The Impact of Corporate Governance On Internet Financial Reporting

Available online at www.sciencedirect.
com
Journal of Accounting and Public Policy 27 (2008) 62–87

www.elsevier.com/locate/jaccpubpol
The impact of corporate governance

on Internet financial reporting
Andrea S. Kelton a, Ya-wen Yang b,*
a
School of Accountancy, University of South Florida, 4202 E. Fowler Avenue,
BSN3403, Tampa, FL 33620, United States
b
Department of Accounting, University of Miami, 5250 University Drive, 304 Kosar-Epstein,
Coral Gables, FL 33146-6531, United States
Abstract
This study examines the association between corporate governance mechanisms and disclosure
transparency measured by the level of Internet financial reporting (IFR) behavior. We measure cor-
porate governance by shareholder rights, ownership structure, board composition, and audit com-
mittee characteristics. We develop a disclosure index to measure the extent of each sample firm’s
IFR by presentation format, information content, and corporate governance disclosures. Results
indicate that firms with weak shareholder rights, a lower percentage of blockholder ownership, a
higher percentage of independent directors, a more diligent audit committee, and a higher percentage
of audit committee members that are considered financial experts are more likely to engage in IFR.
The findings suggest that corporate governance mechanisms influence a firm’s Internet disclosure
behavior, presumably in response to the information asymmetry between management and investors
and the resulting agency costs. Additional exploratory analysis indicates that the association between
corporate governance and IFR varies with firm size. Our results suggest that new regulatory guid-
ance in corporate governance leads to improved disclosure transparency via IFR.
Ó 2007 Elsevier Inc. All rights reserved.
Keywords: Internet financial reporting; Corporate governance; Disclosure transparency
*
Corresponding author. Tel.: +1 305 284 1745; fax: +1 305 284 5737.
E-mail address: [email protected] (Y.-w. Yang).
0278-4254/$ - see front matter Ó 2007 Elsevier Inc. All rights reserved.
doi:10.1016/j.jaccpubpol.2007.11.001
A.S. Kelton, Y.-w. Yang / Journal of Accounting and Public Policy 27 (2008) 62–87 63
1. Introduction
The Internet is a unique information disclosure tool that encourages flexible forms of
presentation and allows immediate, broad, and inexpensive communication to investors.
The majority of Internet financial reporting (IFR) practices is voluntary and, for the most
part, unregulated. Many companies choose to voluntarily disseminate information on
their corporate websites,1 although the extent of IFR varies significantly across firms
(Ashbaugh et al., 1999; Debreceny et al., 2002; Ettredge et al., 2002). Prior research has
shown that variation in the transparency2 of online financial disclosures influences the
investor decision process (Hodge et al., 2004). While the Sarbanes-Oxley Act places many
new corporate governance restrictions on companies to improve the transparency of finan-
cial reporting and disclosure quality, we hypothesize that these corporate governance
enhancements also influence firms’ IFR behavior.
Investors frequently use the Internet to obtain financial information regarding potential
and current investment opportunities (Davis et al., 2003). IFR may lead to improved dis-
closure transparency since ‘‘the Internet has fundamentally improved the way companies
can present financial information” (Economist Intelligence Unit, 2003). As compared to
traditional, paper-based disclosures, IFR allows companies to disseminate information
to a broader audience on a more timely basis and permits the distribution of alternative
types of disclosures not required by the SEC or other regulatory bodies (Ettredge et al.,
2002). Additionally, Internet-based technologies permit companies to utilize alternative
information presentation formats, such as hypertext, multiple file formats (i.e., pdf,
text-based), and multimedia, that may improve the way investors access and understand
the information. According to Hodge et al. (2004), technologies that allow alternative pre-
sentation formats for financial information may facilitate investor information gathering,
improve disclosure transparency, and influence the investor decision process. Therefore, a
firm may improve its disclosure transparency with both the content and presentation for-
mat of Internet disclosures.
In response to the recent high-profile accounting frauds, regulatory bodies have
attempted to improve disclosure transparency by encouraging (or requiring) companies
to use the Internet as a prime tool for information dissemination.3 Ajinkya et al. (2005,
p. 371) suggest that ‘‘promoting stronger governance could also promote more transparent
disclosure.” Accordingly, this study examines the association between governance and dis-
closure transparency in the Internet reporting environment and predicts that a firm’s cor-
porate governance mechanisms will influence its disclosure transparency, measured by the
level of IFR.
1
In 2000, 93 of the Fortune 100 companies presented financial information on their corporate websites (FASB,
2000).
2
Bushman et al. (2004, p. 210) define transparency as ‘‘the widespread availability of firm-specific information
concerning publicly listed firms in the economy to those outside the firm.”
3
For example, the SEC mandates that a company publicly disclose changes to its code of ethics and permits
disclosure in either Form 8-K or on the company’s website (SEC, 2003), and the New York Stock Exchange
(NYSE) requires that listed companies publish their corporate governance guidelines and the charters of their
most important committees on their websites (NYSE, 2003).
64 A.S. Kelton, Y.-w. Yang / Journal of Accounting and Public Policy 27 (2008) 62–87
To test this assertion, we examine the corporate websites of 284 firms traded on the
NASDAQ National Market.4 We develop a disclosure index based on prior literature
and measure the extent of each sample firm’s IFR by presentation format and information
content. We extend prior research by including corporate governance disclosures in our
IFR measurement scheme and testing the association between corporate governance
and corporate governance Internet disclosures. We measure corporate governance by
shareholder rights, ownership structure, board composition, and audit committee charac-
teristics and examine the influence of these factors on disclosure transparency via IFR.
We find that IFR is more likely for firms with weak shareholder rights, a lower percent-
age of blockholder ownership, a higher percentage of independent directors, a more dili-
gent audit committee, and a higher percentage of audit committee members that are
considered financial experts. The findings suggest that corporate governance mechanisms
influence a firm’s disclosure transparency, presumably in response to the information
asymmetry between management and investors and the resulting agency costs. Additional
exploratory analysis indicates that the association between corporate governance and IFR
varies with firm size, suggesting that firms in different sizes use different corporate gover-
nance mechanisms to monitor the financial reporting process. Overall, our results suggest
that the new regulatory guidance in corporate governance leads to improved disclosure
transparency via IFR.
This study contributes to the existing IFR and corporate governance literature in sev-
eral ways. First, we are not aware of any prior studies that test the impact of corporate
governance mechanisms on IFR in the US. Recent empirical work examining the associ-
ation between disclosure in traditional financial reporting and corporate governance has
primarily focused on international settings (Chen and Jaggi, 2000; Eng and Mak, 2003;
Gul and Leung, 2004). Xiao et al. (2004) find a significant association between Internet-
based disclosure choices made by Chinese companies and the different classes of stock
ownership, such as ownership by government agencies and institutional ownership. We
extend prior research by examining the influence of corporate governance on the Internet
financial disclosures of US companies. Our study addresses the impact of corporate gov-
ernance mechanisms specific to the US context, including certain audit committee charac-
teristics identified by the Blue Ribbon Committee and subsequently adopted by the SEC
and major stock exchanges. In addition, we know of no prior study that examines specific
Internet corporate governance disclosures of US companies; thus, our IFR measurement
scheme provides a unique analysis of Internet disclosures.
Second, as firms’ Internet usage is constantly evolving, changes in the IFR environment
warrant continual examination. We provide additional information regarding the Internet
disclosure choices made by firms. We utilize a broad sample of publicly traded companies,
which allows a powerful analysis, as there is considerable variation in the measures of the
explanatory and dependent variables. Since Internet disclosure is primarily voluntary and
for the most part unregulated, our results provide empirical evidence to policy makers and
regulators concerning current IFR practices.
4
SEC approved corporate governance rules require companies with securities listed on the New York Stock
Exchange (NYSE) to disclose specific corporate governance data on their corporate websites (NYSE, 2003).
