Business Strategy and the Environment

Bus. Strat. Env. 25, 165–177 (2016)

Published online 31 October 2014 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/bse.1863

Corporate Sustainable Development: is ‘Integrated

Reporting’ a Legitimation Strategy?
Alessandro Lai, Gaia Melloni and Riccardo Stacchezzini*
University of Verona, Italy

ABSTRACT
In the field of sustainability reporting (SR), the so-called ‘integrated report’ (IR) is gaining
momentum. In spite of its voluntary nature, a growing number of firms are adopting IR by
participating in the International Integrated Reporting Council (IIRC) Pilot Programme.
Stimulated by concerns on the use of SR as a legitimation strategy, the paper investigates
whether the decision to adopt an IR stems from the need to repair legitimacy threats. By
showing that IR adopters have significantly higher Bloomberg ESG disclosure ratings relative
to non-adopters, we reject the hypothesis of firms adopting IR as a response to a poor rating.
Additionally, we show that other proxies of legitimacy pressures (size, leverage, profitability,
industry) do not play a role in explaining IR adoption. Overall, our evidence suggests that
corporate engagement in IR is not a matter of strategic legitimation. Copyright © 2014 John
Wiley & Sons, Ltd and ERP Environment

Received 16 December 2013; revised 10 May 2014; accepted 21 May 2014

Keywords: integrated reporting; sustainability reporting; ESG ratings; sustainable development; communication strategy;
legitimacy theory

Introduction

A
CCORDING TO THE INTERNATIONAL INTEGRATED REPORTING COUNCIL (IIRC), AN INTEGRATED REPORT (IR) IS A CONCISE
representation of how firms create value over time, and it combines financial information with
environmental, social and governance (ESG) information.
The growing attention on the issues of ‘sustainable development’ within companies has led to the
flourishing of sustainability reporting (SR) over the last two decades (Gray, 2002; Kolk and Perego, 2010;
Mårtensson and Westerberg, 2014), and IR is consider to be a ‘tool’ apt to make a breakthrough in SR.
The supporters of IR believe that it will bring greater transparency on corporate commitment to sustainability, by
showing the links between financial and sustainability performance in a single document (Eccles and Krzus, 2010;
Adams, 2013; King and Roberts, 2013). In spite of this, previous studies show that SR does not necessarily reflect the
actual corporate engagement in sustainability (Toppinen et al., 2012; Alonso-Almeida et al., 2013; Pérez-López et al.,
2013). SR may serve as a strategic instrument to improve corporate reputations (Deegan, 2002; Hopwood, 2009;
Gray, 2010), and Milne and Gray (2013) claim that IR is likely to be the same. Indeed, with one of the exceptions
being South Africa, where the adoption of IR is compulsory for listed companies (Institute of Directors Southern
Africa (IoDSA), 2009), IR is a voluntary disclosure choice and, as such, it may represent a reporting strategy to
manage corporate legitimacy.

*Correspondence to: Riccardo Stacchezzini, Business Administration, University of Verona. E-mail: riccardo.stacchezzini@univr.it

Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment
166 A. Lai et al.

The present paper does not question whether IR actually reflects the internal practice of corporate sustainability,
but verifies whether the decision to adopt an IR is part of a legitimation strategy to repair a negative public
perception of firm commitment toward sustainability.
Deegan (2002) argues that firms are likely to embark on voluntary reporting strategies to manage their legitimacy
when they receive poor ratings. Chatterji and Toffel (2010) show that poorly rated firms face legitimacy threats and
respond by choosing business strategy to bolster their environmental rating. Eccles et al. (2011b) provide further
support to these arguments, as they demonstrate the market interest in ESG information and in particular in the
so-called ‘ESG disclosure score’ provided by Bloomberg.
Stimulated by these arguments, we investigate whether firms that are members of the IIRC Pilot Programme
(PP) and adopt IR have significantly lower ‘ESG disclosure score’ with respect to non-adopters.
While previous studies explain IR adoption in relation to institutional factors (Jensen and Berg, 2012),
governance characteristics (Frías-Aceituno et al., 2012), assurance of SR (Sierra-García et al., 2013), and industry
concentration (Frías-Aceituno et al., 2014), the present paper investigates IR adoption from the strategic perspective
of legitimacy theory (Suchman, 1995), verifying whether such adoption can be interpreted as a legitimation strategy
based on corporate communication (Dowling and Pfeffer, 1975; Lindblom, 1994).
The rest of the paper is articulated as follows: the next section introduces the theoretical background of the study
and articulates the hypotheses development; the following sections describe the methodology adopted, the findings
and the main results, respectively. Finally, the last section summarizes the main achievements and the limitations,
and outlines further research fields.

