Does Integrated Reporting Affect Real Activities Manipulation?

Abstract

Integrated reporting (IR) by firms is intended to improve not only the quality of information available to external parties, but also internal managerial decision making. IR is considered useful to address the short-term orientation of firms caused by pressure from short-term oriented shareholders. This study examines whether the introduction of IR discourages real activities manipulation, a form of myopic behavior. Using a large sample of Japanese listed companies, the study empirically tests the effect of IR on real activities manipulation through panel data regression analysis. We find that the introduction of IR is related to higher level of abnormal cash flows from operations, lower level of abnormal production costs, and lower level of total activities manipulation. These results generally suggest that firms tend not to engage in real activities manipulation after IR is introduced. Our results also show that while there is insignificant difference in the degree of real activities manipulation between IR and non-IR firms immediately after the introduction of IR, the degree of real activities manipulation is generally smaller in IR firms than in non-IR firms after more time has passed since the introduction of IR, consistent with the view of practitioners that IR is a continuous improvement process of internal decision making. Regarding the non-financial aspects, additional analysis shows that introducing IR is positively associated with the performance of environmental, social and governance (ESG). Our findings suggest that IR could discourage companies’ short-term oriented behavior and promote long-term value creation, which is of interest to a wide range of stakeholders. Thus, our findings provide insightful evidence for researchers, practitioners, and policy makers interested in the role of IR in stakeholder-oriented corporate governance mechanisms.

The Impact of Corporate Governance, Information Asymmetry and Sustainability Reporting: A Systematic Exploration

“…The degree of real activity manipulation is quite small in IR firms compared to non-IR firms after the introduction stage of IR. It is consistent with the practitioners 'that IR is a continuous improvement process of internal decision-making (Shirabe & Nakano, 2022). Another supported study proved that IR is an effective governance tool in constraining earnings management behaviour.…”

“…It is found that the earning management can be reduced by introducing the IR. A study by Shirabe and Nakano (2022) found an insignificant difference in the degree of real activity manipulation between IR and non-IR firms immediately after introducing IR. The degree of real activity manipulation is quite small in IR firms compared to non-IR firms after the introduction stage of IR.…”

“…This paper would like to elaborate on these modern reporting mechanisms. This reporting mechanism aims to help the business improve information quality (Hamad et al, 2022;Eloff & Steenkamp, 2022), create sustainable value (Hamad et al, 2022), facilitate stakeholder decision-making (Sinnewe et al, 2021) and address the short-term orientation of firms caused by pressure from short-term oriented shareholders (Shirabe & Nakano, 2022). There is no prescribed standard for this reporting mechanism.…”

“…The introduction of IR positively impacts the performance of environmental, social and governance (ESG). IR could discourage companies' short-term behaviour and promote longterm value creation (Shirabe & Nakano, 2022). The capacity of IR quality to allow a debt reduction cost should push managers to a greater propensity towards transparency and disseminating high-quality integrated reports.…”

The Funding Burden in Detecting Financial Fraud

“…The existence of the company's findings in manipulating earnings will show that the value of its shares will drop drastically, so this model will be a valuable tool for investment professionals. Shirabe & Nakano (2022) show that companies with integrated reporting tend not to be involved in actual manipulation activities. In the view of practitioners, integrated reporting is a follow-up process that has experienced improvements in internal decision-making.…”