This study investigates the nexus between integrated reporting (<IR>) and financial performance (FP) in firms listed on sustainable stock exchanges in Namibia and South Africa that have mandatory disclosure requirements. The study is desirable in view of the dearth of studies in this area. Even for existing studies on the subject, results are inconsistent which can send conflicting signals on value relevance of <IR>.
The study employs the positivist paradigm. Hypotheses were developed based on the agency and signaling theories. Data was collected from 225 firms listed on JSE and NSX using stratified and simple random sampling. The dependent variable was FP (measured through return on equity – ROE and return on assets – ROA) while independent variables were <IR> capitals: natural (NC), human (HC), social & relational (SRC), manufactured (MC), intellectual (IC) and Financial (FC). An overall <IR> quality (IRI) was also examined. Leverage (LEV) and Firm Size (FSize) were used as control variables.
NC and FC are the least and most reported <IR> capitals respectively. There is a significant relationship between the quality of <IR> capitals and FP. The significance level is based on the F-statistic with a p-value below 0.05. With the R2 of 45%, it shows a strong influence of disclosure quality levels of <IR> capitals to ROE. ROA yields similar results. Inclusion of control variables in the equation did not deter the statistical significance.
The results confirm the value relevance of <IR>. Firms that have adopted quality <IR> practices have enjoyed higher FP and other firms that still lag behind are encouraged to adopt the practice. The level of <IR> has been highlighted including its gaps. Practitioners and policymakers need to tighten areas like NC reporting.
The study brings more understanding of the state of <IR> and areas of improvement in reporting. The study validates the relevance of agency and signaling theories in explaining <IR> practices. The gaps and levels of reporting under each <IR> capital have been highlighted thus contributing to the tools that can be used to improve <IR>. The study contributes to the literature on mandatory <IR> as well as value relevance of adopting <IR> practices.