Theoretical Background and Research Hypotheses

Over the past decades a number of studies on SR have dealt with the issue that information is disclosed for
legitimation purposes rather than on the basis of any perceived responsibility or commitment to transparency
(Hopwood, 2009).
Concerns about the corporate use of voluntary SR as symbolic practice explain why legitimacy theory (LT) is the
theoretical framework most employed in SR studies (Parker, 2005; Owen, 2008).
Accordingly to LT, a firm legitimacy is threatened whenever there is a disparity between its actions and the expec-
tations of the social system for its conduct, and managers can influence external perception about the organization
by means of communication strategies (Dowling and Pfeffer, 1975; Lindblom, 1994). Firms have an incentive to vol-
untarily disclose information to target groups to indicate that they are conforming to public expectations (Deegan,
2002). In particular, disclosure may be used as a ‘symbol’ to communicate changes in the corporate behaviour
(Dowling and Pfeffer, 1975), thus ‘repairing’ a poor legitimacy (Suchman, 1995). The greater the adverse shift in
the social perceptions of how an organization is acting, the greater the likelihood to use corporate communication
as legitimation strategy (O’Donovan, 2002).
There are several and interrelated factors that have been studied in the literature as sources of legitimacy
threats. Deegan (2002) argues that negative ratings given by particular agencies represent one of these threats,
and firms may use discretionary disclosure choice to (re)gain legitimation. Moreover, with reference to recent
archival empirical studies, Patten (2002); Cho and Patten (2007) and Cho et al. (2012) support LT argument by
showing that the use of SR is explained by legitimacy threats such as bad records on environmental performance
given by particular rating agencies. They offer this result by investigating environmental disclosure voluntarily
offered in (mandatory) annual reports. Conversely, other scholars consider different reporting formats such as
standalone SR and provide different evidence. For instance, Clarkson et al. (2008) and Mahoney et al. (2013) show
that companies with superior sustainability records tend to make more extensive disclosure in their CSR reports,
thus rejecting LT hypotheses.
These conflicting results demonstrate the need of further empirical investigation of what drives firms to disclose
ESG information (Cho et al., 2012) and stimulate us to test the following research hypothesis.

HP1: Firms with weaker ESG disclosure ratings are more likely to adopt an IR.

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DOI: 10.1002/bse
Is “Integrated Reporting” a Legitimation Strategy? 167

Chatterji and Toffel (2010) demonstrate that when firms receiving poor ratings managers are likely to take direct
action to repair them. We chose ESG disclosure ratings because there is a large and growing market interest in com-
munication of companies’ ESG strategies and performances: ESG disclosure ratings capture the analysts’ evaluation
of corporate disclosure on ESG issues and are considered to be representative of management engagement toward
sustainability by investors (Eccles et al., 2011a, 2011b).
In particular, we select the ESG disclosure ratings set by Bloomberg because of the focus of this agency on cap-
ital providers, which are the primary audience of IR. The interest in Bloomberg’s ESG ratings is shown by the
increasing number of users accessing information on ESG issues since its launch in 2009 (2419 in 2009;
4074 in 2010; 5747 in 2011; 7779 in 2012). In this respect, Bloomberg’s ESG disclosure scores are appropriate
to assess if IR adoption is associated with firms’ desire to make up for poor market valuation of their level of
ESG disclosure.
Companies do not only face legitimacy threats related to poor sustainability ratings. Previous studies on LT argue
that corporate legitimacy may depend on additional factors such as size, leverage, profitability and industry (e.g. Patten,
2002; Cho and Patten, 2007; Clarkson et al., 2008; Cho et al., 2012; Mahoney et al., 2013). Drawing on these sugges-
tions, we verify whether IR adoption is affected by the same factors. Of course, we also take into consideration the
findings of previous studies on the determinants of IR adoption (Frías-Aceituno et al., 2012, 2014; Jensen and Berg,
2012; Sierra-García et al., 2013).
In particular, prior studies on LT (Patten, 2002; Cho and Patten, 2007; Cho et al., 2012) provide evidence that the
size of the firm impacts on its level of social exposure because larger firms tend to make more extensive voluntary
disclosure than smaller companies due to a higher public visibility. With specific reference to IR adoption, Frías-
Aceituno et al. (2012, 2014) and Sierra-García et al. (2013) support the same hypothesis that larger companies are
more likely to choose IR as a reporting strategy. We thus expect to find a positive and significant relation between
IR adoption and firm size.

HP2: Larger firms are more likely to adopt an IR.

Other studies on LT purpose that firms’ specific characteristics such as leverage and profitability play a role in
explaining voluntary disclosure choices (Clarkson et al., 2008; Mahoney et al., 2013). In line with LT, a particular
reporting strategy may be influenced by lending institutions requiring borrowers to periodically provide this type
of information. In line with this, we test the following hypothesis.

HP3: Firms with higher leverage are more likely to adopt an IR.

