24 Feb 2014Working Paper Summaries

Integrated Reporting and Investor Clientele

by George Serafeim

As a relatively new phenomenon in the world of corporate reporting, integrated reporting (IR) has gained traction across both the corporate and investor community in the last 10 years. A recent pilot program of the International Integrated Reporting Council, for example, included more than 100 large multinational companies supported by an investor network with more than 40 members. Although IR has the potential to fundamentally change corporate reporting, we still know relatively little about its causes and consequences. Proponents of IR argue that the attraction of long-term investors is a benefit of adopting IR. While anecdotal evidence has suggested the presence of a link, no empirical evidence to date has been provided to establish such a relation. In this paper, the author examines how the practice of IR affects the investor base of the firm. Specifically, analyzing data on more than 1,000 firms between 2002 and 2010, he finds that firms practicing IR have a more long-term investor base and fewer transient investors. In addition, evidence supports a causal mechanism from IR to the investor base of a firm. Investor activism on sustainability issues is shown to be effective in improving IR, but such investor-induced changes in IR do not affect the composition of the investor base. Overall, the paper contributes to emerging scholarship that seeks to understand the causes and consequences of sustainability and integrated reporting. It also contributes to studies examining how companies cater to different types of investors. Key concepts include:

Integrated Reporting (IR) is a reporting innovation that serves as an important determinant of the composition of a firm's investor base.
Firms that practice IR tend to have fewer transient investors and more dedicated investors who are oriented to the long term.
IR is a rare experiment in fundamentally changing corporate reporting. More research is needed on what are the motivations of different firms that practice IR, as well as research on whether and how IR instills 'integrated thinking' inside the firm.

Author Abstract

In this paper, I examine the relation between Integrated Reporting (IR) and the composition of a firm's investor base. I hypothesize and find that firms that practice IR have a more long-term oriented investor base with more dedicated and fewer transient investors. In additional analyses, I find that the results are robust to the inclusion of firm fixed effects, controls for the quantity of sustainability disclosure, alternative ways of measuring IR, and that changes in IR lead changes in investor base while changes in investor base do not lead changes in IR, supporting a causal effect of IR on investor base. Finally, I find that investor activism on environmental and social issues leads to firms practicing more IR but this investor-induced IR does not affect the composition of a firm's investor base.