Integrated Report and Credit Risk: Empirical Evidence from a Mandatory Integrated Reporting Setting

In this chapter, the association of integrated reporting (IR) to corporate reporting informativeness is investigated in the South African context, the pioneer in the IR adoption. IR is deemed to help assess risk metrics and improve risk management by means of integrated thinking. Based on this premise, we hypothesize mandatory IR adoption helps mitigate credit risk resulting in lower cost of debt. The hypothesis is tested by comparing the cost of debt of companies listed on the Johannesburg Stock Exchange before and after its mandatory IR regime (i.e., 2011). Overall, the study documents a reduction in the cost of debt for firms following IR adoption. In additional tests, we also document that the reduction in the cost of debt is higher for those entities which do not have an enterprise risk management system in place, thus suggesting that debtholders perceive that IR promotes a more structured risk management approach. The exploratory study extends prior literature on the IR effects to capital markets participants and to internal decision-making suggesting the potential of IR to encourage the practice and reporting of a holistic risk management approach, which helps decrease credit risk and, thus, resulting in a lower cost of debt.