With reference to profitability, firms with worse performance may choose a communication strategy to gain
legitimacy by deflecting attention from the issue of concern and highlighting other accomplishments in their
reports (Lindblom, 1994). However, Frías-Aceituno et al. (2012, 2014) investigate the existence of a profitability
effect on IR adoption, without finding statistically significant relations. Drawing on the LT proposition, we test
the following hypothesis.

HP4: Firms with lower profitability are more likely to adopt an IR.

Finally, it is deemed that some industries are exposed to more public pressure than others. In particular, prior
studies show that firms from industries that are environmentally sensitive tend to disclose more than companies
with less exposure (Patten, 2002; Cho and Patten, 2007; Cho et al., 2012). In line with this, membership of partic-
ular industry groups that are environmentally sensitive should be positively associated with IR adoption. However,
Frías-Aceituno et al. (2012) and Sierra-García et al. (2013) provide limited evidence of the existence of an industry
effect on IR, and Frías-Aceituno et al. (2014) show that business sector does not impact on the choice of adopting
IR. Drawing on the LT proposition, we test the following hypothesis.

HP5: Firms in environmentally sensitive industries are more likely to adopt an IR.

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168 A. Lai et al.

Research Methodology
Data Collection
We consider the population of IIRC PP members and match it to similar firms that do not adopt IR.
The primary sample (PS) includes 52 international business firms that are actually members of the PP and adopt
an IR. The firms are selected when they satisfy the following criteria: firms are members of the PP at the end of
March 2013 and they have data on Bloomberg’s ESG disclosure ratings available on that date. 85 firms are members
of the PP; 22 are not listed (and Bloomberg does not cover unlisted firms) and 11 have no available data on ESG
ratings. This reduces the PS to 52 firms.
The matching sample (MS) of 52 IR non-adopters is built following these criteria: industry sector classification
(based on the Industry Classification Benchmark (ICB) system created by Dow Jones and FTSE); geographical
region (same continent or country, if possible); size (based on the volume of assets). The MS firms must also have
ESG ratings available on Bloomberg.
The combined sample (PS + MS) is made up of 104 international business firms. All the information is taken
from the Bloomberg Database for years 2009–2011.
Table 1 provides the PS distribution by continent and industry. The PS comprises firms from six different con-
tinents, with a larger proportion of IR adopters coming from Europe (60% of the sample). 10 different industries
are represented. The financials sector has the largest proportion of firms adopting IR (19%), followed by the utilities
and industrials (both 13%).

Data Analysis: Model and Variable Description

Hypothesis testing aims to determine if the decision to adopt an IR is linked to particular legitimacy needs. We thus perform
different levels of analysis, univariate, multivariate and two sensitivity tests, in order to assess the robustness of the results.

A. Distribution by continent
Continent No of firms %

Europe 31 60
United States 7 13
Asia 6 12
South America 4 8
Australia 2 4
Africa 2 4
Total 52 100

B: Distribution by industry
Industry No of firms %
1 Oil and gas 6 12
2 Basic materials 6 12
3 Industrials 7 13
4 Consumer goods 5 10
5 Health care 2 4
6 Consumer services 3 6
7 Telecommunications 2 4
8 Utilities 7 13
9 Financials 10 19
10 Technology 4 8
Total 52 100

Table 1. IR adopters: sample distribution

This table provides the primary sample distribution by continent and industry.

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Is “Integrated Reporting” a Legitimation Strategy? 169

The univariate analysis, based on a difference in means t-test, determines if there is a significant difference in the
ratings between IR adopters and non-adopters in the years before the adoption. Pooling together observations of
years 2009–2011, we compute the independent variable mean values calculated separately for the groups of IR
adopters and non-adopters.
In the multivariate analysis, we estimate a logistic regression model (model 1) using panel data for years 2009–2011.
We focus on the relation between IR adoption and ESG ratings before the adoption. We use clustered standard errors at
industry level and estimate the following regression model:

IR ¼ b0 þ b1 Esg_Scoreit þ b2 Roait þ b3 Assetsit þ b4 Levit þ b5 Euri þ bk Indk;i þ eit ( 1)

(1)

The dependent variable in the regression is IR, a dummy variable that is equal to 1 if firm adopt IR after October
2011 and to 0 otherwise.
ESG ratings (Esg_Scoreit) are measured as Bloomberg’s ESG Disclosure scores of each company. This indicator
measures the ratings of Bloomberg’s analysts on the degree of transparency of a company’s reporting on ESG
performance.
The other independent variables are firm total assets (Assets) as a proxy of firms’ size, return on assets (Roa) for
profitability and debt to equity ratio (Lev) for firm leverage. Industries are represented by nine dummy variables
(Indk) following the ICB industry classification. In order to test HP5, we exclude the oil and gas sector and use it
as a reference, since it represents the industry sector here considered as environmentally sensitive.
Finally, we also consider a control variable (Eur) that is equal to 1 if firms come from European countries and to
0 otherwise. The inclusion of this variable is motivated by the findings of previous studies on determinants of IR
adoption: Jensen and Berg (2012) show that such adoption is influenced by institutional pressures such as the ones
exerted by the countries’ economic labour and cultural systems. Similarly, Sierra-García et al. (2013) support the ex-
istence of a region effect on the decision to embrace IR.
In order to assess the robustness of the results we run two sensitivity tests. The first test aims to determine if there
are significant associations between IR adoption and single ratings that measure the environmental, social and
governance dimensions of sustainability. We focus on the Bloomberg sub-ratings on environmental, social and
governance issues and perform the same multivariate analysis of model 1. We consider the following models:

IR ¼ b0 þ b1 Gov_Scoreit þ βX it þ eit (2)

IR ¼ b0 þ b1 Env_Scoreit þ βX it þ eit (3)

IR ¼ b0 þ b1 Soc_Scoreit þ βX it þ eit (4)

In model 2, we focus on the Bloomberg governance score (Gov_Score), whilst environmental score (Env_Score)
and social score (Soc_Score) are considered in models 3 and 4, respectively. They are measured using panel data for
years 2009–2011. All the other control variables (βX) are defined and measured as in model 1.
The objective of the second sensitivity test is to verify if the statistical associations between IR adoption and
explanatory variables of the model 1 are supported in each single year before the adoption. We thus estimate the
same logistic regression of model 1 but we run it year by year (i.e. 2009–2011, separately).

Findings

Descriptive Statistics
The means, medians and standard deviations of Esg_Score, of the single ESG scores and of all the control variables
are presented in Table 2, distinguishing between PS and MS.
The means of Esg_Score for years 2009–2011 are equal to 47.970 for IR adopters and 43.540 for non-adopters.
This shows that IR adopters have higher ESG ratings with respect to non-adopters. Similarly, the Gov_Score,

Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 25, 165–177 (2016)
DOI: 10.1002/bse
170 A. Lai et al.

Variables Mean Std dev. Min. Max.

A. Primary sample of IR adopters

Esg_Scoreit 47.960 12.381 14.474 73 554
Gov_Scoreit 59.020 9.219 26.786 85 714
Env_Scoreit 42.492 16.054 2.690 79 339
Soc_Scoreit 50.271 16.951 3.333 94 737
Roait 6.684 6.407 4.177 27 448
Assetsit 834 719 3 034 203 844 2 050 000 000
Levit 130.391 292.441 0 3 367.47

B. Matched sample of IR non-adopters

Esg_Scoreit 43.542 14.589 13.158 78.099
Gov_Scoreit 56.193 10.541 26.786 76.786
Env_Scoreit 39.237 17.670 1.786 82.171
Soc_Scoreit 42.841 19.350 3.125 82.456
Roait 6.229 7.757 11.033 39.966
Assetsit 714 563 2 160 852 893 1 100 000 000
Levit 144.669 236.523 0 1 540.717

Table 2. Descriptive statistics

This table provides the descriptive statistics (mean, standard deviation, minimum and maximum) of the primary sample (A) and
the matched sample (B). All panel data are collected from Bloomberg and represent the average value of the variables for years
2009–2011.Variable definition: Esg_Scoreit is the Bloomberg ESG_disclosure score; Gov_Scoreit is the Bloomberg Gov_disclosure
score; Env_Scoreit is the Bloomberg Env_disclosure score; Soc_Scoreit is the Bloomberg Soc_disclosure score; Roait is the return
on assets; Assetsit is the volume of total assets; Levit is the debt to equity ratio.

Soc_Score and Env_Score values of the PS are respectively 59.020, 42.492 and 50.721, whilst the same ratings have
lower levels in the MS (56.193, 39.237 and 39.237).
In Table 3 we present pairwise Pearson correlation coefficients and their significance for the independent vari-
ables of the PS (Panel A) and MS (Panel B). Esg_Score is not significantly correlated with any other variables in
the PS or in the MS, with the exception of the single sub-ratings on ESG issues. We find statistically significant cor-
relations at the 5% level between the ESG score and the single governance, environmental and social scores. This is
consistent with the same construction of the ESG score as a weighted average of the single sub-rating.

Core Findings
Univariate Analysis
The results of the difference in mean t-test comparing the ESG score of firms that adopt IR to those that do
not adopt it are shown in Table 4. This table presents mean comparison t-tests between variables. It reports
the means for all the variables calculated separately for the group of IR adopters and for the group of non-
adopters.
The two groups exhibit significant differences in terms of ESG disclosure scores. The average ESG score of firms
that adopt IR is significantly higher than that of non-adopters at the 1% level. This result is also confirmed with ref-
erence to the single governance, environmental and social scores: the social rating is significantly higher in the PS
with respect to the MS at 1% significance level, whilst the governance and the environmental ones at 5% and 10%,
respectively.
Overall, these results show the existence of statistically significant differences on ESG rating between IR adopters
and non-adopters, with IR adopters having significantly higher ratings than non-adopters.
Findings on the other explanatory variables show that there are no significant differences between the PM and
MS: this means that the PS and MS are similar in terms of size, profitability and leverage.

