Impact of Integrated Reports on Cost of Equity: Evidence From Japanese Listed Firms
Abstract
This study empirically analyzes the effects of the voluntary adoption and quality of integrated reports (IRs) on the cost of equity capital in Japan. Using 514 Tokyo Stock Exchange listed firms (over 2004–2020) and employing propensity score matching, difference‐in‐differences, and fixed effects models, we find that the adoption of IRs significantly reduces the cost of equity capital. This effect is stronger for high‐quality IRs, particularly in environmentally intensive industries and firms with low price‐to‐book ratios. The results suggest that IR adoption mitigates information asymmetry and disclosure of high‐quality information leads to lower capital costs. Moreover, our results remain robust to a series of robustness checks. Taken together, these findings provide evidence that IR disclosure, and high‐quality IR in particular, can serve as a strategic disclosure tool that contributes to improved market valuation through a reduction in the cost of equity capital, and that this practical benefit is particularly pronounced for firms in environmentally intensive industries with strong incentives for non‐financial disclosure, as well as for firms with low market valuations. Firms hesitate to adopt integrated report (IR) because of its costs and operational burdens. By showing that IR adoption is associated with a reduction in the cost of capital, this study offers a concrete economic rationale to support firms’ adoption decisions and serve as an internal justification for the initial investment. The benefit of a reduction in the cost of capital is not driven solely by the act of issuing an IR; rather, improving the quality of IR disclosures is crucial for realizing a stronger cost‐of‐capital reduction. For analysts, IR can complement traditional financial information by improving the assessment of long‐term value creation and risk, which may help produce more credible forecasts and reduce estimation uncertainty—mechanisms consistent with a lower cost of capital.