Does Integrated Reporting Affect Real Activities Manipulation?

Integrated reporting (IR) by firms is intended to improve not only the quality of information available to external parties, but also internal managerial decision making. IR is considered useful to address the short-term orientation of firms caused by pressure from short-term oriented shareholders. This study examines whether the introduction of IR discourages real activities manipulation, a form of myopic behavior. Using a large sample of Japanese listed companies, the study empirically tests the effect of IR on real activities manipulation through panel data regression analysis. We find that the introduction of IR is related to higher level of abnormal cash flows from operations, lower level of abnormal production costs, and lower level of total activities manipulation. These results generally suggest that firms tend not to engage in real activities manipulation after IR is introduced. Our results also show that while there is insignificant difference in the degree of real activities manipulation between IR and non-IR firms immediately after the introduction of IR, the degree of real activities manipulation is generally smaller in IR firms than in non-IR firms after more time has passed since the introduction of IR, consistent with the view of practitioners that IR is a continuous improvement process of internal decision making. Regarding the non-financial aspects, additional analysis shows that introducing IR is positively associated with the performance of environmental, social and governance (ESG). Our findings suggest that IR could discourage companies' short-term oriented behavior and promote long-term value creation, which is of interest to a wide range of stakeholders. Thus, our findings provide insightful evidence for researchers, practitioners, and policy makers interested in the role of IR in stakeholder-oriented corporate governance mechanisms.