Abdelsalam Bryant& Smith (2007) An Examination of The Comprehensiveness of Corporate Internet Reporting Provided by London-Listed Companies

JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH Vol. 6, No. 2 2007 pp.
133
An Examination of the Comprehensiveness of Corporate Internet Reporting Provided by London-Listed Companies

Omneya H. Abdelsalam, Stephanie M. Bryant, and Donna L. Street
ABSTRACT: Recent changes in the regulatory environment of the London Stock Exchange are aimed at prohibiting selective disclosure and enhancing the credibility of reporting. Using an innovative 143-item disclosure checklist, we examine corporate Internet reporting (CIR) comprehensiveness and its determinants within this new regulatory environment. We also extend the literature linking corporate governance measures to CIR. Our ndings indicate that despite this new regulatory environment, there is considerable room for improvement in CIR by London-listed companies. For example, our sample companies provide only 58 percent and 70 percent, respectively, of the credibility and usability items assessed by our comprehensiveness index. After controlling for size, protability, industry, and high growth / intangibles, we nd the CIR comprehensiveness of London-listed companies is associated with analyst following, director holding, director independence, and CEO duality. Because prior research indicates the U.K. leads Europe in Internet reporting, our results may shed light on how CIR will evolve throughout Europe. Keywords: corporate Internet reporting; selective disclosure; voluntary disclosure; timeliness of reporting; credibility of reporting; usability of Internet disclosures. Data Availability: Contact Professor Bryant at: sbryant@coba.usf.edu.
I. INTRODUCTION AND MOTIVATION he Internet provides a unique form of corporate voluntary disclosure that enables companies to provide information instantaneously to a global audience. However, despite its growing importance as a source of corporate information to investors, the content, usability, and perceived credibility of the information provided on corporate websites varies greatly. Research reveals that even companies headquartered in countries traditionally known for high levels of hard copy disclosure, such as the United Kingdom (U.K.), tend to fall short of their potential in regard to the quantity of information provided on the Internet and the level of sophistication of Internet utilization (Lymer 1999).
Omneya H. Abdelsalam is a Lecturer at Aston University and a Visiting Associate Professor at the American University of Sharjah, Stephanie M. Bryant is an Associate Professor at the University of South Florida, and Donna L. Street is a Professor at the University of Dayton. 1
Abdelsalam, Bryant, and Street
In this paper, we examine the association between the comprehensiveness, usability, and credibility of corporate Internet reporting (CIR) disclosures and corporate governance measures for a sample of 110 London-listed companies. Our analysis is motivated primarily by recent changes in the regulatory environment of the London Exchange directed at, inter alia, addressing the concerns of U.K. and European Union (EU) regulators prohibiting selective disclosure and the regulators desire to enhance the credibility of reporting. The Financial Services and Market Act of 2000 highlights the U.K. governments desire to overhaul nancial market regulations and uphold the London Exchanges status as one of the worlds leading exchanges (Al-Hawamdeh and Snaith 2005). Under the Act, which became effective December 1, 2001, listed companies should review the scope, nature, and method used to disseminate information to the market. The general requirement of the Financial Services Authority is that listed companies disclose all material developments without delay (emphasis added). The Internet provides a unique means to achieve this disclosure objective. Furthermore, European Commission Directive/6/2003 recommends speedy dissemination of information to the market and prohibits private briengs. Accordingly, private briengs and other forms of selective disclosure are frowned upon, as the intent is for information to be made available to all investors at the same time. Londonlisted companies should thus be expected to increasingly turn to the Internet to achieve the widespread disclosure of nancial and other information to stakeholders in a timely and simultaneous manner. Our ndings highlight the need for improvement in CIR by London-listed companies, especially with regard to improving the credibility of information provided on corporate websites and site usability. Specically, the sample companies provide only 58 percent and 70 percent, respectively, of the credibility and usability items assessed by our index. Further, after controlling for size, protability, industry, and high growth/intangibles, our ndings indicate that the CIR comprehensiveness of London-listed companies is associated with analyst following and several measures of corporation governance (e.g., director holding, director independence, and CEO duality). Our study provides two important contributions. First, we provide insight into CIR disclosure practices in the U.K. in this new regulatory environment of increased transparency. Prior research indicates that while the U.K. lags the United States (U.S.) in Internet reporting, it leads Europe (Lymer 1999). Thus, our results may preview how CIR reporting throughout Europe will evolve to address the concerns of EU regulators. Second, we extend the emerging body of literature linking corporate governance measures to CIR disclosure. While several prior studies examine corporate governance and voluntary disclosure in general, ours is among the rst to link Internet disclosures with corporate governance measures. As noted previously, levels of Internet disclosure and sophistication of use have historically lagged their potential even in countries associated with high levels of disclosure. Hence, in the absence of supporting empirical evidence, ndings from the voluntary disclosure literature should not be assumed to hold true within the specic context of CIR. Next, we briey review prior CIR studies. This is followed by sections on hypotheses development, methodology, results, discussion, and conclusion. II. CIR LITERATURE REVIEW The extant studies on CIR can be categorized as either descriptive studies (i.e., providing statistics on how many items of a given disclosure checklist are disclosed/provided) or association studies (i.e., providing evidence of independent variables associated with the level of disclosure) addressing the determinants of CIR.
Journal of International Accounting Research, Volume 6, No. 2, 2007
An Examination of the Comprehensiveness of Corporate Internet Reporting
Descriptive Studies Lymer (1999) provides a review of the CIR academic1 and professional2 literature published during the 1990s. Concentrating on the former, Lymer concludes that, as of the late 1990s, European companies were considerably behind their U.S. counterparts with respect to providing large amounts of corporate data on the Internet. Further, European companies were behind the U.S. in the sophisticated utilization of Internet technology, and there appeared to be a wide divergence of corporate usage of the Internet within and between countries, with the U.K. being the closest to the U.S. model and Spain being the furthest away.3 A descriptive study by the Interactive Bureau (2003) concluded that, based on an analysis of U.K. FTSE-100 company websites, 72 of the websites needed substantial attention in terms of site design, usability, and content, and that the websites failed to meet the needs of key constituents. Debreceny and Gray (1999) survey the corporate websites of 45 large, listed U.K., German, and French companies to examine audit implications of electronic dissemination of nancial information. Their ndings raise signicant issues regarding the format and usability of the information provided. Lymer and Debrecenys (2003) review of the extent of guidance on CIR provided by securities regulators and audit standard setters reveals that actual pronouncements issued as of the date of the study represent an inadequate response to the challenges arising from current and future CIR. Several standard setters and professional groups have also sponsored CIR studies. These include the International Accounting Standards Committee (Lymer et al. 1999), Canadian Institute of Chartered Accountants (CICA) (Trites 1999), and the U.S. Financial Accounting Standards Board (FASB 2000, 2004). Association Studies In addition to describing CIR, researchers have more recently begun to conduct empirical research focused on identifying company- and/or country-specic characteristics associated with CIR disclosure, focusing primarily on either content or presentation of disclosures. Table 1 summarizes studies from this body of work. Independent variables studied include, among other things, size, industry, free oat, high growth/intangibles, and protability. Allam and Lymer (2003) examined CIR in ve developed countries utilizing a 36-item disclosure index addressing general attributes and Financial/Annual Reportrelated attributes of CIR. With regard to U.K. companies, they found no signicant differences in the CIR quality of U.S. and U.K. companies or U.K. and Canadian companies; however, they did nd differences in CIR quality between U.S. and Canadian companies, with Canadian companies disclosing less. Additionally, the CIR of U.K. companies exceeded that of Australian and Hong Kong companies. In summary, several prior studies describe CIR disclosure and presentation for companies headquartered in specic countries or listed on specic stock exchanges. Additionally, as summarized in Table 1, evidence links several company-specic characteristics with
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Works reviewed include Petravick and Gilbert (1996); Gray and Debrecency (1997); and Louwers et al. (1996); and in Europe, Marston and Leow (1998); Lymer (1997); Lymer and Tallberg (1997); Flynn and Gowthorpe (1997); Deller et al. (1998); Molero Lopez et al. (1999); Deller et al. (1999); Gowthorpe and Amat (1999); and Hedlin (1999). Practitioner studies include Jenkins (1993a) and (1993b); AICPA (1996); Chavez (1996); Helms and Mancino (1998); Debreceny and Gray (1999); CICA (1999); Spaul (1997); Green and Spaul (1997); Gowthorpe and Flynn (1997); and Gulliford et al. (1998). Additional descriptive studies published in more recent years include Craven and Marston (1999); Jones (2003); and Davey and Homkajohn (2004).
TABLE 1 Overview of Empirical Studies Addressing Determinants of CIR Comprehensiveness Date of Data Collection Number of Checklist Items 2 3
Author(s)
Sample
Dependent Variables Presence of website Disclosure of any nancial information on website Website provides: Comprehensive set of nancial statements (including footnotes and auditor report) Link to annual report elsewhere on Internet Link to U.S. SECs Electronic Data Gathering, Analysis and Retrieval (EDGAR) system Presence of website Disclosure of any nancial information on website 7-Content 5-Timeliness 14-Technology 12-User support
Signicant Independent Variables Size ( )a Size ( ) Protability ( ) AIMR highly ranked rm ( )
Marston and November 1996 U.K. FTSE-100 Leow (1998) Ashbaugh et al. November 1997 290 U.S. companies (1999) through (criticized by January 1998 AIMR)
Craven and Marston (1999) Pirchegger and Wagenhofer (1999)
July 1998
206 largest U.K. companies
2 38
Size ( ) Abdelsalam, Bryant, and Street Size ( ) Free Float ( ) (both for Austrian companies only)
December 1997 26 / 20 Austrian and companies 1998 / December 1997 1998 German DAX-30 1998 only
(continued on next page)
TABLE 1 (continued) Debreceny et al. (2002) (IASC sponsored) Journal of International Accounting Research, Volume 6, No. 2, 2007 November 1998 through February 1999 660 large companies in 22 countries (30 highest market cap companies listed in each country in Dow Jones Global Index) 2 1-Presentation (type of website) 1-Content (amount of disclosure)
Size ( ) U.S. Listing ( ) Growth prospects / intangibles
For Content:
Ettredge et al. (2001)
February through May 1998 Late 1997 through early 1998
Ettredge et al. (2002)
402 U.S. companies (AIMR rated, Biotechnology, and Computer technology) 193 U.S. companies (AIMR rated)
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6 Accounting information items 11 Other nancial information items
(Market Value to Book Value) ( ) For Presentation: Size ( ) U.S. Listing ( ) General cross listing ( ) Level of technology (particularly being in pharmaceutical industry) ( ) Disclosure Environment Size ( ) Industry (petroleum highest and homebuilding lowest)
Size ( ) Correlation annual earnings and
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4 Financial information items required in SEC lings 12 Items of voluntary disclosure
For both:
returns ( ) For voluntary disclosure only: Raising equity capital (if stock issued during 1996 or 1997) ( ) Quality (AIMR measure) ( ) (continued on next page)
TABLE 1 (continued) Date of Data Collection Not specied Number of Checklist Items 8
Author(s) Oyelere et al. (2003)
Sample 229 N.Z. companies (123 with Websites; 90 included Internet nancial reporting)
Dependent Variables Financial and nonnancial information provided on corporate website
Signicant Independent Variables Size ( ) Liquidity ( ) Ownership spread (higher the proportion of shareholding by top 40 percent of shareholders, lower the probability of disclosure) Industry (primary industry group sector: oil and gas and forestry highest) Size ( ) Industry ( ) (both related to existence of website but not extent of disclosure on web) Size ( ) (only for Australia) Country (U.S., U.K., and Canadian companies close and leading / Australian companies follow with small gap / H.K. lagged behind (continued on next page)
Marston (2003) 1998 plus follow up in May 2001 Allam and Lymer (2003) End of 2001 and early 2002
99 top Japanese companies
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250 companies (50 largest in advanced capital markets; U.S., U.K., Canada, Australia, and H.K.)
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Whether company had website Whether any English website on homepage Whether 11 items of nancial information disclosed on website 12-General attributes 24-Financial / Annual report attributes
TABLE 1 (continued) Abdelsalam et al. (2004) July 2004 30 Indian companies on BSE Sensex 114 64-Content 50-Usability For overall and content disclosure: Big 4 auditor ( ) Free oat ( ) Gearing ( ) PE (protability) ( ) U.S. listing / ling ( ) Industry (manufacturing) [overall only] ( ) None signicant for usability For 2000: Size ( ) Free Float ( ) For 2003 Size ( ) ROE ( ) Foreign Listing ( ) State Share Ownership ( )