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Is “Integrated Reporting” a Legitimation Strategy? 171

Variables Esg_Score Gov_Score Env_Score Soc_Score Roa Assets Lev

A. PS of IR adopters
Esg_Scoreit 1.000
Gov_Scoreit 0.378* 1.000
Env_Scoreit 0.940* 0.181* 1.000
Soc_Scoreit 0.814* 0.209* 0.600* 1.000
Roait 0.156 0.113 0.053 0.274* 1.000
Assetsit 0.045 0.019 0.037 0.051 0.027 1.000
Levit 0.135 0.135 0.103 0.115 0.097 0.042 1.000

B. MS of IR non-adopters
Esg_Scoreit 1.000
Gov_Scoreit 0.636* 1.000
Env_Scoreit 0.940* 0.458* 1.000
Soc_Scoreit 0.827* 0.479* 0.618* 1.000
Roait 0.049 0.092 0.080 0.041 1.000
Assetsit 0.155 0.187* 0.117 0.176* 0.020 1.000
Levit 0.112 0.303* 0.028 0.198* 0.240* 0.017 1.000

Table 3. Pairwise correlation coefficients

This table provides the pairwise correlation coefficients between the variables of the PS (Panel A) and MS (Panel B). All the vari-
ables are defined and measured as in Table 2.
*indicates that the correlation is statistically significant at the 5% level.

Variables IR adopters IR non-adopters t-statistic Signif.

Esg_Scoreit 47.960 43.542 2.884 ***

Gov_Scoreit 59.020 56.193 2.522 **
Env_Scoreit 42.492 39.237 1.684 *
Soc_Scoreit 50.271 42.841 3.610 ***
Roait 6.684 6.229 0.565
Assetsit 834 719 714 563 0.403
Levit 130.391 144.669 0.471

Table 4. Univariate analysis: difference in mean t-test

This table presents the mean comparison t-test between variables. It reports the means for all the
variables calculated separately for the group of IR adopters and for the group of non-adopters. All
variables are defined and measured as in Table 2.
***, **, * indicate that the estimated coefficients are statistically significant at the 1%, 5% and 10%
levels, respectively.

Multivariate Analysis
Table 5 presents the logistic regression results with IR as dependent variable. Esg_Score is significantly and posi-
tively associated with a firm likelihood of voluntary IR adoption (coefficient = 0.032 at 5% level).
We find no effect of firms’ size and profitability on IR adoption as shown by the positive but insignificant coef-
ficient of the variables Assets and Roa. Regarding leverage, it is negatively related to the choice to adopt IR but the
relation is not statistically significant. With reference to industry variables, we find that ‘basic materials’, ‘industrials’
and ‘financials’ sector firms are more likely to adopt IR with respect to the ‘oil and gas’ sector, as shown by the
coefficients of three variables that are positive and significant at the 5% level. We do not find any different significant
effect of membership to industry sectors. Finally, the control variable Eur (coefficient = 0.122 40) has no signifi-
cant effect on the decision to adopt IR.

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172 A. Lai et al.

Dependent variable: IR Model 1

Independent variable Coefficients Standard errors

Esg_Scoreit 0.03222** [0.01565]

Roait 0.00422 [0.02826]
Assetsit 1.59 × 108 [6.23 × 108]
Levit 0.00048 [0.00100]
Euri 0.12240 [0.37920]
ind_2 0.29871** [0.12191]
ind_3 0.39600** [0.17521]
ind_4 0.04968 [0.26094]
ind_5 0.13778 [0.17692]
ind_6 0.45634 [0.40576]
ind_7 0.30001 [0.45199]
ind_8 0.0111 [0.15009]
ind_9 0.53011** [0.26676]
ind_10 0.42436 [0.33745]
cons 1.66410 [0.62962]
Observations 309
Pseudo-R square 0.0277

Table 5. Multivariate analysis: logistic regression model

This table presents the logistic regression results with IR as dependent variable. IR
takes the value 1 for firms that adopted IR after October 2011. All the independent var-
iables are measured pooling together years 2009–2011. Variable definition: Esg_Scoreit
is the Bloomberg ESG_disclosure score; Roait is the return on assets; Assetsit is the vol-
ume of total assets; Levit is the debt to equity ratio. Euri is an indicator variable that is
equal to 1 if firms are incorporated in Europe; ind_1 = oil & gas; ind_2 = basic materials;
ind_3 = industrials; ind_4 = consumer goods; ind_5 = health care; ind_6 = consumer
services; ind_7 = telecommunications; ind_8 = utilities; ind_9 = financials; ind_10 =
technology; cons is the constant term. Robust standard errors are in brackets. All
standard errors are clustered by industry.
**indicates that the estimated coefficient is statistically significant at the 5% level.

