The Capital Market effects of Integrated Sustainability Reporting

While the bulk of prior research suggests that firms with higher Integrated Reporting () disclosures are associated with higher firm values, some recent research, on the other hand, suggests that higher disclosures could be associated with lower firm values since could be used by managers as a smokescreen to hide poor performance. In this paper, we integrate these two ideas to provide some evidence that at low to moderate levels of , there is a positive relationship between an score and (1) firm value, and (2) liquidity (a proxy for the capital market channel), but at progressively higher levels of , the relationships become negative consistent with the smokescreen/obfuscation explanation. Furthermore, in additional exploratory tests, we find a non-linear relationship between and earnings quality measures and readability, consistent with the idea that managers may use high disclosures as a smokescreen to hide earnings management.