Marston and Polei (2004)
July 2000 and May / June 2003
50 German companies (top quartile and bottom quartile of DAX 100)
53 (2000) 71 (2003)
Xiao et al. (2004)
August 2002
300 largest Chineselisted companies (203 had a website)
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Content (16-investor related, accounting and nancial information, 5-Timeliness, 5Contact details, 14-Corporate governance, and 5-Social Responsibility) Presentation (10 Technology, 6 navigation, 7 Structure and 3 contact and information supply services) 58-Content 24-Presentation
For the 203 with website: IT Industry ( ) Size ( ) Legal person ownership ( ) Leverage ( ) State Share Ownership ( )
Various measures of size have been used, including market capitalization, sales / turnover, number of employees, total assets. Results generally support any measure of size as being appropriate, but market capitalization is the most commonly used.
the level of CIR disclosure. Findings for the latter subset of research vary by country or exchange listing, clearly indicating that CIR determinants vary by institutional environment. The current research utilizes a richer, more comprehensive CIR index for evaluating the comprehensiveness of information London-listed companies provide on their corporate websites. Additionally, we extend the research linking corporate governance factors to the level of disclosure to specically address CIR (i.e., a subset of voluntary disclosure). Indeed, Gul and Leung (2004) suggest that the failure to include governance variables in prior studies examining levels of voluntary disclosure may contribute to the mixed ndings in regard to the association with control variables including protability. A summary of the emerging body of work addressing the association of governance factors and voluntary disclosure is incorporated within the following section on hypotheses development. III. HYPOTHESES The distinct characteristics of the institutional environment within which London-listed companies now operate (i.e., as impacted by recent regulations and guidelines issued by U.K. and EC authorities), along with agency theory (particularly in regard to ownership diffusion and other dimensions of governance), provide the basis for our hypotheses.4 While governance factors have been assessed as determinants of voluntary disclosure in prior literature, the focus of this work has primarily been within the context of smaller, particularly emerging, capital markets. New regulatory requirements and pressures, however, suggest that ownership diffusion and other dimensions of governance may also impact the level of voluntary disclosure in general, and CIR in particular. Specically, recent prohibitions in the U.K. on selective disclosure place tremendous pressure on listed companies to communicate nancial and other information to a vast audience at the same time this information is provided to analysts following the company. Thus, in the current regulatory environment of the London Exchange, analyst following and ownership diffusion both play a key role in dening the breadth of a companys target audience for the dissemination of instantaneous information. It also logically follows that those companies with stronger governance structures should be more responsive to adhering to the spirit of these new regulatory requirements and recommendations. Ownership Diffusion: Major Shareholding Agency theory suggests that in a more diffused ownership environment, companies will be expected to disclose more information to reduce agency cost and information diffusion (Jensen and Meckling 1976). The potential for agency conicts is greater for a company with diffused ownership because of the divergence of interests between contracting parties. In a widely-held company, managers may provide additional information to signal they are acting in the best interests of the principles. Conversely, highly concentrated ownership may be linked to lower levels of disclosure. Recent regulatory requirements and pressures within the context of the London Exchange may magnify incentives for managers of widelyheld companies to not only provide additional information, but to provide information utilizing a timely vehicle capable of reaching a vast audience (i.e., the Internet). When information is made known to analysts, it should also be made simultaneously available to all other interested parties. The Internet provides an obvious way to achieve this requirement.
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For reviews of the voluntary disclosure literature, see Rowbottom et al. (2005); Healy and Palepu (2001); Verrecchia (2001); Debreceny et al. (2002); Ettredge et al. (2002); Xiao et al. (2004); Craven and Marston (1999); Rowbottom (2002); Wagenhofer (2003); Richardson (2001); and Verrecchia (1983).
Prior research addressing the level of voluntary disclosure supports the agency theory hypothesis that level of disclosure is positively associated with wider ownership dispersion. Chau and Gray (2002), in a study of Hong Kong and Singapore companies, report a signicant positive relationship between the proportion of outside ownership and level of voluntary disclosure. In a study of Indian BSE Sensex companies, Abdelsalam et al. (2004) nd a signicant positive association between free oat and level of CIR. Three studies of Malaysian companies utilize shares held by the ten largest shareholders as a surrogate for ownership concentration. In these studies, Haniffa and Cooke (2002) identify a positive relationship between the proportion of shares held by the ten largest shareholders and the level of disclosure; however, Hossain et al. (1994) nd a negative association between this same measure of ownership structure and the level of disclosure. Ghazali and Weetman (2006) do not nd a signicant association between the proportion of shares held by the ten largest shareholders and level of disclosure. We note that the varying ndings for Malaysian companies may be linked to modications in governance regulations in this jurisdiction. Furthermore, of the above studies, only Abdelsalam et al. (2004) examine the association of ownership dispersion and level of CIR reporting (as opposed to voluntary disclosure in general). Director Holding A director who owns a substantial portion of the companys shares bears the consequences and reaps the benets of managerial actions that destroy and create value; thus, agency costs may be reduced by director ownership (Jensen and Meckling 1976). High director ownership aligns the interests of the agent and shareholder and reduces the need for shareholder monitoring through disclosure. Empirical evidence supports this argument. Both Eng and Mak (2003), in a study of Hong Kong companies, and Ghazali and Weetman (2006), in a study of Malaysian companies, nd that director ownership is signicantly negatively associated with the level of voluntary disclosure. The following hypotheses test the relationship between ownership diffusion and comprehensiveness of CIR. H1a: H1b: Majority shareholding is negatively associated with CIR. Director holding is negatively associated with CIR.
Major shareholding is measured by the percent of stock held by major shareholders (i.e., those holding at least three percent of the outstanding shares). Director holding is measured by the proportion of the companys shares held by members of the board of directors. Other Corporate Governance Variables: Director Independence In addition to ownership diffusion, prior research links other dimensions of governance to voluntary disclosure. Fama and Jensen (1983) propose that the existence of independent (nonexecutive) directors should yield more effective monitoring of the board of directors, thereby limiting managerial opportunism and resulting in increased disclosure. Adams and Hossain (1998), in a study of New Zealand companies, and Chen and Jaggi (2000), in a study of Hong Kong companies, nd a signicant positive association between the proportion of independent directors and the level of voluntary disclosure, thereby supporting a complementary association. Supporting a substitute relationship, Eng and Mak (2003), in
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a study of Singapore companies, nd a negative association, but note that their results may be associated with the greater representation of outside directors on the boards of Singapore companies in comparison to other countries. Ho and Wong (2001) and Haniffa and Cooke (2002) do not nd an association between the proportion of independent directors and level of voluntary disclosure. CEO Role Duality CEO role duality occurs when the CEO is also chair of the board of directors. Agency theory supports the separation of these two roles to allow for checks and balances over managements performance (Haniffa and Cooke 2002). When the CEO is also chair, board effectiveness may be compromised because the CEO may be capable of controlling board meetings, selecting agenda items, and selecting board members. Blackburn (1994) and Argenti (1976) support separation of these two roles. Gul and Leung (2004), in a study of Hong Kong companies, nd that duality is negatively associated with voluntary disclosure. In line with this body of research, the Cadbury Committee Report (1992) recommends that large companies separate the roles of CEO and chair of the board of directors. Contrary to expectations, Haniffa and Cooke (2002) report a signicant negative relationship between having an independent, nonexecutive director as chair of the board and the level of disclosure. However, Ghazali and Weetman (2006) highlight that Haniffa and Cookes ndings predate new governance rules in Malaysia; their study of Malaysian companies does not nd a signicant relationship between duality and level of disclosure. The following hypotheses test the relationship between key governance factors and comprehensiveness of CIR. H2a: H2b: The proportion of independent directors is positively associated with CIR comprehensiveness. CEO dual role is negatively associated with CIR comprehensiveness.
Independence is measured by the proportion of nonexecutive directors to total directors. CEO dual role is coded 1 if the CEO is also the chair of the board. Otherwise, dual role is coded as 0. Analyst Following Recent research (Hope 2003; Cahan et al. 2005) provides evidence that the number of analysts following a company is positively associated with the level of voluntary disclosure in corporate annual reports. As the Financial Services Authority cautions London-listed companies to avoid selective disclosure and has indicated that all material developments are to be disclosed to a widespread audience in a timely manner, it follows that Londonlisted companies with a larger analyst following will turn to the Internet as a key means of ensuring that information previously provided rst, or perhaps exclusively, to analysts will now be supplied to all investors in a timely manner. Based on recent research linking analyst following with disclosure in annual reports and the growing pressure for Londonlisted companies to disclose timely information to a wider audience, we anticipate a positive relationship between analyst following and CIR. The following hypothesis tests the relationship between analyst following and CIR comprehensiveness. H3: Analyst following is positively associated with comprehensiveness of CIR.
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IV. METHOD Sample Selection and Data Collection We obtained the names of companies listed in London from the London Exchange website. After sorting the list by market capitalization, we randomly selected 120 companies from the top quartile and used Ofine Explorer software to download each of the websites in our sample.5 By focusing on the top quartile of the London Exchange, we examine those companies most likely to be have a larger analyst following, and accordingly, most likely to be impacted by the new regulations and recommendations on selective disclosure.6 Because website content and design are frequently updated, analyzing the content and usability of all sample websites as of a specic date is important. Thus, to avoid temporal differences in website content, all downloads took place on a single day in mid-2005. Using Ofine Explorer software, we specied the starting page using the URL address of the company, and directed the program to download all les linked to the starting page from the starting server up to level ve (e.g., any page that is ve clicks away from the home page). We assumed that the longer the number of clicks to nd the information, the less useful it is to the user (Rubin 1994). While downloading les from web pages, the software creates a folder for each web page in which les were downloaded. Every folder was identied by a folder name typical to the web page URL. This arrangement makes it easy to explore the les, which were downloaded from each web page separately (Usama and Matsumoto 2004). Each download was examined for completeness. For every folder, we checked the downloaded les to determine if the entire contents of the web page were successfully downloaded.7 We discarded ten companies because the download process was unsuccessful. Thus, our sample consists of 110 London-listed companies with complete website downloads. Of the 110 companies in our sample, 80 (72.7 percent) are domiciled in the U.K. The appendix to the paper lists the sample companies and their country of domicile. Description of CIR Comprehensiveness Index The dependent variable measures are derived from a new, more comprehensive CIR index drawn primarily from our extensive review of the CIR literature, Loranger and Nielsons (2003) Internet reporting usability guidelines, and the investor relation literature. With few exceptions (Abdelsalam et al. 2004, 114 items; Xiao et al. 2004, 82 items; Marston and Polei 2004, 71 items; and Allam and Lymer 2003, 36 items), previous studies generally reviewed a very limited number of content and/or usability items.