Sensitivity Tests
Table 6 presents the results of the first sensitivity test. In the logistic regression with IR as dependent variable we
substitute the ESG score with the single, environmental, social and governance scores and show that governance
and social scores significantly impact on the likelihood of IR adoption. This evidence is shown by the positive
and significant coefficient of the variables at the 5% significance level. We find a positive but not significant
coefficient of the effect of environmental score on IR adoption.
In Table 7 we present the results of the second sensitivity test of logistic regression run separately for the years
2009–2011. These results are consistent with our previous results on panel data (model 1): we find that 2009–2011
Esg_Score values have a positive and significant impact on IR adoption. We further provide evidence of the existence
of a statistically significant industry effect for the same industry groups of model 1. In contrast, we find a negative
and significant coefficient of Lev in years 2010 and 2011. The robustness of the analysis is thus shown also by the
results of the second sensitivity test to control for year effects.
To summarize, the univariate analysis highlights that IR adopters have significantly higher ratings than
non-adopters in the years before the adoption. The multivariate analysis confirms these results by showing
that firms with higher ESG scores are more likely to adopt IR. The sensitivity tests provide further support
to our previous findings.

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Is “Integrated Reporting” a Legitimation Strategy? 173

Dependent variable: IR Model 2 Model 3 Model 4

Independent variable Gov_Scoreit Env_Scoreit Soc_Scoreit

Coefficients Std errors Coefficients Std errors Coefficients Std errors

Single_Scoreit 0.032** 0.015 0.015 0.013 0.029** 0.012

Roait 0.014 0.022 0.008 0.027 0.001 0.030

Assetsit 3.34 × 108 5.86 × 108 1.96 × 108 6.91 × 108 2.46 × 108 5.19 × 108
Levit 0.001 0.002 0.000 0.001 0.001 0.001
Euri 0.065 0.270 0.001 0.380 0.088 0.282
ind_2 0.009 0.111 0.252* 0.133 0.297** 0.129
ind_3 0.159*** 0.059 0.287 0.243 0.155 0.099
ind_4 0.257 0.157 0.005 0.274 0.031 0.222
ind_5 0.148* 0.077 0.113 0.212 0.037 0.130
ind_6 0.045 0.187 0.188 0.375 0.638* 0.384
ind_7 0.066 0.350 0.153 0.536 0.118 0.350
ind_8 0.076 0.133 0.051 0.122 0.200 0.211
ind_9 0.121 0.328 0.423 0.295 0.423 0.320
ind_10 0.005 0.127 0.294 0.383 0.211 0.202
cons 1.960 0.814 0.862 0.486 1.428 0.526
Observations 309 303 309
Pseudo R square 0.0190 0.0119 0.0399

Table 6. Sensitivity test: logistic regression model by score

This table presents the logistic regression results with IR as dependent variable. IR takes the value 1 for firms that adopted IR after
October 2011. All the independent variables are measured pooling together years 2009–2011. Variable definition: in model 2
Single_Scoreit corresponding to Gov_Scoret is the Bloomberg Gov_disclosure score; in model 3 Single_Scoreit corresponding to
Env_Scoret is the Bloomberg Env_disclosure score; in model 4 Single_Scoreit corresponding to Soc_Scoret is the Bloomberg
Soc_disclosure score. All the other variables are defined and measured as in Table 5.
***, **, * indicate that the estimated coefficients are statistically significant at 1%, 5% and 10% levels, respectively.

Discussion

LT assumes that companies adopt communication strategy to manage their public image (Dowling and Pfeffer,
1975; Lindblom, 1994). Some proponents of LT argue that firms with poorer ratings face greater exposure and
are thus stimulated to use disclosure in an attempt to reduce the pressure on them (Deegan, 2002).
Our results reject this argument: IR adopters do not have lower Bloomberg ESG disclosure scores with respect to
non-adopters (HP1). This means that firms are not using IR to repair the poor evaluation of the quality of their
sustainability disclosure, as measured by Bloomberg’s score.
Findings on other variables that are usually selected in testing LT hypotheses put additional doubts on the power
of this theoretical framework in unfolding IR adoption.
First, our findings reject the LT hypothesis of larger firms making more extensive disclosure due to greater
legitimacy needs (HP2). This finding is not consistent with previous studies on factors associated with IR
adoption. Frías-Aceituno et al. (2012, 2014) and Sierra-García et al. (2013) find a significant positive effect of
firm size on IR adoption. This can be explained by differences in the sample selection of IR adopters: we con-
sider only IR adopters that are official member of the IIRC PP on IR. In contrast, the other scholars identity
minimum items required for the report published to be considered an IR irrespective of the membership to
the IIRC PP.
Second, our results do not support the LT hypothesis since we find no evidence of the impact of leverage on IR
adoption (HP3). This result is consistent with the work of Mahoney et al. (2013), who find no effect of leverage on the

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DOI: 10.1002/bse
174 A. Lai et al.