NASDAQ does not have a similar requirement for Internet corporate governance disclosure and, thus, provides a
unique setting to examine the factors that encourage companies to voluntarily use the Internet to disseminate
financial information, including corporate governance disclosures.
Finally, exploratory analysis indicates that the association between corporate gover-
nance mechanisms and IFR varies with firm size. This finding is consistent with the notion
that ‘‘one size doesn’t fit all” (Blue Ribbon Committee, 1999) when it comes to corporate
governance. Additionally, this result suggests that the role of corporate governance in
financial reporting and, specifically, disclosure transparency may be more complex than
anticipated and provides avenues for future research.
The remainder of the paper is organized as follows: Section 2 reviews prior research on
Internet financial reporting. Section 3 develops the hypotheses. Section 4 outlines sample
selection and variable definitions. Section 5 presents the results and analysis, and the final
section sets forth conclusions.
2. Prior research on IFR
Research on IFR has produced valuable insights into the determinants of companies’
Internet disclosure choices. For example, Ashbaugh et al. (1999) document IFR practices
and provide preliminary evidence on why some firms disseminate financial information on
their corporate websites, while others do not. The results indicate that firms engaging in
IFR are larger and more profitable than those not engaging in IFR. Furthermore, firms
responding to their survey indicate that disseminating information to shareholders is an
important reason for establishing an Internet presence. Ashbaugh et al. (1999) was one
of the first studies to examine the IFR issue; however, it did not provide a theoretical ratio-
nale for its analysis.
Several recent studies have attempted to alleviate this problem by using theories on vol-
untary disclosure to generate hypotheses. Ettredge et al. (2002) classify IFR into required
filings (i.e., disclosures that are required by the SEC, such as Forms 10-K and 10-Q) and
voluntary disclosures and investigate whether Internet dissemination of both types of data
can be explained by theories of incentives for voluntary disclosure by traditional methods
(e.g., Lang and Lundholm, 1993). The results show that the presence of required items on
a company’s website is associated with size and information asymmetry while the presence
of voluntary disclosures is associated with size, information asymmetry, demand for exter-
nal capital, and disclosure reputation.
Debreceny et al. (2002) study voluntary IFR in 22 countries to identify the firm and
environmental determinants of IFR. Instead of separating the Internet financial content
into required and voluntary items (in a manner similar to Ettredge et al., 2002), they exam-
ine both the content and presentation methods of disclosure. The findings reveal that the
presentation aspect of IFR is more associated with the level of technology and disclosure
environment than the content of IFR. Xiao et al. (2004) measure IFR in multiple dimen-
sions (i.e., content, presentation methods, mandatory items, and voluntary items) and ana-
lyze the determinants of Internet-based disclosure by Chinese listed companies. Their
primary focus is on factors unique to the Chinese context, such as the existence of state
ownership dominance. They find that IFR is positively and significantly associated with
the proportion of institutional ownership (also called legal person ownership5), but not
with ownership by domestic private investors, foreign investors, or the state.
5
Xiao et al. (2004, p. 192) define institutional shares as those ‘‘owned by separate legal entities, such as
investment institutions, other enterprises, and the foreign partners of a corporatized joint venture.”
One characteristic of prior studies is the strong focus on the economic aspects of the
determinants of IFR. A number of studies examine the relationship between IFR and fac-
tors such as firm size, profitability, leverage, etc. (e.g., Craven and Marston, 1999; Ettredge
et al., 2002; Debreceny et al., 2002; Oyelere et al., 2003). Few studies investigate gover-
nance factors as determinants of Internet-based disclosures, such as ownership structure
and composition of the board of directors (Xiao et al., 2004). Given the current emphasis
on corporate governance to improve disclosure transparency and recent findings that link
corporate governance factors to voluntary disclosure (e.g., Gul and Leung, 2004; Ajinkya
et al., 2005), examination of whether governance factors influence IFR is warranted.
Another characteristic of prior studies is the common use of analysts’ ratings obtained
from the CFA Institute (formerly AIMR). In order to explore the link between firms’
engagement in IFR and reputations for their corporate reporting practices, both Ashb-
augh et al. (1999) and Ettredge et al. (2002) use a sample of firms for which analysts’ rat-
ings of overall disclosure quality were available from the CFA Institute in its 1994–1995
and 1995–1996 An Annual Review of Corporate Reporting Practices.6 As Internet usage
is evolving, changes in the IFR environment warrant current examination and a broader
analysis of disclosure practices.
3. Hypotheses
The primary objective of this paper is to investigate whether corporate governance

mechanisms are associated with a firm’s Internet financial reporting behavior. Agency the-
ory (Jensen and Meckling, 1976) provides a framework linking disclosure behavior to cor-
porate governance. Agency theory suggests that agency costs arise from the conflicts of
interests between shareholders and managers. The economic benefits of any reduction in
agency costs will be shared by shareholders and managers in most market situations (Pratt
and Zeckhauser, 1985). As a result, managers often ‘‘voluntarily undertake various
actions, including disclosures and submissions to monitoring” (Xiao et al., 2004, p. 197).
Corporate governance mechanisms are involved in monitoring and determining a firm’s
overall information disclosure policy. The role of governance mechanisms in determining
disclosure policy may be either complementary or substitutive (Ho and Wong, 2001). It is
complementary when adoption of governance mechanisms strengthens the internal control
of the firm and makes it less likely for managers to withhold information for their own
benefits, leading to improvements in disclosure comprehensiveness and in the quality of
financial statements. On the other hand, it is substitutive when governance mechanisms
reduce information asymmetry and opportunistic behaviors in the firm, resulting in a
decrease in the need for more monitoring and disclosure.
Consistent with the predictions of agency theory, prior research has examined the influ-
ence of corporate governance mechanisms on various dimensions of a firm’s overall disclo-
sure policy, such as disclosure quality (e.g., Beasley, 1996; Klein, 2002), disclosure timing
(Sengupta, 2004), and propensity for voluntary disclosures (e.g., Ajinkya et al., 2005). We
extend this notion by examining the association between corporate governance and
another dimension of a firm’s overall disclosure policy – disclosure transparency. We mea-
sure disclosure transparency by the level of IFR.
6
An Annual Review of Corporate Reporting Practices was discontinued in 1995–1996.
Transparent disclosures provide more information regarding a firm’s activities. A firm’s

financial disclosure transparency is associated with its method of information dissemina-
tion (Bushman et al., 2004). Innovations in information technology have enabled compa-
nies to improve disclosure transparency through alternative methods of information
dissemination, such as Internet financial reporting. According to Healy and Palepu
(2001, p. 432), ‘‘The Internet provides management with the opportunity to access all
investors and to provide daily updates of important information.” Thus, a firm can
improve its disclosure transparency through use of IFR.
We measure corporate governance by shareholder rights, ownership structure, board
composition, and audit committee characteristics. Shareholder rights vary across firms.
Some firms reserve little power for management and allow shareholders to quickly and
easily replace directors (by either internal or external takeover) while other firms reserve
extensive power for management and place strong restrictions on shareholders’ ability
to replace directors. As shareholder rights decrease, the cost of replacing management
increases for shareholders. As a result, agency costs increase. We expect firms to respond
to the increase in agency costs with increases in disclosure transparency. Consequently, we
expect firms with weak shareholder rights to be more likely to engage in IFR than firms
with strong shareholder rights. Accordingly, we test the following hypothesis, stated in
the alternative form7:
H1. The level of a firm’s Internet-based disclosure is negatively associated with its
shareholder rights.
