Integrated reporting and cost of capital in sub-Saharan African countries

Abstract

Purpose

Given the significant role of both integrated reporting and cost of capital in the survival and prosperity of a firm, it is essential to understand their relationship by investigating whether integrated reporting influences the cost of capital of a firm. This research paper aims to examine the impact of integrated reporting practice on the cost of capital of listed firms in sub-Saharan Africa (SSA).

Design/methodology/approach

The study covered a period of 10 years from 2009 to 2018. One hundred and forty-seven listed firms in 10 SSA countries were used for the study. The study employed panel data analysis and utilised a dynamic estimation technique called the generalised method of moments.

Findings

The evidence shows that integrated reporting has a negative relationship with cost of capital, indicating integrated reporting can reduce firms' cost of capital. The results further showed that social, governance and environmental disclosures all have negative relationships with cost of capital, suggesting that firms that make these disclosures would have a lower cost of capital. These results are consistent with signalling theory, which holds that firms send a positive signal to the market about their performance and prospects when they provide information relating to value creation, predominantly environmental, social and governance issues.

Research limitations/implications

The major limitation of the study is the selection of only English-speaking countries. French-speaking countries may have a different reporting practice, hence a different effect on the cost of capital.

Practical implications

This study contributes to policy development on integrated reporting in SSA and informs key stakeholders involved in promoting and supporting the adoption of integrated reporting in Africa.

Originality/value

The findings from this paper consolidate existing research in integrated reporting and cost of capital by providing empirical evidence on the relationship between integrated reporting, its components and the cost of capital from emerging economies. This study contributes to the understanding of investors' reactions to integrated reporting. Further, it fills a gap in the non-availability of literature on the relative impact of the various components of integrated reporting.

Citation

Maama, H. and Marimuthu, F. (2022), "Integrated reporting and cost of capital in sub-Saharan African countries", Journal of Applied Accounting Research, Vol. 23 No. 2, pp. 381-401. https://doi.org/10.1108/JAAR-10-2020-0214