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Ofine Explorer is a Windows ofine browser that allows downloading an unlimited number of websites for later ofine viewing, searching, browsing or updating. (http: / / www.metaproducts.com / mp / mpProducts Detail.asp?id 1). The program automatically downloads all pages, images, and associated les within a website, thereby, providing a snapshot of the site for a given point in time. The snapshot can later be browsed ofine without Internet access and ensures that changes to the website made during the course of the research do not impact the study. Though there are various types of software available to download the contents of web pages, Ofine Explorer was found to be most reliable, fastest download, and easiest use software (Usama and Matsumoto 2004). Indeed, for our sample companies the correlation matrix reveals that size is positively correlated at .622 with analyst following. The software noties the user of any failed downloads with a red X next to the URL. If this sign was found on any downloaded web page, we repeated the download until all the contents of all web pages were successfully downloaded. To assure the success of downloading, we compared such web pages with the online web pages to conrm that their entire contents were accurately captured in the download process. If the contents were still not successfully downloaded, this company was excluded from the sample (Usama and Matsumoto 2004).
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Our goal was to assimilate, in one instrument, as many items as possible (both nancial and nonnancial), identied by the relevant investor relations literature and prior CIR studies as important components of CIR. To this end, our initial instrument contained 163 items. Following a pilot test, some items were deleted because we were unable to assess the applicability of the content or usability item. Eliminating these items ensured that companies were not penalized for nondisclosure of nonapplicable items. Our nal checklist contains 143 items (74 content and 69 usability) and accordingly, represents the most comprehensive assessment of CIR utilized to date, thereby providing for a richer assessment of content and usability. Figure 1 depicts the checklist taxonomy. Dependent Measures: Content Content refers to what information is disclosed on the website. Our 74 content checklist items are drawn from previous academic literature8 usability guidelines (e.g., Loranger and Nielsen 2003; Nielsen 1999), and the investor relations literature.9 We extend prior research
FIGURE 1 Taxonomy of Checklist Items
Full Checklist (CIR Comprehensiveness) (n = 143 items) (COMPRE)
Content (n = 74 items)
Usability (n = 69 items) (USABILITY) Examples: Navigation buttons Hyperlinks that change color FAQs Built-in search
General Content (n = 19 items) (GCONTENT) Examples: Investor glossary Interactive stock/share charts Segment information
Credibility (n = 55 items) (CREDIBILITY) Examples: Timeliness Code of ethics Audit opinion Audit logo on audit report
These include Deller et al. (1998); Marston and Leow (1998); Ashbaugh et al. (1999); Craven and Marston (1999); Lymer (1999); Debreceny and Gray (1999); Deller et al. (1999); Pirchegger and Wagenhofer (1999); Ettredge et al. (2001); Hodge (2001); Ettredge et al. (2002); Debreceny et al. (2002); Oyelere et al. (2003); Marston (2003); Allam and Lymer (2003); Lymer and Debreceny (2003); Abdelsalam et al. (2004); Marston and Polei (2004); Xiao et al. (2004); Davey and Homkajohn (2004); Fisher et al. (2004); and Mercer (2004). These include CP (2003); Geerings et al. (2003); Gray (2001); IFAC (2003); Jones (2002, 2003, and 2004); Colman (2004); and Carey and Parker (2006).
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by decomposing Content into two categories: General Content (19 items) and Credibility (55 items). Examples of general content items include investor glossary, interactive stock/ share charts, segment information, and press releases. The Credibility Primer (CP 2003) denes credibility as providing transparent, timely, full, and fair disclosure. Mercer (2004, 186) denes disclosure credibility as investors perceptions of the believability of a particular disclosure. Mercer (2004, 187) further identies several inuences on credibility, including: Managements credibility. The degree of external and internal assurance. Various characteristics of the disclosure, including its precision, venue, timing and amount of supporting information. Based on these denitions, our Credibility content items include those related to the timely presentation of information (see Mercer 2004; IFAC 2003; Ettredge et al. 2002; Ettredge and Gerdes, Jr. 2005) corporate governance (Jones 2002), or the audit opinion (see Lymer and Debreceny 2003; Fisher et al. 2004). Examples of timeliness checklist items include the use of webcasts to quickly disseminate information, the disclosure of quarterly as opposed to semi-annual reports, and disclosure of time lags in updating various items online. Credibility checklist items associated with corporate governance include disclosure of governance details such as names and contact information for corporate directors, remuneration of executives and directors, and display of the companys code of ethics online. Disclosures relative to the audit report are also an important indicator of credibility. For example, hyperlinking from audited to unaudited information within an annual report lessens credibility of the information provided on the website, as many individuals do not notice the difference when moving from audited to unaudited information through the use of hyperlinks (Hodge 2001). Additionally, displaying the audit rm logo with a hyperlink to the auditors website enhances credibility. Likewise, having scanned original signatures displayed on the audit report (as opposed to typed signatures) promotes credibility (Fisher et al. 2004). Usability Usability addresses the specics of website design and refers to how easy is it to navigate the site and locate information (i.e., ease of use). Our usability checklist items are drawn from prior literature (see Table 1), as well as the usability guidelines of Loranger and Nielsen (2003). These authors surveyed individual and professional investors, nancial analysts, and nancial journalists to develop guidelines for improving the usability of information provided on corporate websites. Examples of usability items include easy to see and use navigation buttons, hyperlinks that change colors when visited, FAQs (frequently asked questions), and built-in search features. To calculate the dependent variables for the multivariate analyses, we categorized content items as either general content items, GCONTENT, or items enhancing website credibility, CREDIBILITY. Usability items are captured in the variable USABILITY. A measure of the overall level of disclosure comprehensiveness is provided by the variable COMPRE. The number of CIR comprehensiveness index items comprising the dependent measures COMPRE, USABILITY, GCONTENT, and CREDIBILITY is 143, 69, 19, and 55, respectively. We completed a checklist for each of the 110 companies in our sample. The disclosure index calculation is based on an adaptation of Camfferman and Cooke (2002, 13). If an index item is disclosed on the website, general content and credibility items are scored as 1; otherwise, these items are scored as 0. To assess usability, visibility and le format of the corresponding content or credibility is assessed. Visibility is judged as good
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and scored as 1 if the item is either clearly noticeable on the website or easily located using site map or search facilities; otherwise, visibility is scored as 0. When a content or credibility item is not located on the website, any corresponding visibility item is considered not applicable and scored NA. Thus, a company is not penalized on usability when the corresponding content item is coded as NA. File format is addressed by certain index usability items. For these checklist items, PDF, HTML, and processable format les (i.e., les that can be downloaded into a spreadsheet or database) are scored as 0, 1, and 2, respectively.10 After the initial scoring, each website was carefully reviewed a second time to ensure accuracy and consistency of the CIR comprehensiveness index scoring. Each dependent variable was calculated based on the ratio of the actual CIR comprehensiveness index score for the company to the maximum possible index score for that company (based on the number of applicable CIR comprehensiveness index items). Independent Variables Data for test and control variables were obtained from several sources, including the London Stock Exchange website, Manifest, Lexis-Nexis (i.e., Disclosure Incorporated, Worldscope, Hoovers Company In-depth Records, and International Institutional Database), Bloomberg, and company annual reports. The test variables include major shareholding (MAJORHOLDING), director holding (DIRECTORHOLDING), director independence (INDEPENDENCE), CEO duality (DUALROLE), and number of analysts following the company (ANALYSTS). Control Variables The extant literature identies several company-specic characteristics as relevant to the voluntary disclosure of nancial information on the Internet. However, the results are inconsistent across studies, often depending on country and exchange studied. Some variables such as company size are generally signicant in prior literature, and should be included in the model. Other variables, however, such as industry, are more problematic. While prior evidence indicates industry is an important explanatory variable, the type of industry and direction of association is uncertain and appears to be driven by country-specic and/or exchangespecic factors. For example, in their study of the association of corporate governance variables and voluntary disclosure, Ho and Wong (2001) report a positive association for the control variable manufacturing industry. Conversely, Abdelsalem et al. (2004) report a negative association between being in the manufacturing industry and CIR. Examination of the bivariate correlations demonstrates that in our study, being in the manufacturing industry is positively associated with at least two of our dependent measures. Based on this analysis, we include manufacturing industry as a control variable in our models. Companies in the
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PDF le format is coded as 0 on usability because this le format is the least exible for users. For example, data contained in a PDF le is often impossible to copy and paste into a spreadsheet program for further analysis. HTML les are coded as 1, which is an improvement in usability over PDF les. Jones (2003) notes that although HTML content takes longer to prepare, it is more exible for companies and their end users. Companies can take advantage of HTMLs ability to easily link related web pages, such as linking board committee charters to sections of the proxy statement that highlight committee activities rather than just policies and procedures. Last, processable le formats such as Excel are coded as 2, which reects the highest level of usability. This data can be easily downloaded and further analyzed without having to copy and paste or otherwise transform the data.
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manufacturing industry (i.e., rst-digit-SIC code 2 or 3) are coded as 1. Other companies are coded as 0.11 Prior research also suggests an association between being in a technology-based industry (Xiao et al. 2004; Debreceny et al. 2002) and level of CIR. In our study, level of technology is captured by the control variable high growth/intangibles. This variable was introduced into the CIR literature by Debreceny et al. (2002). These authors suggest that companies with high-growth prospects and high intangibles arising from factors such as technology, corporate strategy, and human resources will likely exhibit a high market-tobook-value ratio. Their study did not nd an association between level of CIR disclosure and high growth/intangibles for a sub-sample of low-growth/intangible companies. However, for a sub-sample of high-growth/intangible companies, they report a negative association between growth prospects and intangibles and CIR. In the current study, high-growth prospects/intangibles is measured by the natural logarithm of the ratio of market-to-bookvalue. Because our sample is not large enough to analyze along high- and low-growth lines, this control variable is measured utilizing a two-tailed test.12 Protability has also been found to be a signicant predictor of Internet disclosure (see Table 1), although the direction of the association is unclear as the ndings are mixed. Examination of the bivariate correlations in our study between ROA and the dependent measures reveals a correlation between ROA and at least one dependent measure, GCONTENT. Based on this analysis and prior literature, we include size (natural logarithm of total assets), protability (Return of Assets [ROA]), and two measures of industry (manufacturing industry versus other, and high growth/intangibles) as control variables.13 We use a onetailed test for size and two-tailed tests for the other control variables. Regression Models To test our hypotheses, we perform ordinary least squares regression using rank transformation.14 The model estimated for all four of our ordinary least squares regressions is (Equation (1)): DVi
3 7
11
MAJORHOLDING
4
DIRECTORHOLDING
5
INDEPENDENCE ROA
8
DUALROLE
9
ANALYSTS

