The integrated reporting quality, cost of equity and financial performance in Islamic banks

Abstract

Purpose The purpose of this paper is to examine the effect of integrated reporting quality (IRQ) on the cost of equity and financial performance of Islamic banks (IBs) in the Middle East and North Africa (MENA) region. Design/methodology/approach This study examines 67 IBs in the MENA region over a period of six years (2015–2020). This paper is motivated by the use of the method of ordinary least on square panel data. A multiple regression model is used to analyze the impact of the quality of integrated reporting, on the one hand, on the cost of equity and, on the other hand, on the financial performance of IBs in the MENA region. Similarly, as an extension of the research, the authors exploited the dynamic effect of the data set through the generalized method of moments and estimated the impact of the one-year lagged value of the cost of equity. Findings The empirical results obtained do indicate that the quality of integrated reporting seems to have a significant negative effect on the cost of equity capital. It is also interesting to note that IRQ has a positive and significant impact on the financial performance of IBs. Research limitations/implications Current research can help and encourage IBs to provide quality information to reduce the cost of equity. Furthermore, this research could be a valuable source of information for policymakers, regulators and stakeholders on IB governance practices and disclosure. Finally, integrated reporting is very important for the progress and development of the Islamic banking sector. Originality/value This paper is motivated by the limited research on integrated reporting and financial performance of IBs. It makes an important contribution to the academic literature by adding to the limited body of research on the cost of equity, performance and quality of integrated reporting in the MENA region. This study is also important for the investors seeking to reduce the cost of equity to improve financial performance.