We examine the impact of corporate ownership structure on IFR using measures of
managerial ownership and block ownership. Managerial ownership reconciles the (poten-
tial) agency conflicts between managers and shareholders and thus reduces agency costs
(Jensen and Meckling, 1976). Empirical studies find that managerial ownership overcomes
the problem of managerial myopia, with high managerial ownership associated with an
increase in innovation and productivity of firms and, in the long term, the value of these
firms (Francis and Smith, 1995; Holthausen et al., 1995). Because managerial ownership
serves to align the interests of shareholders and managers, it reduces shareholders’
demands for monitoring. Thus, we predict the effect of managerial ownership on IFR
to be substitutive, such that the need for more monitoring and more transparent disclosure
is decreased by a greater percentage of managerial ownership. Eng and Mak (2003) find
managerial ownership to be negatively associated with voluntary disclosure in Singapore
companies. Accordingly, we test the following hypothesis stated in the alternative form:
H2. The level of a firm’s Internet-based disclosure is negatively associated with its
managerial ownership.
7
Consistent with prior research (Debreceny et al., 2002; Ettredge et al., 2002; Xiao et al., 2004), we use multiple
measures of IFR in our analysis (see additional discussion of our IFR measurement scheme in Section 4.2).
Although we hypothesize an association between corporate governance and IFR, we know of no theory or
empirical evidence that suggests that the association between governance and IFR will vary depending on the
specific measure of IFR. Therefore, we do not provide separate hypotheses for the various measures of IFR that
are examined in our analysis.
Blockholders refer to entities holding more than 5% of a firm’s outstanding shares.

When share ownership is less diffused, less monitoring is required. Prior research indicates
a negative relationship between block ownership and disclosure (Mitchell et al., 1995; Sch-
adewitz and Blevins, 1998). We predict that the effect of blockholders on IFR is substitu-
tive, such that need for more monitoring and more transparent disclosure is decreased by a
greater percentage of blockholder ownership. Accordingly, we test the following hypoth-
esis stated in the alternative form:
H 3. The level of a firm’s Internet-based disclosure is negatively associated with its block
ownership.
Board independence is an important element in monitoring the corporate financial

accounting process (Klein, 2002) and affecting the reliability of financial reports (Anderson
et al., 2004). A high percentage of independent directors on the board enhances the mon-
itoring of managerial opportunism and reduces management’s chance of withholding
information. Empirical evidence suggests a positive association between corporate disclo-
sure and board independence. Beasley (1996) finds that the proportion of independent
directors on the board is positively related to the board’s ability to influence disclosure
decisions. Chen and Jaggi (2000) find evidence of a positive relation between the propor-
tion of independent directors and the comprehensiveness of corporate disclosure in the
Hong Kong context. Based on findings from the largest 300 Chinese companies, Xiao
et al. (2004) suggest that IFR format and disclosure of information not required by the
China Securities Regulatory Commission are positively associated with the proportion
of independent directors.
Ajinkya et al. (2005) provide evidence on the relation between board independence and
voluntary disclosure. They find that firms with a greater percentage of outside directors are
more likely to issue earnings forecasts (proxy for voluntary disclosure) and to make more
frequent forecast disclosures and conclude that ‘‘monitoring mechanisms are related to the
extent and quality of discretionary information a manager discloses” (p. 371).
In contrast to the above findings, Eng and Mak (2003) find that increased presence of
outside directors is associated with reduced disclosure using a sample of Singapore firms.
Gul and Leung (2004) also report a negative association between independent directors
and voluntary disclosures using a sample of Hong Kong companies. These findings sug-
gest that independent directors play a substitute-monitoring role leading to a decrease
in the demand for additional disclosure. Overall, prior research provides mixed evidence
on the link between the financial reporting process, including the level of disclosure,
and the independence of the board of directors. Accordingly, we test the following hypoth-
esis stated in null form:
H4. There is no association between the level of a firm’s Internet-based disclosure and its
proportion of independent directors on the board.
According to agency theory, vesting the power of the CEO and the chairman of the
board in one person creates a strong individual power base, which could impair board
independence and erode the board’s ability to execute its oversight and governance roles
(Fama and Jensen, 1983; Finkelstein and D’Aveni, 1994). The oversight and governance
roles also extend to the dissemination of corporate information to outsiders. Gul and Leu-
ng (2004) find that CEO duality is associated with decreased levels of voluntary corporate
disclosure in the annual reports of Hong Kong companies. Accordingly, we test the fol-
lowing hypothesis stated in the alternative form:
H5. The level of a firm’s Internet-based disclosure is negatively associated with its CEO
duality.
The role of the audit committee in corporate governance is a subject of increasing reg-
ulatory interest.8 Prior research has shown that key audit committee characteristics –
rather than the mere presence of an audit committee – critically impact the audit commit-
tee’s ability to effectively execute its duties (Abbott et al., 2003; Carcello and Neal, 2003).
Consistent with prior literature, we focus on audit committee financial expertise and meet-
ing frequency.9
Empirical evidence suggests that audit committee financial expertise has a positive
effect on financial reporting quality. For example, the financial and governance expertise
of audit committee members is found to be negatively associated with aggressive earn-
ings management (Bédard et al., 2004) and the occurrence of restatement (Abbott
et al., 2004) and positively associated with perceived financial reporting quality (proxy
by the financial reporting quality scores reported in the 1992–1993 and 1995–1996 AIMR
Review of Corporate Reporting Practices) (Felo et al., 2003). These results indicate that
financial expertise on the audit committee affects financial disclosure. We extend this
notion and suggest that audit committee financial expertise is associated with disclosure
transparency, measured by IFR. We propose the following hypothesis stated in the alter-
native form:
H6. The level of a firm’s Internet-based disclosure is positively associated with its audit
committee financial expertise.
Audit committee meeting frequency is often used as a proxy for audit committee dili-
gence. Recent research supports the importance of audit committee meeting frequency.
Beasley et al. (2000) find that audit committees of fraud firms meet less often than audit
committees of a nonfraud industry benchmark. Abbott et al. (2003) find that firms whose
audit committees meet at least four times annually are less likely to have restated audited
financial statements. These results imply that audit committees that meet frequently are
more diligent in the discharge of their duties. Bronson et al. (2006) find a positive associ-
ation between the number of audit committee meetings and voluntary disclosure of man-
8
In October 1999, the Blue Ribbon Committee issued a summary statement of its recommendations, addressing
audit committee member independence, financial literacy and expertise, and committee size, as well as increased
audit committee autonomy over external auditor engagement. The SEC, major stock exchanges and the AICPA
subsequently adopted certain BRC recommendations regarding audit committees.
9
We also explored the association of audit committee independence and IFR, but failed to find any significant
results due to a lack of variation in audit committee independence in our sample. Only five of the 284 sample
companies do not have audit committees solely consisting of independent directors. As noted in Abbott et al.
(2003, p. 30), ‘‘. . .the NYSE and NASDAQ/AMEX have proposed additional restrictions on (and qualifications
for) audit committee membership. . . It seems likely that variation in the characteristics commonly used by
research in this area . . . will be diminished in the future.”
agement reports on internal controls. Thus, more diligent audit committees appear to
influence disclosure policy. We extend this notion and expect firms with diligent audit
committees to be more likely to have transparent disclosure, and, consequently, will be
more likely to engage in IFR. Accordingly, we test the following hypothesis stated in
the alternative form:
H7. The level of a firm’s Internet-based disclosure is positively associated with its audit
committee meeting frequency.
4. Sample and variables
4.1. Sample
The initial sample of 3488 firms traded in the NASDAQ National Market was obtained
from the 2003 COMPUSTAT dataset. We choose to examine securities listed on NAS-
DAQ because unlike the New York Stock Exchange (NYSE), NASDAQ does not require
listed companies to disclose specific corporate governance data on their corporate websites
and, thus, provides a unique setting to examine the factors that encourage companies to
voluntarily use the Internet to disseminate financial information, including corporate gov-
ernance disclosures. We then match our initial sample with the 2002 Investor Responsibil-
ity Research Center (IRRC) dataset, which leaves us with 583 companies. The IRRC
dataset provides the Gompers et al. (2003) ‘‘Governance Index”, which provides a proxy
for the balance of power between shareholders and managers (i.e., shareholder rights). We
eliminate financial institutions (SIC codes 6000-6999; n = 37), firms with fiscal year-ends
other than December 31 (n = 225), and firms with recent merger and acquisition events
(n = 11). Five companies are further excluded because their proxy statements were
unavailable. Twenty-one firms are eliminated due to missing governance disclosure in their
proxy statements. The final sample consists of 284 companies.