MFG IND
TOT ASSETS
MKTCAP BV
12
13
14
The major ndings in CIR related to industry reveal associations with manufacturing, service, and technology industries. In the current study, the relatively small number of sample observations in the two latter categories precludes valid statistical inference regarding these two industries. Prior studies in CIR, however, use MKTCAP BV (market capitalization to book value) to assess high growth and intangibles. Incorporating this variable in the current study captures the technology / service dimension incorporated in prior studies. Thus, our study assesses industry via manufacturing versus nonmanufacturing, and additionally via high-tech / new economy versus other. We attempted to develop additional measures of intangible asset holdings such as investment in advertising and research and development. However, we were unable to obtain this information (as at the time of our study, disclosure of these items of information was not required within this institutional environment) for a signicant number of our sample companies, thus precluding analysis on these proxies. We performed sensitivity analysis to determine which measures of size and protability to include in our reported models. Total assets and ROA yielded the best-tting models. We omit other variables such as leverage, which are not consistently signicant in prior literature. Cooke (1998, 211212) notes that, In the case of disclosure studies, the dependent variable is a metric ratio and therefore can be legitimately transformed, where necessary, and used in regression analysis.
16 where: DVi MAJORHOLDING DIRECTORHOLDING INDEPENDENCE DUALROLE ANALYSTS MFG IND ROA TOT ASSETS MKTCAP BV
percent of applicable comprehensiveness index items supplied/ satised for each of four dependent measures; percent of stock held by major shareholders (those owning more than ve percent of the company stock); percent of stock held by directors; proportion of independent, nonexecutive to total directors; 1 if Chairman of Board is also CEO, 0 otherwise; number of analysts following a company; 1 if company in manufacturing industry, otherwise 0; return on assets; natural logarithm of total assets in U.S. dollars; and natural logarithm of the ratio of market to book value.
V. RESULTS CIR Comprehensiveness IndexDescriptive Results Descriptive statistics for the test and control variables are provided in Table 2. Approximately one quarter of companies are in the manufacturing industry. Average (mean) company size, measured by total assets, is 26.1 billion U.S. dollars. ROA is on average 3.83. The CEO also serves as Chairman of Board of Directors for approximately onequarter of the companies. On average, about one-third of the companies stock is held by major shareholders, while directors own about six percent of the stock. On average, about 40 percent of the members of the board of directors are independent (i.e., nonexecutive), and an average of 13 analysts follow each company. Overall CIR comprehensiveness in each of the three areas assessed by the dependent variables is summarized in Table 2. Accordingly, Panel A of Table 2 represents a scorecard of CIR comprehensiveness. COMPRE has a minimum of 44 percent and a maximum of 86 percent, with a mean of 66 percent and a standard deviation of .088. This nding represents notable improvement in comparison to Craven and Marstons (1999) analysis of CIR by U.K.-domiciled companies. However, none of the sample companies provided/satised 100 percent of the 143 index items applicable to that company, thereby highlighting the opportunity for further improvement in CIR practices. Some additional insight is achieved by examining scores for the dependent variables, focusing specically on USABILITY and each of the two content categories. On average, the companies perform best on GCONTENT, where they provide 79 percent of the items. Companies fare somewhat worse on USABILITY where, on average, they satisfy 70 percent of the items. On average, companies score only 58 percent on CREDIBILITY. Furthermore, there is considerable variation for GCONTENT. OLS Regression Robustness Tests For the multivariate analyses, four regressions were estimated, one for each of the four main dependent variables (COMPRE, GCONTENT, USABILITY, and CREDIBILITY). Our nal regression model includes nine independent variables (ve test and four control variables). Bivariate correlations between all variables, including the control variables, are presented in Table 3 (Panel A). A review of the tolerance and variance ination factor statistics
17
TABLE 2 CIR Comprehensiveness Index Descriptive Statistics, n (Untransformed) Panel A: Dependent Variables Dependent Variables COMPRE (143 items) Percent of relevant content and usability items provided or satised GCONTENT (19 items) Percent of relevant general content items provided CREDIBILITY (55 items) Percent of relevant content items relating to credibility provided USABILITY (69 items) Percent of relevant usability items satised Panel B: Independent Variables Categorical Variables DUALROLE MFG IND (control) Continuous Variables MAJORHOLDING DIRECTORHOLDING INDEPENDENCE ANALYSTS ROA (control) TOT ASSETS (in millions) (control) MKTCAP BV (control)
a
110
Min. 0.44 0.25 0.31 0.53
Max. 0.86 1.00 0.80 0.89
Mean 0.66 0.79 0.58 0.70
Std. Dev. 0.088 0.149 0.097 0.094
Frequency 29 25 Min. 0 0 0 0 32.04 11.724 12.14a Max. 92.44 60 92.30 49 32.76 1,030,000 130.25
Percent 26.4 22.7 Mean (Std. Dev.) 30.77 (19.79) 5.69 (11.19) 42.67 (19.04) 13.28 (9.66) 3.83 (7.38) 26,152 (108,074) 3.61 (12.72)
MKTCAP BV is negative for companies with negative book value.
provides no evidence of pro signicant multicollinearity in the regression model (Table 3, Panel B).15 Prior to estimating the OLS regression models, we performed regression diagnostics to determine if the assumptions of normality and equal variances were met for all dependent variables. Diagnostics included Q-Q normality plots, examination of histograms of all dependent variables, scatter plots of residuals against the predicted values, and the Kolmogorov-Smirnov Z-test with Lilliefors correction for each independent and dependent variable. The Kolmogorov-Smirnov Z-test with Lilliefors correction for each independent and dependent variable indicated that some of the corporate governance independent variables are not normally distributed; thus, following Cheng et al. (1992); Lang and Lundholm
15
According to Neter et al. (1989, 409), variance ination factors (VIF) above 10 indicate serious multicollinearity and result, on the average, in larger differences between the estimated and true standardized regression coefcients. Such multicollinearity is problematic because it leads to unstable coefcients. The highest VIF in our models is 2.524. Additionally, we examine the tolerance levels to determine whether they are acceptable. Tolerance levels are all above .20, and are thus acceptable.
18
TABLE 3 Pearson Correlations and Collinearity Diagnostics for Dependent and Independent Variablesa Panel A: Correlations 1 1 2 3 4 5 6 7 8 9 10 11 12 13 COMPRE GCONTENT USABILITY CREDIBILITY DUALROLE MFG IND INDEPENDENCE DIRECTORHOLDING MAJORHOLDING ANALYSTS ROA TOT ASSETS MKTCAP BV 1 .785b .874 .823 .123 .246 .429 .446 .193 .514 .132 .469 .037 1 .609 .575 .026 .273 .414 .389 .266 .399 .225 .417 .099 1 .505 .071 .201 .323 .351 .150 .449 .083 .342 .090 1 .230 .174 .359 .384 .136 .424 .109 .438 .043 1 .020 .069 .276 .058 .012 .144 .003 .181 1 .133 .093 .130 .225 .075 .078 .231 1 .391 .223 .413 .135 .372 .023 1 .096 .349 .216 .533 .075 1 .267 .270 .428 .059 1 .099 .622 .059 2 3 4 5 6 7 8 9 10 11 12 13
1 .333 .10
1 .079
Panel B: Collinearity Diagnostics Variable MAJORHOLDING DIRECTORHOLDING INDEPENDENCE DUAL ROLE ANALYSTS MFG IND ROA TOT ASSETS MKTCAP BV
a b
Tolerance .906 .738 .750 .902 .726 .943 .796 .396 .890
VIF 1.345 1.762 1.359 1.204 1.887 1.137 1.257 2.524 1.124 Abdelsalam, Bryant, and Street
Correlation matrix and collinearity diagnostics are performed on transformed variables (e.g., ranks). Bold indicates coefcient is signicant at .05, two-tailed.
19
(1993, 1996); Wallace and Naser (1995); and Cooke (1998), the continuous independent and dependent variables were transformed into ranks before running the regression analysis.16 We also computed normal score transformations as a supplemental analysis.17 We also investigated whether analyst following should be modelled as an endogenous variable. If ANALYSTS is endogenous (i.e., correlated with the error term ) in Equation (1), ordinary least squares (OLS) will not provide consistent parameter estimates. A common approach to test for endogeneity is to perform the Hausman (1978) test. Specically, we regress each of our dependent measures on the residuals of a rst-stage regression, along with the exogenous variables. The coefcient on the residual was not statistically signicant from zero, thus failing to reject the null hypothesis of exogeneity; therefore, we conclude that analyst following is not endogenous to any of our measures of CIR. Full OLS Regression Model The OLS regression results for all models are shown in Table 4, utilizing both normal scores regression and rank regression. All four regression models are signicant at p .000 using both normal scores regression and rank regression. Unless otherwise noted, the following discussion refers to the rank-regression results. Hypothesis 1 predicts that ownership structure is signicantly associated with CIR comprehensiveness, as well as the general content, credibility, and usability of information reported on corporate websites. With respect to major shareholding (H1a) for all four dependent variables, we cannot reject the null. Thus, we nd no evidence that level of CIR disclosure is associated with major shareholding for London-listed companies. For hypothesis 1, however, we nd a signicant negative association between director .083), general content (p .039), and holding (H1b) and CIR comprehensiveness (p usability (p .079). We do not nd a signicant association between director holding and credibility. Our ndings are thus consistent with those of Eng and Mak (2003) and Ghazali and Weetman (2006). Both of these studies indicate that, within the context of smaller, emerging markets, director ownership is signicantly negatively associated with the level of voluntary disclosure. Our ndings extend this association to a larger, highly developed market and, specically, to an important subset of voluntary disclosureCIR. Hypothesis 2 predicts that CIR is signicantly associated with the governance features of director independence and CEO duality. With regard to director independence (H2a), a .069) and signicant positive association is supported for CIR comprehensiveness (p .025). This nding is consistent with Adams and Hossain (1998) general content (p and Chen and Jaggi (2000), as both studies support a complementary relationship between the proportion of independent, nonexecutive directors on the board and the level of voluntary disclosure. We, however, nd no evidence of a signicant difference between director
