Strategic information disclosure, integrated reporting and the role of intellectual capital

Purpose The purpose of this paper is to use a theoretical and empirical model to investigate the adoption of the integrated reporting (IR) framework as a strategic choice to signal intellectual capital (IC) to equity investors, with specific reference to the pharmaceutical industry. Design/methodology/approach The choice of drafting an integrated report is modelled as a means for managers to strategically disclose price-relevant information related to IC. The voluntary disclosure model developed by Verrecchia (1983) is used, also introducing the role of financial analysts to derive a directly reproducible empirical equation. Findings Theoretically, as IR requires managers to exert an effort in reporting activity, this work shows that in equilibrium, only firms with sufficient IC have decided to adopt IR, resulting in rational investors’ willingness to pay more only for the forecasted earnings of integrated reporters. This theory is tested in the pharmaceutical sector, where the modelling choice is probably more valid, with mixed results. Research limitations/implications When compliant with the International Integrated Reporting Council’s (IIRC) standards, IR provides the means to disclose IC in a perfectly verifiable way. Furthermore, since the IIRC has only recently been established, the conclusions have only been tested on a limited data set. Originality/value This work connects the value relevance of IR to IC by adopting an equilibrium approach, which, in turn, provides specific indications of how to build a consistent empirical test of the theory.