therefore, this study aims to analyse specific characteristics of boards of directors and their influence on the quality of ICD.…”

“…This work specifically focuses on determinants relating to corporate governance and different characteristics of boards of directors. In fact, boards play a fundamental role in the communication choices of companies with their stakeholders (Healy, 2002; Kostant, 1999; Perrini, 2006; Vitolla, Raimo, & Rubino, 2020). According to agency theory, the board of directors is a control mechanism capable of reducing information asymmetry and aligning the interests of ownership and management (Jensen & Meckling, 1976) in relation to both financial (Brennan & Solomon, 2008; Bushman & Smith, 2001; Healy, Hutton, & Palepu, 1999; Healy & Palepu, 2001) and non‐financial information (Gray, Owen, & Maunders, 1987; Prado‐Lorenzo, Gallego‐Alvarez, & Garcia‐Sanchez, 2009; Prado‐Lorenzo & Garcia‐Sanchez, 2010).…”