Dependent variable: IR

Independent variable t = 2009 t = 2010 t = 2011

0.031* 0.046** 0.029*
Esg_Scoreit [0.016] [0.020] [0.017]

Roait 0.036 0.007 0.013

[0.039] [0.037] [0.032]
Assetsit 0.000 0.000 4.99 × 109
[0.000] [0.000] 5.09 × 108
Levit 0.000 0.002*** 0.002***
[0.001] [0.001] [0.001]
Euri 0.051 0.021 0.026
[0.440] [0.351] [0.378]
ind_2 0.503*** 0.365** 0.305**
[0.184] [0.174] [0.129]
ind_3 0.468*** 0.642** 0.352*
[0.165] [0.257] [0.197]
ind_4 0.192 0.190 0.015
[0.305] [0.405] [0.235]
ind_5 0.009 0.234 0.110
[0.239] [0.235] [0.134]
ind_6 0.185 0.719 0.547
[0.442] [0.457] [0.477]
ind_7 0.148 0.647 0.548
[0.422] [0.696] [0.367]
ind_8 0.007 0.117 0.094
[0.106] [0.141] [0.103]
ind_9 0.512*** 1.114*** 0.787***
[0.198] [0.306] [0.283]
ind_10 0.396 0.636 0.345
[0.353] [0.408] [0.349]
cons 1.817 2.348 1.338
Observations 104 102 103
Pseudo R square 0.0365 0.0588 0.0318

Table 7. Sensitivity test: logistic regression model by year

This table presents the logistic regression result with IR as the dependent variable. All
the independent variables are measured separately for years 2009–2011 respectively.
Robust standard errors are in brackets. All the other variables are defined and mea-
sured as in Table 5.
***, **, * indicate that the estimated coefficients are statistically significant at 1%, 5%
and 10% levels, respectively.

decision to adopt a CSR report, and supports the view that voluntary disclosure choices are not strongly influenced
by external pressure from lending institutions.
Third, consistent with Mahoney et al. (2013), we find no effect of profitability on IR adoption (HP4). This means
that IR adopters do not face legitimacy threats arising from a weak financial performance. This evidence is also in
line with the work of Frías-Aceituno et al. (2012), which rejects the hypothesis of a significant effect of profitability
on IR reporting strategy.
Fourth, we show the existence of a limited industry effect on IR disclosure choice: of the ten sectors analysed,
firms classified as ’basic materials’, ’industrials’ and ’financials’ are more likely to adopt IR with respect to ’oil
and gas’ members. This result rejects HP5 and does not support previous studies on SR showing that environmentally
sensitive industries tend to adopt legitimation reporting strategies (Patten, 2002; Cho and Patten, 2007; Cho et al.,

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DOI: 10.1002/bse
Is “Integrated Reporting” a Legitimation Strategy? 175

2012). Conversely, our findings are consistent with those of Frías-Aceituno et al. (2014), showing no effect of the
membership to specific business sectors in the decision to adopt IR.
Finally, we further show that there is no significant association between IR adoption and the firms’ region, here
used as a control variable. This result differs from the findings of Jensen and Berg (2012) and Frías-Aceituno et al.
(2014): they provide evidence of the importance of institutional characteristics of the country to explain the decision
to choose IR as communication strategy. We believe that the dissimilar results may be explained, again, by the dif-
ferences in the samples of IR adopters analysed.
With reference to all the hypotheses tested in this study, LT-oriented analysis appears to be unable to explain the
voluntary choice to adopt IR. The findings support previous studies claiming that disclosure on sustainability is not
driven by the need of corporate legitimacy (e.g. Clarkson et al., 2008; Mahoney et al., 2013).
What is more, that our results show a relation between IR adoption and sustainability rating that goes in the
opposite direction to what LT predicts: the higher the ESG score, the greater the probability to adopt an IR. Firms
are not adopting IR to repair specific legitimacy threats related to a low ESG rating.
It is clearly out of the scope of this research to question the reliability of Bloomberg’s score in measuring the qual-
ity of firms’ ESG disclosure. However, what our results suggest is that only firms already committed to sustainability
disclosure are choosing this particular reporting strategy. In other words, by showing a positive relation between
ESG disclosure score and IR adoption, we support the idea that firms adopting embarking on this reporting process
already have a good level of transparency on sustainability issues.