4.2. Measurements of Internet financial reporting
FASB (2000, Chapter 2) describes IFR in terms of content and presentation. Prior
research indicates that both the content and presentation format of Internet disclosures
can improve disclosure transparency. IFR allows dissemination of alternative types of dis-
closures not required by regulatory bodies (Ettredge et al., 2002). Additionally, Internet-
based technologies allow alternative presentation formats for financial information that
may improve transparency (Hodge et al., 2004). Therefore, we develop a list of 36 items
(TOTAL) to measure a company’s Internet financial reporting by content (CONTENT)
and presentation format (FORMAT) based on Xiao et al. (2004), Ettredge et al. (2002),
and Debreceny et al. (2002). Table 1 presents the measurement schemes for FORMAT
and CONTENT.
FORMAT examines the IFR presentation formats and options provided on a com-
pany’s website that are not available in the traditional paper paradigm. Presentation for-
mat can provide more transparent disclosures by enhancing the readability, accessibility,
and understandability of financial information (FASB, 2000). For example, financial dis-
closure format affects the manner in which information is acquired and processed (Cle-
Table 1
The measurement schemes of FORMAT and CONTENT
Disclosure items % of firms disclosing
FORMAT
1 Annual report in multiple file formats 45.8
2 Financial data in processable format 37.7
3 Hyperlinked table of contents 98.6
4 Drop-down navigational menu 28.9
5 Hyperlinks inside the annual report 50.0
6 Hyperlinks to data on a third-party’s website 26.1
7 Audio files 82.0
8 Video files 2.5
9 Email alerts 70.8
10 Direct e-mail to investor relations 73.9
11 Dynamic graphic images 67.3
12 Internal search engines 54.2
CONTENT
13 Current year’s annual report 92.6
14 Last year’s annual report 89.8
15 Recent quarterly report 60.9
16 Other filings 63.4
17 Link to EDGAR or 10-K Wizard 46.5
18 Charters for the audit committee 76.1
19 Code of conduct and ethics for directors, officers and employees 85.2
20 Members of the Board of Directors 71.5
21 Recent monthly financial data 0.7
22 Performance overview (e.g., highlights, fact-sheet, ‘FAQ’) 69.0
23 Earnings estimates 25.0
24 Calendar of events of interests to investors 70.8
25 Recent financial news releases 90.8
26 Listing of analysts following the firm 63.4
27 Analyst ratings 2.1
28 Text of speeches and presentations 15.1
29 Same-day stock prices 73.9
30 Historical stock prices 62.3
31 Information about the firm’s stock transfer agent 75.0
32 The advantages of holding the firm’s stock 1.1
33 Information regarding a dividend reinvestment plan 23.2
34 Dividend history 52.8
35 Corporate governance principles/guidelines 38.7
36 Charters for other committees 77.1
A score of 1 (for present) and 0 (for absent) was assigned to each disclosure item.
ments and Wolfe, 2000; Hodge et al., 2004). Thus, we examine whether firms provide the
annual report in multiple file formats and whether they utilize other presentation formats
for IFR, such as processable formats, dynamic graphic images, and audio and video files.
Additionally, IFR allows navigational tools that provide users with alternative options for
searching for information and may improve the accessibility and transparency of financial
disclosures to investors. For example, hyperlinks encourage users to develop individual
information search strategies depending on their own unique interests and goals (Conklin,
1987). Accordingly, we examine the navigational tools provided on firms’ corporate web-
sites, including hyperlinks,10 drop-down navigational menus, and internal search engines.
CONTENT examines the specific disclosure items located on a company’s website.
Some of the 24 items included in CONTENT provide unique information to investors
(e.g., calendar of events of interest to investors), while other items can be found elsewhere,
such as in the firm’s annual report (e.g., members of the board of directors) or on a third-
party website such as Yahoo finance (e.g., stock price data). However, we suggest that by
voluntarily disseminating the information on their corporate websites, even though the
information may be located elsewhere, companies are choosing to make the disclosures
more salient to investors and are increasing disclosure transparency.11
Consistent with Ettredge et al. (2002), we include a link to EDGAR as a CONTENT
item because EDGAR includes many required filings such as proxy statements that are
not presented in either annual or quarterly reports. Similar to Xiao et al. (2004), we
include last year’s annual report in our IFR measure to assess a firm’s continual commit-
ment to disclosure transparency via IFR. Regulatory bodies have recently begun requiring
public disclosure of specific corporate governance data. As such, we include corporate
governance related disclosures, such as a code of conduct and audit and other committee
charters, in our IFR measure and include CG, a measure of a firm’s total corporate gov-
ernance disclosures, in our analysis.
Data was collected by examining the Investor Relations sections of each sample firm’s
website for the presence of each of the 36 IFR measurement items. A score of 1 (for pres-
ent) and 0 (for absent) was assigned to each disclosure item. Data was collected by the
authors between October and November 2004. Due to the dynamic nature of the IFR
environment, a Web research tool, Onfolio, was used to capture the website content at
the time the IFR variable was measured.
4.3. Assessment of validity of IFR scale
We assess the internal consistency of our IFR measurement scheme with Cronbach’s
coefficient alpha. Cronbach’s coefficient alpha assesses the degree to which correlation
among the IFR disclosure items is attenuated due to random error (Cronbach, 1951).
Cronbach’s coefficient alpha for FORMAT, CONTENT, CG, and TOTAL are .60, .77,
.73, and .82, respectively. Nunnaly (1978) suggests.70 as an acceptable level of Cronbach’s
alpha for assessing scale reliability.12 We also assess the correlation of the categories of the
IFR scale (CONTENT and FORMAT) and find the correlation coefficient to be positive
and statistically significant (p < .001), implying that disclosure strategies are consistent
across categories (Botosan, 1997).
10
We include a hyperlink to data on a third-party’s website as a FORMAT item and not a CONTENT item.
Firms typically do not have control over the content on a third-party website. We only examine disclosures
provided by the firms on their websites for our measure of CONTENT. A hyperlink to a third-party website is a
navigational tool that improves the user’s accessibility to additional information and as such is included in our
measure of FORMAT.
11
Research has shown that disclosure saliency affects investor judgments (Maines and McDaniel, 2000).
12
Prior disclosure research has presented Cronbach’s coefficient alpha values of 0.64 (Botosan, 1997) and 0.51
(Gul and Leung, 2004).
4.4. Explanatory variables
Table 2 summarizes all the variables used in the hypotheses tests. GOV is a proxy for
the level of shareholder rights and is obtained from the Governance Index in the IRRC
dataset. The index is constructed from 24 distinct corporate governance provisions
grouped by the following: (1) tactics for delaying hostile bidders, (2) voting rights, (3)
director/officer protection, (4) other takeover defenses, and (5) state laws. For every firm,
one point is added to the Governance Index for each provision that reduces shareholder
rights. Thus, the Governance Index has a possible range from 1 to 24. Firms with a lower
index have stronger shareholder rights and firms with a higher index have weaker share-
holder rights.13
MGMT and BLOCK measure the percentages of shares owned by the company’s man-
agement and directors and by outside blockholders (who own at least 5% of the firm),
respectively.14 IDIRECT measures the percentage of independent directors on the board.