16
17
Rank transformation is useful in some cases because it yields distribution-free data (Cheng et al. 1992; Wallace et al 1994); is insensitive to outliers (Gray et al. 1998; Cheng et al. 1992); provides results similar to those derived from ordinal transformation; mitigates the impact of measurement errors, outliers and residual heteroscedasticity on regression results; and is useful when the relationship between the dependent and independent variables is not strictly linear and there is no theoretical basis for suggesting a relationship between the dependent and independent variables (Cooke 1998). Both normal scores and rank transformation are acceptable approaches to dealing with nonnormal or heteroscedastic data. Cooke (1998, 214) notes that, In effect, the ranks are being substituted by scores on the normal distribution and so the normal scores approach may be considered to represent an extension of the rank method. The two analyses typically yield similar results.
20
TABLE 4 Determinants of CIR Comprehensiveness Results of OLS Regression, Full and Reduced Models, n Full Model Normal Scores Ranks Coefcient Coefcient p-value p-value Estimate Estimate .025 .015 .186 .134 .159 .344 .331 .032 .064 .104 .802 .430 .032 .068 .185 .001 .078 .698 .298 .199 .350 7.345 (.000) 34.296 .008 .143 .136 5.380 .326 11.344 .028 .129 .064 .025 .463 .083 .069 .188 .002 .069 .750 .146 .439 .358 7.561 (.000)
110
Predicted Sign* Panel A: Dependent VariableCOMPRE Intercept MAJORHOLDING (H1a) DIRECTORHOLDING (H1b) INDEPENDENCE (H2a) DUALROLE (H2b) ANALYSTS (H3) MFG IND (Control) ROA (Control) TOT ASSETS (Control) MKTCAP BV (Control) Adjusted R2 F-Ratio
Reduced Model Normal Scores Ranks Coefcient Coefcient p-value p-value Estimate Estimate .007 .004 .240 .172 .179 .317 .255 .940 .478 .003 .025 .150 .0005 .16 .337 10.162 (.000) 41.318 .028 .223 .169 4.675 .332 9.130 .000 .367 .008 .030 .212 .000 .131 .347 10.570 (.000)
/ / /
TABLE 4 (continued) Panel B: Dependent VariableGCONTENT Intercept MAJORHOLDING (H1a) DIRECTORHOLDING (H1b) INDEPENDENCE (H2a) DUALROLE (H2b) ANALYSTS (H3) MFG IND (Control) ROA (Control) TOT ASSETS (Control) MKTCAP BV (Control) Adjusted R2 F-Ratio .139 .071 .179 .189 .132 .168 .199 .108 .005 .188 .186 .223 .048 .025 .242 .070 .020 .225 .484 .032 .256 5.051 (.000) 57.911 .090 .192 .191 6.581 .147 16.322 .091 .049 .152 .000 .171 .039 .025 .153 .099 .014 .320 .353 .085 .290 5.819 (.000) .105 .090 .214 .198 .101 .151 .355 .311 .147 .011 .018 .293 .057 .069 .228 6.304 (.000) 51.741 .123 .244 .202 6.551 .157 12.494 .000 .075 .006 .017 .144 .05 .05 .278 7.934 (.000) Journal of International Accounting Research, Volume 6, No. 2, 2007
/ / /
21
22
TABLE 4 (continued) Full Model Normal Scores Ranks Coefcient Coefcient p-value p-value Estimate Estimate .029 .017 .177 .056 .006 .375 .227 .022 .014 .157 .784 .429 .054 .283 .488 .001 .269 .813 .459 .080 .226 4.430 (.000) 49.420 .026 .160 .084 1.001 .375 8.741 .000 .030 .151 .004 .395 .079 .202 .441 .001 .202 .996 .413 .099 .226 4.443 (.000) Reduced Model Normal Scores Ranks Coefcient Coefcient p-value p-value Estimate Estimate .008 .012 .195 .072 .044 .332 .166 .938 .447 .021 .225 .409 .0005 .402 .210 5.797 (.000) 41.471 .008 .170 .095 2.295 .328 7.020 .001 .466 .044 .168 .361 .0005 .288 .214 5.896 (.000)
Predicted Sign* Panel C: Dependent VariableUSABILITY Intercept MAJORHOLDING (H1a) DIRECTORHOLDING (H1b) INDEPENDENCE (H2a) DUALROLE (H2b) ANALYSTS (H3) MFG IND (Control) ROA (Control) TOT ASSETS (Control) MKTCAP BV (Control) Adjusted R2 F-Ratio
/ / /
TABLE 4 (continued) Panel D: Dependent VariableCREDIBILITY Intercept MAJORHOLDING (H1a) DIRECTORHOLDING (H1b) INDEPENDENCE (H2a) DUALROLE (H2b) ANALYSTS (H3) MFG IND (Control) ROA (Control) TOT ASSETS (Control) MKTCAP BV (Control) Adjusted R2 F-Ratio .033 .075 .092 .124 .372 .237 .271 .029 .172 .026 .749 .208 .191 .094 .024 .018 .169 .739 .091 .761 .253 4.999 (.000) 19.187 .084 .015 .099 17.069 .229 6.859 .051 .277 .084 .229 .184 .443 .152 .004 .023 .293 .573 .017 .335 .283 5.656 (.000) .064 .024 .189 .189 .351 .234 .209 .534 .390 .022 .023 .030 .008 .280 .242 6.757 (.000) 42.963 .005 .153 .141 13.822 .297 5.368 .000 .479 .058 .072 .015 .0015 .405 .251 7.038 (.000)
/ / /
* The p-values are one-tailed when a sign expectation is provided. Model: DVi 1MAJORHOLDING 2DIRECTORHOLDING 3INDEPENDENCE 4DUALROLE 5 ANALYSTS 6MFG IND . 8TOT ASSETS 9 MKTCAP BV Variable Denitions: DVi percent of applicable comprehensiveness index items supplied / satised for each of four dependent measures; MAJORHOLDING percent of stock held by major shareholders; DIRECTORHOLDING percent of stock held by directors; INDEPENDENCE percent of stock held by outsiders; DUALROLE 1 if Chairman of the Board is also the CEO; ANALYSTS number of analysts following a company; MFG IND 1 if company in manufacturing industry; else 0; ROA net income / total assets; TOT ASSETS natural logarithm of total assets in U.S. dollars; and MKTCAP BV natural logarithm of the ratio of market to book value.
ROA
23
24
independence and usability or credibility. This nding conrms that prior research should disaggregate the dimensions of CIR. A signicant negative association with dual role (H2b) is supported only for the cred.004). Interestingly, while the dual role variable is insignicant in the ibility model (p other three models, it is highly signicant in the credibility model. This nding is consistent with Gul and Leungs (2004) results indicating that duality is associated with lower voluntary disclosure. Again, we extend prior ndings regarding director independence and dual role to hold for a large, developed market and specically to CIR, and furthermore provide support for the argument that research should disaggregate the dimensions of CIR. Our ndings provide evidence supporting hypothesis 3 for all four models. Specically, we nd a signicant positive association between the number of analysts following the company and CIR comprehensiveness (p .002), general content (p .099), usability (p .001), and credibility (p .023). Hence, our ndings are consistent with prior research providing evidence that the number of analysts following a company is positively associated with the level of disclosure (Hope 2003; Cahan et al. 2005), and we extend this nding to hold in particular for CIR. Given the prohibition on selective disclosure, this nding is of particular relevance within the institutional setting of the London Exchange. As a form of sensitivity analysis, results utilizing normal scores regression are also reported in Table 4. As noted above, the ndings are highly similar, with one exception. Using normal scores, we additionally provide marginal evidence of a positive association between CIR credibility and director independence (p .094). Additionally, utilizing normal scores regression, the association between director holding and CIR comprehensiveness and CIR usability is signicant at p .05 as opposed to p .10. For our control variables, contrary to Abdelsalam et al. (2004), we nd evidence of a positive association between CIR and being in the manufacturing industry. Both normal regression scores and rank regression scores yield a positive and signicant association for .078 and .069, respectively) and general content (p .020 CIR comprehensiveness (p and .014, respectively) and manufacturing industry. Protability (ROA) is not signicant in any model. Both the normal scores regression and rank scores regression provide evidence of a positive association between size (total assets) and CIR credibility (p .091 and .017, respectively). We also nd a negative signicant relationship between high growth/intangibles and CIR. Using both normal scores regression and rank regression, the association is signicant .032 and .085, respectively) and usability (p .080 and .099, for general content (p respectively). This indicates that high-growth/intangibles companies perform lower on these dimensions, while low-growth/intangibles companies perform better. Thus, consistent with Debreceny et al. (2002), we provide additional evidence that the volatile environment of high growth/intangibles companies contributes to lower performance in CIR. As a nal sensitivity test, we investigate whether the results hold for both U.K. and non-U.K.-domiciled rms. First, we split the sample between U.K. (n 80) and non-U.K.30) rms and re-ran all regressions. While the U.K.-domiciled sample domiciled (n retains statistical power and integrity, the small sample size for the non-U.K.-domiciled rms leads to an over-tted model without statistical integrity. This is evidenced by the fact that the adjusted R2s drop sharply in this sub-sample in all regressions. Similar results are obtained for all other variations in our models. Second, we added an indicator variable (1 U.K.-domiciled, 0 non-U.K.-domiciled) to further test whether country of domicile
25