Conclusions
Given the widespread concern on the use of reporting strategies as symbolic practices, the aim of the paper was to
empirically test whether the decision to enter the IIRC project and adopt an IR stems from legitimacy needs. To this
end, we focused our attention on the relation between IR adoption and sustainability ratings, here considered as
proxies of corporate legitimation on sustainability.
The core result rejects the LT-based hypothesis that IR early adopters are using IR as a response to the low rating
being given by sustainability agencies. Additional results on different sources of legitimacy threats (size, leverage,
profitability and industry) further support the idea that firms are not adopting IR as a legitimation strategy.
Our research contributes to extant literature in different ways.
First, we enrich the emerging literature on the motivations of IR adoption by analysing additional factors that
may be associated with this reporting strategy. The decision to embrace IR appears to be linked not only to institu-
tional factors (Jensen and Berg, 2012) and industry specific characteristics (Frías-Aceituno et al., 2014) but also to
firms’ specific features. Next to the firms’ characteristics such as the structure of the board (Frías-Aceituno et al.,
2012) and the choice of having the SR assured (Sierra-García et al., 2013), we show that the sustainability ratings
are relevant in understanding the choice of IR adoption: there is a strong positive relation between higher ESG score
and the adoption of the IR, while firms with lower ESG scores are less likely to embark on IR.
Second, we contribute to the studies analysing corporate reporting as a legitimation strategy (Dowling and
Pfeffer, 1975; Lindblom, 1994) by extending the traditional focus on financial and stand-alone CSR reports. We
extend this literature by adopting research designs established in previous studies on SR but considering a different
type of report: the IR. In this respect, it might the case that the conflicting findings among studies that support LT
and the ones that reject it can be traced to differences in the ‘type’ of report investigated. Studies supporting LT
analyse the sustainability disclosure voluntarily offered in the financial reports (Cho and Patten, 2007; Patten,
2002; Cho et al., 2012), whilst studies rejecting LT choose stand-alone CSR reports or similar forms of SR (Clarkson
et al., 2008; Mahoney et al., 2013). Our findings go in the same direction as the last contributions, suggesting that
IR, as well as stand-alone CSR reports, is not a ‘mechanism’ of strategic legitimation.
Third, our findings cast some doubts on the adequacy of LT to explain this IR adoption and call for the use of
innovative theoretical perspectives or the combination of existing ones in order to analyse IR adoption. In this re-
spect, we agree with scholars admitting the possibility to adopt LT in combination with other theoretical perspectives
to explain SR (Parker, 2005; Owen, 2008; Cormier and Magnan, 2013; Stubbs et al., 2013).

Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 25, 165–177 (2016)
DOI: 10.1002/bse
176 A. Lai et al.

Our results are also of interest for practitioners. Understanding IR adoption is especially relevant for business
strategy, as it helps managers to understand under which conditions IR will be more expected (Jensen and Berg,
2012). By showing that ESG ratings are significantly higher for firms that adopt IR with respect to IR non-adopters,
our main result means that IR catalyses companies that already have a high degree of transparency on ESG issues.
Actually, as academic literature (Eccles and Krzus, 2010; Eccles and Krzus, 2010; Adams, 2013; Busco et al., 2013;
King and Roberts, 2013) and professional studies (e.g. KPMG, 2012) argue, IR adoption could be a very demanding
process in the lack of adequate distinctive internal capabilities. In light of this, managers could be discouraged to
choose IR as a reporting strategy if not strongly committed in sustainability reporting.
The main limitation of the study is linked to the fact that we have focused on a very peculiar measure of corporate
legitimation on sustainability. Even if we have considered other (more general) proxies of legitimacy threats, we
invite future research to augment our findings by considering additional sources of public pressure toward SR.
Another caveat is linked to sample size. The combined sample of 104 international firms is relatively small. How-
ever, it considers the whole population of IIRC PP members that have sustainability ratings available on Bloomberg.
Future research can progressively extend our initial sample to future IR adopters.
The future research agenda on IR can also consider different research perspectives to understand a firm’s
motivation to adopt this type of report. We shed light on the importance of not limiting the analysis to legitimacy
threats to explain IR adoption. Consistent with contributions recommending a ’practice turn’ in disclosure studies
(Lodhia and Jacobs, 2013), future research may also analyse the role of ’internal actors’ (e.g. managers and other
organization members) to explain IR adoption.

Acknowledgement
The authors are grateful to the two anonymous reviewers and to the editor for their insightful comments. We gratefully thank
also Laura Magazzini, assistant professor of econometrics at the University of Verona (Italy). Furthermore, we acknowledge
the attendees to the 4th Financial Reporting Workshop held in Rome in June 2013. While the article is the result of a joint effort
of the authors, the individual contributions are as follows: Alessandro Lai wrote “Introduction”; Gaia Melloni wrote “Research
methodology”, “Findings” and “Discussion”; Riccardo Stacchezzini wrote “Theoretical background and research hypotheses”
and “Conclusions”.

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