We classify independent board members according to the definition in NASD Market-
place Rule 4200(A)(15).15 DUAL measures CEO duality and is equal to one if the firm’s
Table 2
Variable definitions
Variable Predicted Definition
sign
Dependent variables
CONTENT Total score for content items
FORMAT Total score for presentation format items
CG Total score for corporate governance disclosures (sum of items 18–20, 35, and
36)
TOTAL Total score for all 36 items
Independent variables
GOV + Corporate governance index obtained from the IRRC dataset; the index has a
possible range from 1 to 24
MGMT Percentage of equity ownership by management and directors
BLOCK Percentage of the company’s outstanding voting stock held by outside
blockholders, where block is defined at the 5% ownership
IDIRECT ? Percentage of independent directors on the board
DUAL One if the firm’s CEO is also chairman of the board of directors, and zero
otherwise
ACEXPERT + Percentage of financial experts on the audit committee
ACMEETING + Number of audit committee meetings in year 2003
Control variables
SIZE Natural logarithm of the firm’s market value of equity
ROE Return on equity
LOSS One if the firm has a net loss in year 2003, and zero otherwise
GROWTH Ratio of market capitalization to book value of net assets
EQUITY One if the firm is a net issuer of common equity in year 2003, and zero
otherwise
CORR Correlation between earnings and returns for 1994–2003
BIG4 One if auditor is Big-4 firm, and zero otherwise
INDUSTRY Industry dummies based on the first digit of SIC codes, for a total of eight
dummies
CEO is also the chairman of the board, and zero otherwise. MGMT, BLOCK, IDIRECT,
and DUAL were obtained from the sample companies’ publicly disclosed reports for year
2003.
ACEXPERT measures the percentage of financial experts on the audit committee,
where financial expertise is defined as the audit committee member being a CFO or a
CPA. ACMEETING measures the number of audit committee meetings during 2003.
ACEXPERT and ACMEETING were obtained from the Board Analyst database for year
2003.
We control for variables that prior research has found to be relevant to voluntary dis-
closure choices. The control variables included are firm size (SIZE), profitability (ROE),
growth opportunities (GROWTH), need for new external equity capital (EQUITY), infor-
mation asymmetry (CORR), auditor type (BIG4), and industry (INDUSTRY). Empirical
evidence shows a positive association between firm size and disclosure (Chow and Wong-
Boren, 1987; Lang and Lundholm, 1993). An explanation is that there may be a fixed com-
ponent to disclosure cost, so that the cost per unit of size is decreasing (Lang and Lund-
holm, 1993). Economies of scale suggest that larger firms are more likely to post financial
reports at websites than smaller ones (Ashbaugh et al., 1999). We measure firm size (SIZE)
by the natural logarithm of the firm’s market value of equity on December 31, 2003. Firm
profitability is included in the control variables because managers of profitable firms have
greater incentives to disclose information to raise shareholder confidence and support
management compensation contracts (Malone et al., 1993; Wallace et al., 1994) than man-
agers of other firms. We measure profitability (ROE) with return on equity.
Traditional accounting measures do not fully capture the value of firms with high
growth prospects and high intangibles (Lev and Sougiannis, 1999). Therefore, high growth
firms attempt to mitigate information asymmetry by making disclosures through addi-
tional mediums such as IFR or conference calls (Frankel et al., 1999). Consistent with
Frankel et al. (1999), we measure a firm’s growth prospects (GROWTH) by the mar-
ket-to-book ratio. We also include a measure of the firm’s needs for new external equity
capital (EQUITY). Managers have incentives to disclose favorable information prior to
a security offering. They also might disclose negative information if the market interprets
not doing so even more unfavorably (Lang and Lundholm, 1993; Frankel et al., 1995).
EQUITY is a dichotomous variable which equals one if the firm is a net issuer of common
equity in year 2003, and zero otherwise.
Lang and Lundholm (1993) argue that a low correlation between annual returns and
earnings could be a proxy for information asymmetry since it would indicate that earnings
disclosures provide little information about firm value. Firms with more informative tra-
ditional disclosures (measured with the earnings-return correlation) disseminated less
information at corporate websites (Ettredge et al., 2002). Following prior studies, we
include the correlation between annual returns and earnings for 1994–2003 to control
for information asymmetry (CORR).
Prior research indicates that audit firm size is positively associated with voluntary dis-
closure (Ahmed and Courtis, 1999). Xiao et al. (2004) find that the extent of Internet cor-
porate disclosure is greater among Chinese companies audited by the Big-5 (now Big-4)
firms. We measure BIG4 using a dichotomous variable that equals one if auditor is a
Big-4 firm, and zero otherwise. Industry dummies based on firms’ one digit SIC codes
(for a total of eight industry dummies) are also included. All the data necessary to calcu-
late our control variables were obtained from CRSP and COMPUSTAT databases.
5. Results
5.1. Main findings
Table 1 presents the measurement scheme of the IFR scale and provides the percent of
sample firms disclosing each of the items in the disclosure index. All of the 284 sample
firms had accessible corporate websites although seven did not have an Investor Relations
section on their sites. The most popular presentation format is hyperlinked table of con-
tents (98.6%). Other frequently adopted presentation formats are audio files (82.0%) –
which typically consisted of recordings of earnings conference calls – and direct email links
to Investor Relations (73.9%). Only 2.5% of sample firms had video files on their websites.
The three most common content items are current year’s annual report (92.6%), recent
financial news releases (90.8%), and last year’s annual report (89.8%). Of the 24 content
items, 16 were found at half or more of the corporate websites. Very few sample companies
disclosed recent monthly financial data (0.7%), the advantages of holding the firm’s stock
(1.1%), and analyst ratings (2.1%).
Table 3 provides the descriptive statistics for the full sample. The means scores for the
24 content items, 12 format items, and five corporate governance disclosure items are
13.27, 6.38, and 3.49, respectively. The level of overall Internet disclosures (TOTAL) in
the sample ranges widely. Of a possible TOTAL score of 36, the highest score is 31,
and the lowest is 0. The mean (median) is 19.65 (21), indicating that the extent of IFR dis-
Table 3
Descriptive statisticsa
Variable Mean Std. Dev. Min Median Max
Dependent variables
CONTENTb 13.27 3.89 0 14 20
FORMAT 6.38 2.34 0 6 14
CG 3.49 1.50 0 4 5
TOTAL 19.65 5.63 0 21 31
GOV 7.97 2.40 1 8 17
MGMT 0.14 0.16 0.01 0.09 0.96
BLOCK 0.2 0.15 0 0.18 0.94
IDIRECT 0.72 0.12 0.33 0.75 0.91
DUAL 0.59 0.49 0 1 1
ACEXPERT 0.4 0.25 0 0.33 1
ACMEETING 7.85 3.31 2 7 20
Control variables
SIZE 6.76 1.35 3.13 6.72 12.24
ROE 0.08 0.9 5.47 0.04 8.49
GROWTH 3.36 4.34 20.48 2.79 25.83
EQUITY 0.79 0.41 0 1 1
CORR 0.15 0.35 0.90 0.17 0.91
BIG4 0.97 0.17 0 1 1
a
See Table 2 for variable definitions.
b
The maximum possible scores for CONTENT, FORMAT, CG, and TOTAL are 24, 12, 5, and 36, respec-
tively. See Table 1 for the measurement schemes.
closure of our sample tends to be limited, according to our IFR measurement scheme. The
distribution of managerial ownership (MGMT) is skewed to the right (mean = 14%; med-
ian = 9%). On average, 72% of our sample firms’ boards of directors consist of indepen-
dent directors (IDIRECT) and 59% of the CEOs in our sample firms are also the
chairman of the board (DUAL). On average, 40% of the audit committee members are
considered financial experts and the committees met 7.85 times during 2003. In addition,
79% of the sample firms were net issuers of common equity in year 2003. Finally, 97% of
the sample firms had a Big-4 auditor in year 2003, suggesting a lack of variation in the
variable BIG4.
Table 4 presents the correlation matrix between the explanatory and control variables.
The explanatory variables with the highest correlation are MGMT and IDIRECT
(q = 0.37). When both MGMT and IDIRECT are included in the same regression
model, their significant correlation may impair the model’s ability to explain the variation
in disclosures. Therefore, as a robustness check, alternative models are analyzed excluding
one of the two highly correlated variables at each time. Results (not tabulated) indicate
that the inter-correlation between these two variables did not provide any threat to the
validity of our findings.