appeared to be a signicant variable. This variable was insignicant in all variations of our models. Thus, we nd no evidence of a domicile effect.18 Supplemental AnalysisReduced OLS Regression Model We also report a reduced model based on the variables found to be signicant in the full regression model, as well as additional variables we selected based on evidence from the correlation matrix. This method is utilized by Haniffa and Cooke (2002) in their study of corporate governance and voluntary disclosure, and is described in more detail in Pindyck and Rubinfeld (1981, 117120). The reduced regression model contains all of the ve test variables in the full model and the manufacturing industry control variable, which was signicant in two of the four regression models. We do not include the size variable in the reduced regression, as it is only signicant in one of the four full-model regressions (CREDIBILITY). Additionally, although the variance ination factors do not approach the problematic range, the size variable does have the highest variance ination factor (2.524) and lowest tolerance (.396). The correlation matrix reveals that size is correlated at .622 with analyst following; therefore, we estimate the reduced models without the size variable. As expected, without the size variable, analyst following becomes even more signicant. Protability was also dropped from the reduced model, as it was not signicant in any of the full models. The reduced model regressions are all signicant (p .000), with F-ratios and adjusted R2s ranging from 10.570 and .347 for COMPRE to 5.656 and .283 for USABILITY. The results are similar to the full model, and as in the full model, results across independent variables are similar for the normal scores regression and the rank scores. We highlight one exceptionour reduced model provides some evidence supporting H1a. Using our full model, we did not nd evidence of an association between major holding and CIR for any of the four models; however, in our reduced model, major holding is marginally signicant .075). Thus, we nd some for the general content model in the rank regression (p evidence that ownership dispersion is positively associated with CIR general content. In line with the full model, however, major holding is again insignicant using normal scores regression. VI. DISCUSSION The ndings reveal that despite recent regulatory pressure in the U.K. to enhance, inter alia, the timeliness of information dissemination, London-listed companies still have signicant deciencies in CIR and are not heeding Jones (2002) advice for enhancing the quality of their investor communication and the completeness of their CIR. Cognizant of the limitations of todays nancial reporting, major international organizations including the EC and IFAC have expressed concerns and issued recommendations in regard to both hard copy and CIR reporting. For example, in Directive 2004/109/EC, the European Parliament addresses the transparency of information disclosed to investors, noting:
The disclosure of accurate, comprehensive and timely information about security issuers builds sustained investor condence and allows an informed assessment of their business performance and assets. This enhances both investor protection and market efciency. (European Union 2004, 38) (emphasis added)
18
As a form of sensitivity analysis, we devoted substantial effort to collect the variable number of shareholders. However, this information was only available for 61 sample companies. We reran our full model for these 61 companies and added the variable number of shareholders. Number of shareholders was not signicant at p .10 for any of the four dependent variables. Therefore, we conclude there is very little evidence to support an association between ownership diffusion and CIR (H1a) within the context of the London Exchange.
26
Our study reveals that many companies listed on the EUs largest exchange are falling short of Parliaments expectations in regard to comprehensiveness, including its timeliness dimension. IFAC (2003) notes that globalization of markets continues to be a major factor both for goods and services and for the provision of capital needs. Securities offerings are no longer limited to an entitys home country, but are frequently offered in multiple jurisdictions. One of the most critical issues raised in IFACs strategic plan is the need to enhance the credibility of nancial reporting worldwide (Colman 2004). Focusing specically on CIR, IFAC (2003) recommends that companies develop a policy to address, among other things, how to differentiate audited and nonaudited nancial information and the frequency of updating nancial information. Our study provides several examples of poor CIR performance for London-listed companies in these key areas highlighted by IFAC. Our research reveals that many London-listed companies are ignoring the views of IFAC, the EC, and U.K. Financial Services authorities and have a long way to go with respect to enhancing both their online usability and credibility disclosures. Specically, many London-listed companies clearly have not implemented policies to ensure that the drivers of quality investor communication (i.e., comprehensiveness, usability, and veriability/credibility) are incorporated in their CIR reporting. Thus, our ndings may prompt U.K. regulators to specify the means by which London-listed companies are to disclose transparent, credible information. For example, the U.K. government is proposing that Company Law be modied to further promote timely reporting by requiring companies to make their nancial results available online within four months of the reporting date (DTI 2002). Thus, our ndings indicate that U.K.-listed companies must more seriously consider widespread impressions regarding the low credibility of nancial reporting and take voluntary action to enhance the credibility of hard copy nancial information and the information reported on their corporate websites. Alternatively, more regulation may be forthcoming. While Directive 2004/109/EC spells out requirements for improving the quality of online disclosures, there are no apparent requirements for the disclosure of corporate governance information. In contrast, the Securities and Exchange Commission (SEC) requires signicant corporate governance disclosures for U.S. companies listed on the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ). For example, a U.S. company listed on one of these exchanges must disclose whether it has adopted a code of ethics for its principle ofcers. Furthermore, any such code must be made publicly available on the companys website. Additionally, U.S. companies listed on the NYSE or NASDAQ are required to post corporate governance guidelines and charters for the most important board of director committees (e.g., audit committee, compensation committee, and nominating/corporate governance committees) online (Matheson and Reynolds 2004). Our research, therefore, reveals that London-listed companies have room for improvement with regard to improving their online credibility disclosures, such as timeliness and corporate governance requirements, if they are to achieve a level of online disclosure comparable to that required of U.S. companies listed on the NYSE or NASDAQ. Regulation may be necessary to achieve this goal. We nd that in this new regulatory environment, both analyst following and corporate governance disclosures are associated with CIR. After controlling for size, protability, and industry assessed via both manufacturing versus other industries and high growth/intangibles, we nd the CIR comprehensiveness of London-listed companies is associated with
27
analyst following, director holding, director independence, and CEO duality. By disaggregating total CIR disclosure into three components, we are able to also specify the components of CIR impacted by various determinants. VII. CONCLUSION This study provides practical insight into the comprehensiveness of disclosures by London-listed companies and highlights the need for improvement in CIR comprehensiveness in many areas, including credibility and usability. We additionally extend the emerging literature linking governance factors and voluntary disclosure to specically address CIR disclosure within the institutional environment of a large, highly developed marketthe London Exchange. Prior work in this area has focused on voluntary disclosure in general, and the samples have been pulled from smaller, primarily developing, markets. Our ndings suggest that the EU should consider requiring, as opposed to simply recommending, the disclosure of credible, timely information via the Internet and other outlets. Furthermore, the U.K. Financial Services Authority should consider additional action to enhance not only the timeliness but other components of the credibility of nancial and other information disclosed to investors. Our research suffers from some limitations. The sample of 110 companies was selected randomly from the top quartile of companies listed on the London Stock Exchange website because the time required to hand-collect data for the dependent variable made study of a larger, more diverse sample impracticable. Accordingly, the results may not generalize to smaller companies listed on the exchange; however, one would expect companies from the top quartile of the London Exchange to be the most receptive to regulatory pressure from U.K. and EU sources and to therefore be among the top CIR performers within this institutional environment. For many of the sample companies, data were not available for certain variables that might have proven interesting, such as number of shareholders and research and development expenditures. Additionally, while our study captures both manufacturing versus other, as well as high-technology inuences, the relatively small number of observations from certain industries precludes testing for a ner industry effect. Despite these limitations, the current study provides a contribution to understanding disclosures of companies traded on the London Stock Exchange, and is especially relevant given recent changes in the institutional environment in which London-listed companies operate. As the information age is evolving daily, CIR is an important area of study. The more we know about why and how companies disclose information on their websites, the less agency and information transfer costs investors and other users will bear. Our study provides a springboard for future research in the area of CIR.
28
APPENDIX Sample Companies, n

