The Determinants and Value Relevance of Integrated Reporting Quality: Evidence from Japan

Integrated reporting is a novel reporting approach based on integrating financial and nonfinancial information. Japan has emerged as the largest voluntary adopter of this reporting trend. The purpose of this thesis is to evaluate whether Japanese integrated reports meet the International Integrated Reporting Council's and the International Accounting Standards Board ideals for clear, concise and complete communication by analysing the textual qualities of those reports, particularly, readability, conciseness, tone and coverage. The study also intends to examine the financial determinants of these qualities, specifically analysing the effects of profitability, size, liquidity, leverage and dividends. Lastly, the study seeks to explore the value relevance of these textual qualities, assessing how they influence investor perceptions and decisions. To achieve those aims a battery of textual analyses were conducted on a sample of 618 Japanese firms' integrated reports from 2016-2021. Readability is assessed using FOG index and Flesch Reading Ease formula, conciseness is proxied by number of words in an integrated report, tone is analysed using DICTION software and Loughran and McDonald (2011) dictionary, and coverage is assessed through ESG disclosure scores according to Refinitiv database. Subsequently, regression models were employed to analyse the financial determinants influencing these textual qualities. Finally, the Ohlson (1995) model was utilised to assess the value relevance of the investigated characteristics. The findings highlight significant challenges in Japanese IR practices, particularly in terms of readability and conciseness, with reports often being lengthy and difficult to read. There is also noticeable bias towards optimism and certainty in reports’ tone. The study’s findings suggests that firm size is a significant determinant of IR quality, correlating with greater reading difficulty, longer reports, more optimistic tones and increased ESG coverage, while profitability does not consistently enhance IR quality. Leverage positively affects report length and negatively influences optimism, while liquidity shows a negative correlation with certainty and ESG coverage. Dividends yields is inversely associated with optimism and ESG disclosure scores. Furthermore, the value relevance analysis indicates that investors favour integrated reports that are readable, concise, balanced in tone with comprehensive coverage of ESG topics. However, excessively brief reports are viewed negatively, and overly optimistic tones are less value relevant. This study represents the first comprehensive textual analysis of integrated reporting in Japan, a country where IR practices are prevalent and actively promoted by regulatory bodies. This research offers substantive insights for policy makers tasked with improving the quality of integrated reporting. Particularly, it highlights the need for clearer, more concise reporting to enhance the decision-usefulness of integrated reporting.