Table 5 reports the regression results. Given that our dependent variables are count
data, we conduct the analysis using Poisson regressions (Cameron and Trivedi, 1998;
Long, 1997; Long and Freese, 2003). We fit the data using negative binomial regressions
when likelihood ratio tests indicate over-dispersion of the dependent variables. A separate
model was analyzed for each of the measures of IFR (FORMAT, CONTENT, CG, and
Table 4
Correlation matrix
A B C D E F G H I J K L
GOV A 0.08 0.00 0.09 0.10 0.02 0.04 0.04 0.09 0.05 0.01 0.03
MGMT B 0.09 0.20 0.32 0.09 0.05 0.06 0.17 0.01 0.02 0.09 0.06
BLOCK C 0.02 0.25 0.09 0.01 0.01 0.09 0.09 0.10 0.10 0.14 0.02
IDIRECT D 0.10 0.37 0.02 0.08 0.06 0.07 0.01 0.09 0.06 0.09 0.02
DUAL E 0.12 0.09 0.04 0.06 0.05 0.09 0.14 0.03 0.12 0.02 0.04
ACEXPERT F 0.05 0.01 0.02 0.09 0.02 0.16 0.06 0.05 0.04 0.04 0.08
ACMEETINC G 0.02 0.02 0.08 0.04 0.11 0.12 0.18 0.10 0.04 0.01 0.11
SIZE H 0.00 0.09 0.06 0.00 0.14 0.10 0.15 0.34 0.33 0.02 0.13
ROE I 0.00 0.01 0.06 0.06 0.01 0.03 0.04 0.14 0.06 0.18 0.15
GROWTH J 0.00 0.07 0.07 0.02 0.02 0.01 0.12 0.04 0.39 0.09 0.03
EQUITY K 0.01 0.16 0.14 0.10 0.02 0.03 0.03 0.06 0.15 0.10 0.16
CORR L 0.06 0.02 0.02 0.02 0.04 0.12 0.08 0.11 0.01 0.02 0.16
BIG4 M 0.06 0.03 0.08 0.02 0.01 0.05 0.13 0.13 0.18 0.06 0.04 0.06
Bold text indicates significance at 0.01 level or better. The upper portion of the table presents Spearman rank-
order correlations and the lower portion presents Pearson product–moment correlations. GOV = Corporate
governance index obtained from the IRRC dataset; the index has a possible range from 1 to 24.
MGMT = Percentage of equity ownership by management and directors. BLOCK = Percentage of the com-
pany’s outstanding voting stock held by outside blockholders, where block is defined at the 5% ownership level.
IDIRECT = Percentage of independent directors on the board. DUAL = One if the firm’s CEO is also chairman
of the board of directors, and zero otherwise. ACEXPERT = Percentage of financial experts on the audit
committee. ACMEETING = Number of audit committee meetings in year 2003. SIZE = Natural logarithm of
the firm’s market value of equity. ROE = Return on equity. GROWTH = Ratio of market capitalization to book
value of net assets. EQUITY = One if the firm is a net issuer of common equity in year 2003, and zero otherwise.
CORR = Correlation between earnings and returns for 1994–2003. BIG4 = One if auditor is Big-4 firm, and zero
otherwise.
Table 5
Regression results
A B C D
FORMAT CONTENT CG TOTAL
Constant 1.07*** 1.57*** 0.46*** 2.04***
(2.87) (6.14) (2.37) (9.73)
GOV 0.01 0.01** 0.02*** 0.01**
(0.60) (1.71) (2.92) (1.67)
MGMT 0.07 0.10 0.12 0.09
( 0.36) ( 0.77) ( 0.76) ( 0.83)
BLOCK 0.40** 0.25** 0.17 0.30***
( 2.27) ( 2.02) ( 1.22) ( 2.95)
IDIRECT 0.37* 0.40** 0.51*** 0.39***
(1.62) (2.54) (2.63) (2.99)
DUAL 0.04 0.02 0.02 0.03
( 0.88) ( 0.54) ( 0.56) ( 0.93)
ACEXPERT 0.04 0.15** 0.29*** 0.11**
(0.40) (2.21) (4.96) (2.05)
ACMEETING 0.02*** 0.01** 0.01** 0.01***
(2.63) (2.40) (1.94) (3.75)
SIZE 0.03** 0.04*** 0.03*** 0.04***
(1.79) (2.85) (2.56) (3.27)
ROE 0.00 0.02 0.03 0.01
( 0.07) ( 0.73) ( 0.87) ( 0.61)
GROWTH 0.00 0.00 0.01** 0.00
(0.67) (1.00) ( 2.10) (1.00)
EQUITY 0.01 0.01 0.07* 0.01
(0.10) (0.16) ( 1.50) (0.20)
CORR 0.08 0.07* 0.13*** 0.07**
(1.08) (1.36) (2.33) (1.73)
BIG4 0.00 0.28*** 0.28*** 0.18**
(0.02) (2.36) (2.40) (1.97)
Likelihood ratio v2 32.96 72.66 91.44 95.48
prob > v 0.00 0.00 0.00 0.00
Regression model Poisson Poisson NegBin Poisson
T-statistics are in the parenthesis. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively,
using a one-tailed t-test for all variables except IDIRECT. Coefficients of the eight industry dummies are not
statistically significant and omitted in the table for ease of presentation. GOV = Corporate governance index
obtained from the IRRC dataset; the index has a possible range from 1 to 24. MGMT = Percentage of equity
ownership by management and directors. BLOCK = Percentage of the company’s outstanding voting stock held
by outside blockholders, where block is defined at the 5% ownership level. IDIRECT = Percentage of inde-
pendent directors on the board. DUAL = One if the firm’s CEO is also chairman of the board of directors, and
zero otherwise. ACEXPERT = Percentage of financial experts on the audit committee. ACMEET-
ING = Number of audit committee meetings in year 2003. SIZE = Natural logarithm of the firm’s market value
of equity. ROE = Return on equity. GROWTH = Ratio of market capitalization to book value of net assets.
EQUITY = One if the firm is a net issuer of common equity in year 2003, and zero otherwise. CORR = Cor-
relation between earnings and returns for 1994–2003. BIG4 = One if auditor is Big-4 firm, and zero otherwise.
TOTAL) and the results of each regression are presented in columns A–D of Table 5,
respectively.
Hypothesis 1 predicts that firms with weak shareholder rights will be more likely to
engage in IFR than firms with strong shareholder rights. Firms with weak shareholder
rights have a higher value of GOV than their counterparts, thus H1 predicts a positive
coefficient on GOV. Results in Table 5 provide some support for H1 as the coefficients on
GOV are positively and statistically significant for three of the four IFR measures (CON-
TENT, CG, and TOTAL). That is, firms with weak shareholder rights tend to provide
more Internet disclosures, including Internet corporate governance disclosures, than firms
with strong shareholder rights. Presumably, firms respond to an increase in agency costs
(caused by weak shareholder rights) with increased disclosure transparency. An additional
explanation may be provided by signaling theory, such that a lack of disclosures might
send unfavorable signals to investors especially for firms with weak shareholder rights.
Consequently, firms with high GOV (i.e., weak shareholder rights) tend to provide more
Internet disclosures than those firms with low GOV (i.e., strong shareholder rights).
Hypothesis 2 predicts that IFR will be negatively associated with a firm’s managerial
ownership. As shown in Table 5, none of the coefficients of MGMT are statistically signif-
icant. Therefore, H2 is not supported.
Hypothesis 3 predicts that IFR will be negatively associated with a firm’s blockholder
ownership. As shown in Table 5, the coefficients on BLOCK are negative and statistically
significant for three of the of the IFR measures (FORMAT, CONTENT, and TOTAL)
providing some support for H3. Results suggest that the effect of blockholders on IFR
is substitutive, such that need for disclosure transparency via Internet reporting is
decreased by an increased percentage of blockholders.