Panel A: Sample Companies and Country of Domicile Company Name Total S.A Lilly(Eli) & Co Lukoil OAO BASF AG Caterpillar Inc Centrica Koninklijke KPN NV Morrison (Wm.) Supermarkets AEGON NV INCO Alliance Unichem Hammerson EMAP Burberry Group Rank Group Persimmon Cobham BBA Group Liberty Group Meggitt MFI Furniture Group Premier Farnell Atkins (WS) OTE Cosmote Mobile VT Group Crest Nicholson Country of Domicile France U.S.A. Russia Germany U.S.A. U.K. Netherlands U.K. Netherlands Canada U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. South Africa U.K. U.K. U.K. U.K. Greece Greece U.K. U.K. Company Name TBI Shaftesbury Candover Investments Regal Petroleum Northgate Information Whatman Securities Trust of Scotland Kier Group Enterprise Unite Group SOCO International Cox Insurance Hldgs Mucklow (A.& J) Group Bloomsbury Publishing Autonomy Corp ITE Group Ted Baker SSI Countryside Properties HSBC Hldgs NTT Docomo Inc Schlumberger BHP Billiton Limited Electrolux AB British Sky Broadcasting Group Cadbury Schweppes
110
Country of Domicile U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. India U.K. U.K. Japan Netherland Antilles Australia Sweden U.K. Country of Domicile U.K. Netherlands U.K. U.K. Japan U.S.A. Bermuda U.K. U.K. U.K. U.K. U.K. Sweden Republic of Ireland U.K. U.K. U.K. U.K. Japan U.K. Bermuda Luxembourg U.K. U.K. U.K.
Company Name TPG NV Wolseley Xstrata PLC Daiwa Securities Group Torchmark Corp Esprit Hldgs AMVESCAP Royal Sun & Alliance Tomkins Tate & Lyle Kesa Electricals SKF Independent News & Media Pennon Group HMV Group Matalan RIT Capital Partners Konami Corp Northumbrian Water Group PLC Beneld Group Espirito Santo Financial Group Hiscox Great Portland Estates Westbury Jurys Doyle Hotel Group
APPENDIX (continued)
Orascom Constructions Industry Second Alliance Trust Yule Catto & Co Merrill Lynch European Invest Scottish Radio Hldgs African Rainbow Minerals Pipex Communications Speedy Hire Robert Wiseman Dairies London Scottish Bank Republic of Ireland Egypt U.K. U.K. U.K. U.K. South Africa U.K. U.K. U.K. Amstrad Aviva Sabmiller ITV Old Mutual Cable & Wireless Friends Provident Kelda BPB Bank Hapolalim Signet U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. Israel U.K. Dairy Farm Bradford & Bingley United Business Media Invensys Somereld Wood Group Avis-Europe Stanley Leisure Acambis House of Frasers Melrose U.K. Bermuda U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K. U.K.
Panel B: Frequency Counts of Country of Domicile Country U.K. U.S.A. Netherlands, Japan, Bermuda South Africa, Greece, Sweden, Republic of Ireland France, Russia, Germany, Canada, India, Netherlands Antilles, Australia, Luxemburg, Egypt, Israel Number of Companies Domiciled 80 3 3 each 2 each 1 each
29
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JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH Vol. 6, No. 2 2007 pp.