Hypothesis 4 posits that there will be no association between IFR and the proportion of
independent members of the board of directors. As shown in Table 5, the coefficients on
IDIRECT are positive and statistically significant for each of the IFR measures. Consis-
tent with the finding in Ajinkya et al. (2005) that voluntary disclosure (via earnings fore-
casts) is positively associated with the percentage of outside directors on the board, our
results indicate that board independence is positively related to corporate Internet disclo-
sures. Our results suggest that the new NYSE and NASDAQ corporate governance rules
requiring a majority of each listed company’s board to be comprised of independent direc-
tors and imposing strict definitions of independence respond to the SEC’s call for improv-
ing financial reporting and corporate transparency.
Hypothesis 5 predicts that IFR will be negatively associated with a firm’s CEO duality.
As shown in Table 5, none of the coefficients of DUAL are statistically significant. There-
fore, H5 is not supported.
Hypothesis 6 predicts that IFR will be positively associated with audit committee finan-
cial expertise. As shown in Table 5, the coefficients on ACEXPERT are positive and sta-
tistically significant for three of the IFR measures (CONTENT, CG, and TOTAL)
providing support for H6. Firms with a greater percentage of financial experts on the audit
committee are more likely to pursue disclosure transparency with IFR.
Hypothesis 7 predicts that IFR will be positively associated with audit committee dili-
gence, measured by the number of meetings. Table 5 provides strong support for H7 since
the coefficients on ACMEETING are positive and statistically significant for each of the
IFR measures. Firms with more diligent audit committees are more likely to provide Inter-
net financial disclosures.
Together, results from H6 and H7 suggest that the effect of the audit committee on IFR
is complementary. Audit committees that have a higher percentage of financial experts and
meet more frequently are associated with increased Internet disclosure. Findings are con-
sistent with recommendations from the Blue Ribbon Committee (1999) that a strong audit
committee will lead to improved oversight and monitoring of the financial reporting
process.
SIZE is the only control variable that provides statistical significance for each of the
IFR measures. Consistent with prior IFR research (Ashbaugh et al., 1999; Debreceny
et al., 2002; Ettredge et al., 2002; Xiao et al., 2004), we find that larger firms are more likely
to use the Internet to provide financial disclosures. CORR and BIG4 are both positive and
statistically significant for three of the IFR measures (CONTENT, CG, and TOTAL). Our
results for BIG 4 are consistent with prior research that indicates a positive association
between audit firm size and voluntary disclosure (Ahmed and Courtis, 1999; Xiao et al.,
2004). In contrast to findings from Ettredge et al. (2002), our results show a positive asso-
ciation between CORR and IFR, suggesting that firms engaging in IFR more intensively
tend to experience less information asymmetry. Additionally, we find GROWTH and
EQUITY to be negative and statistically significant for CG. In contrast to prior research
findings that high growth firms (Frankel et al., 1999) and firms in need of new external
equity capital (Lang and Lundholm, 1993; Frankel et al., 1995) tend to reduce information
asymmetry by making disclosures through additional mediums, our results show that these
firms make less Internet corporate governance disclosures than low growth firms and firms
that do not need external financing.
5.2. Additional analysis of firm size
To gain further insight into the nature of the association between corporate governance
and IFR, we examine the influence of size on our results. Different sized firms encounter
different risks. Larger more complex firms may have different information requirements
and monitoring costs than smaller firms, which may lead to variation in governance struc-
tures, such as board size and composition (Bushman et al., 2004; Boone et al., 2007). Sim-
ilarly, Hofstetter (2006) analyzes the particular corporate governance issues faced by
controlled companies, e.g., family companies or listed subsidiaries, with a functional, effi-
ciency-based perspective and concludes that public companies and controlled companies
pose different challenges for corporate governance. Firm size is also associated with vol-
untary disclosure choices (Healy and Palepu, 2001). Thus, differences in corporate gover-
nance and firm size may influence the demand for disclosure transparency via IFR. We
extend prior research and explore the relationship between firm size and the role of corpo-
rate governance mechanisms in IFR.
First, we divide the full sample into two groups based on the median value of SIZE
(6.72). We then run the regression models separately on small companies (SIZE less than
6.72) and large companies (SIZE greater than or equal to 6.72). Panel A in Table 6 pre-
sents descriptive statistics for small and large firms and Panels B and C present the regres-
sion results. The mean values of all independent variables, except for ACMEETING, are
not significantly different between small firms and large firms (t-statistics not reported).
However, comparison of the regression coefficients in Panels B and C of Table 6 provides
interesting results worth additional discussion.
First, the coefficients on IDIRECT are statistically significant for CONTENT and
TOTAL for large firms; however, the coefficients on IDIRECT are only significant for
CG for small firms. These results suggest that the impact of independent directors on
IFR is more significant for larger firms.
Table 6
Descriptive statistics and regression results by firm size
Variable Small firms Large firms
Panel A: Mean (standard deviation) by firm size
Dependent variables
CONTENT 12.70 13.80
(4.12) (3.59)
FORMAT 6.26 6.48
(2.37) (2.32)
CG 3.36 3.60
(1.50) (1.49)
TOTAL 18.96 20.29
(5.92) (5.29)
GOV 8.12 7.83
(2.11) (2.65)
MGMT 0.14 0.14
(0.14) (0.17)
BLOCK 0.20 0.19
(0.14) (0.16)
IDIRECT 0.73 0.71
(0.12) (0.13)
DUAL 0.55 0.63
(0.50) (0.48)
ACEXPERT 0.38 0.42
(0.24) (0.26)
ACMEETING 7.34 8.32
(3.19) (3.35)
Control variables
SIZE 5.70 7.74
(0.76) (0.98)
ROE 0.19 0.02
(1.21) (0.42)
LOSS 0.52 0.28
(0.50) (0.45)
GROWTH 3.16 3.54
(4.03) (4.62)
EQUITY 0.79 0.78
(0.41) (0.41)
CORR 0.19 0.11
(0.34) (0.36)
BIG4 0.96 0.99
(0.21) (0.12)
A B C D
Panel B: Regression results for small firms
Constant 1.32*** 1.69*** 0.66* 2.20***
(2.45) (4.44) (1.63) (7.11)
GOV 0.00 0.01 0.01 0.01
(0.14) (1.04) (0.41) (0.94)
MGMT 0.18 0.26 0.24 0.23
( 0.57) ( 1.14) ( 0.98) ( 1.26)
(continued on next page)
Table 6 (continued)
A B C D
BLOCK 0.45** 0.27* 0.13 0.33**
( 1.68) ( 1.45) ( 0.54) ( 2.14)
IDIRECT 0.12 0.23 0.64** 0.19
(0.34) (0.95) (1.96) (0.97)
DUAL 0.08 0.05 0.05 0.06*
( 1.02) ( 0.92) ( 0.73) ( 1.36)
ACEXPERT 0.18 0.35*** 0.46*** 0.30***
(1.21) (3.34) (3.93) (3.43)
ACMEETING 0.03*** 0.03*** 0.02** 0.03***
(2.41) (3.25) (2.22) (4.09)
SIZE 0.04 0.02 0.00 0.03
(0.81) (0.52) (0.06) (0.90)
ROE 0.03 0.02 0.00 0.02
(0.85) (0.31) (0.06) (0.75)
GROWTH 0.01 0.01* 0.00 0.01**
(1.25) (1.49) (0.01) (1.95)
EQUITY 0.09 0.01 0.10 0.04
(0.92) (0.18) ( 1.22) (0.68)
CORR 0.00 0.05 0.10 0.03
( 0.04) (0.62) (0.95) (0.50)
BIG4 0.13 0.11 0.17 0.03
( 0.77) (0.85) (0.98) (0.26)
Likelihood ratio v 21.36 54.98 71.72 69.60
prob > v2 0.09 0.00 0.00 0.00
Panel C: Regression results for large firms
Constant 0.68 1.49*** 0.35 1.89***
(0.98) (3.22) (0.62) (4.96)
GOV 0.00 0.01 0.02** 0.01
(0.00) (0.80) (1.74) (0.66)
MGMT 0.02 0.01 0.09 0.01
( 0.07) ( 0.03) ( 0.40) ( 0.06)
BLOCK 0.44** 0.32** 0.31* 0.36***
( 1.78) ( 1.91) ( 1.45) ( 2.57)
IDIRECT 0.43 0.45** 0.23 0.44***
(1.34) (2.06) (0.88) (2.46)
DUAL 0.03 0.02 0.02 0.02
( 0.38) ( 0.34) (0.42) ( 0.50)
ACEXPERT 0.07 0.01 0.17* 0.03
( 0.49) ( 0.08) (1.50) ( 0.35)
ACMEETING 0.02** 0.00 0.00 0.01*
(1.86) (0.47) (0.24) (1.44)
SIZE 0.05** 0.04* 0.03 0.04**
(1.65) (1.62) (1.23) (2.26)
ROE 0.07 0.04 0.11 0.05
( 0.86) ( 0.67) ( 1.08) ( 1.04)
GROWTH 0.00 0.00 0.01** 0.00
(0.08) (0.13) ( 1.95) (0.16)
EQUITY 0.08 0.02 0.03 0.04
( 0.89) ( 0.33) ( 0.41) ( 0.76)
CORR 0.13* 0.09* 0.08 0.10**
(continued on next page)
Table 6 (continued)
A B C D
(1.29) (1.29) (0.99) (1.79)
BIG4 0.44 0.86*** 0.54* 0.72***
(1.11) (2.77) (1.30) (2.94)
Likelihood ratio v 26.10 45.76 21.12 62.96
prob > v2 0.02 0.00 0.07 0.00
T-Statistics are in parenthesis. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively,
using a one-tailed t test for all variables except IDIRECT. Coefficients of the eight industry dummies are not
statistically significant and omitted in the table. GOV = Corporate governance index obtained from the IRRC
dataset; the index has a possible range from 1 to 24. MGMT = Percentage of equity ownership by management
and directors. BLOCK = Percentage of the company’s outstanding voting stock held by outside blockholders,
where block is defined at the 5% ownership level. IDIRECT = Percentage of independent directors on the board.