An Examination of the Comprehensiveness of Corporate Internet Reporting Provided by London-Listed Companies

Abdelsalam, Bryant, and Street

An Examination of the Comprehensiveness of Corporate Internet Reporting

Journal of International Accounting Research, Volume 6, No. 2, 2007

Journal of International Accounting Research, Volume 6, No. 2, 2007

Signicant Independent Variables Size ( )a Size ( ) Protability ( ) AIMR highly ranked rm ( )

Craven and Marston (1999) Pirchegger and Wagenhofer (1999)

206 largest U.K. companies

(continued on next page)

An Examination of the Comprehensiveness of Corporate Internet Reporting

Ettredge et al. (2001)

February through May 1998 Late 1997 through early 1998

Ettredge et al. (2002)

6 Accounting information items 11 Other nancial information items

4 Financial information items required in SEC lings 12 Items of voluntary disclosure

Journal of International Accounting Research, Volume 6, No. 2, 2007

Author(s) Oyelere et al. (2003)

Dependent Variables Financial and nonnancial information provided on corporate website

99 top Japanese companies

Abdelsalam, Bryant, and Street

An Examination of the Comprehensiveness of Corporate Internet Reporting

Journal of International Accounting Research, Volume 6, No. 2, 2007

Marston and Polei (2004)

July 2000 and May / June 2003

50 German companies (top quartile and bottom quartile of DAX 100)

Xiao et al. (2004)

300 largest Chineselisted companies (203 had a website)

Abdelsalam, Bryant, and Street

Journal of International Accounting Research, Volume 6, No. 2, 2007

An Examination of the Comprehensiveness of Corporate Internet Reporting

Journal of International Accounting Research, Volume 6, No. 2, 2007

Abdelsalam, Bryant, and Street

Journal of International Accounting Research, Volume 6, No. 2, 2007

An Examination of the Comprehensiveness of Corporate Internet Reporting

Journal of International Accounting Research, Volume 6, No. 2, 2007

Abdelsalam, Bryant, and Street

Journal of International Accounting Research, Volume 6, No. 2, 2007

An Examination of the Comprehensiveness of Corporate Internet Reporting

Abdelsalam, Bryant, and Street

Journal of International Accounting Research, Volume 6, No. 2, 2007

An Examination of the Comprehensiveness of Corporate Internet Reporting

Journal of International Accounting Research, Volume 6, No. 2, 2007

Abdelsalam, Bryant, and Street

Journal of International Accounting Research, Volume 6, No. 2, 2007

An Examination of the Comprehensiveness of Corporate Internet Reporting

Min. 0.44 0.25 0.31 0.53

Max. 0.86 1.00 0.80 0.89

Mean 0.66 0.79 0.58 0.70

Std. Dev. 0.088 0.149 0.097 0.094

MKTCAP BV is negative for companies with negative book value.

Journal of International Accounting Research, Volume 6, No. 2, 2007

Journal of International Accounting Research, Volume 6, No. 2, 2007

An Examination of the Comprehensiveness of Corporate Internet Reporting

Journal of International Accounting Research, Volume 6, No. 2, 2007

Journal of International Accounting Research, Volume 6, No. 2, 2007

Abdelsalam, Bryant, and Street

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An Examination of the Comprehensiveness of Corporate Internet Reporting

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Journal of International Accounting Research, Volume 6, No. 2, 2007

Abdelsalam, Bryant, and Street