DUAL = One if the firm’s CEO is also chairman of the board of directors, and zero otherwise. ACEX-
PERT = Percentage of financial experts on the audit committee. ACMEETING = Number of audit committee
meetings in year 2003. SIZE = Natural logarithm of the firm’s market value of equity. ROE = Return on equity.
GROWTH = Ratio of market capitalization to book value of net assets. EQUITY = One if the firm is a net
issuer of common equity in year 2003, and zero otherwise. CORR = Correlation between earnings and returns for
1994–2003. BIG4 = One if auditor is Big-4 firm, and zero otherwise.
Interestingly, although we find that composition of the board of directors is associated

with IFR in large firms, we find that characteristics of the audit committee are associated
with IFR in small firms. All except one of the coefficients on ACEXPERT and ACMEET-
ING are positively and statistically significant for small firms; the coefficients for large
firms on ACEXPERT and ACMEETING are significant for only some of the regressions.
Our exploratory findings suggest that although there are no significant differences in
corporate governance mechanisms between large and small firms (possibly due to regula-
tory requirements and public pressure after recent financial scandals), firm size affects
which governance mechanisms are effective in improving a firm’s disclosure transparency
via IFR. Specifically, we find that outside monitoring by independent directors is associ-
ated with IFR in large firms while audit committee expertise and diligence are associated
with IFR in small firms.
Prior research suggests that the monitoring process over financial reporting is different
for different sized firms with evidence of smaller firms being more likely to restate reported
quarterly earnings (Kinney and McDaniel, 1989) and correct prior period earnings over-
statements (DeFond and Jiambalvo, 1991). Additionally, O’Reilly et al. (1998) suggest
that large firms have stronger internal control systems than small firms. Strong internal
control systems are fundamental to investor confidence in financial reporting and may
affect a firm’s needs for and the link between other monitoring mechanisms and disclosure
policy. These findings suggest that firm size may affect which governance mechanisms
influence a firm’s disclosure policy, specifically disclosure transparency via IFR, and lend
support to our findings. However, this remains an area for future research.
5.3. Sensitivity tests: Alternative weighting for disclosure items
The disclosure index weighed presentation and content items equally. However, one
may argue that content is more important than presentation format for improving disclo-
sure transparency. Thus, we re-estimate the regression models by assigning twice more
weight to content items over presentation items. The alternative weighting scheme did
not change the significance of the results. Our original analysis also equally weighed con-
tent that can only be found on a firm’s website and content that can be found elsewhere
(i.e., annual report, EDGAR or 10-K Wizard). A case can be made that content that can
only be found on a firm’s website provides unique information to investors and, therefore,
should be more heavily weighed than content that can be found elsewhere. Doubling the
weight assigned to content unique to the firms’ websites (i.e., items 21, 22, 24, 28, 32, and
33) did not change the results in the CONTENT and TOTAL regressions.
6. Conclusions
This study extends prior IFR research by examining whether corporate governance
affects a firm’s disclosure transparency, measured by its Internet financial reporting behav-
ior. IFR provides an efficient means for companies to communicate with investors,
decrease costs associated with distributing hard-copy information, and increase the fre-
quency of information disclosure (Ashbaugh et al., 1999; FASB, 2000). The Internet also
provides flexibility as to the type of information disclosed to investors and the presentation
format of the disclosures. Thus, IFR may be an effective tool for improving disclosure
transparency (Economist Intelligence Unit, 2003). Research suggests that variation in
the transparency of online disclosures influences the investor decision process (Hodge
et al., 2004). The number of individual investors that use the Internet to research invest-
ment opportunities and conduct stock trades online is constantly growing..(Spiro and
Baig, 1999), which makes IFR an important area of academic research.
Overall, results indicate that corporate governance mechanisms influence disclosure
transparency, measured by Internet disclosure behavior. Specifically, we find that firms
with weak shareholder rights are more likely to use the Internet to disseminate informa-
tion, including corporate governance disclosures, to existing and potential investors than
firms with strong shareholder rights. A possible explanation is that managers provide
additional disclosures to shareholders in response to the increase in agency costs that
result from the existence of weak shareholder rights. Results also show that a firm’s block
ownership is negatively associated with its Internet disclosures, suggesting that the effect of
blockholders on IFR is substitutive and that block ownership decreases a firm’s need for
additional monitoring through disclosure transparency.
In addition, we find that firms with a higher percentage of independent directors are
more likely to engage in IFR than their counterparts. This finding is an important exten-
sion of recent research that has shown a positive association between corporate disclosure
and board independence (Beasley, 1996; Chen and Jaggi, 2000; Xiao et al., 2004; Ajinkya
et al., 2005). Our finding suggests that board independence is effective in improving disclo-
sure transparency through Internet reporting. Finally, we find that diligent audit commit-
tees with a high percentage of financial experts are associated with increased Internet
disclosure. The audit committee plays a complementary role by improving oversight
and monitoring of the financial reporting process, leading to increased disclosure transpar-
ency via IFR.
Additional exploratory analysis suggests that the association between corporate gover-
nance and Internet financial reporting is dependent upon firm size. Specifically, indepen-
dent directors are associated with IFR in large firms. Audit committee expertise and audit
committee diligence are associated with IFR in small firms. We speculate that specific
characteristics of large and small firms may contribute to firms placing varying emphasis
on monitoring mechanisms that influence the financial reporting environment. However,
this remains an empirical question for future research.
Overall, our results provide empirical evidence to policy makers and regulators that
corporate governance is associated with Internet disclosure and suggest that the new reg-
ulatory guidance in corporate governance enhances disclosure transparency via IFR. This
is an important finding given that investors frequently use the Internet as their primary
information source, and regulators are encouraging companies to use their websites for
disclosure purposes.
Because we examine the IFR behavior of firms trading on the NASDAQ market,
results may not be generalizable to firms trading on other stock exchanges. Future
research could examine whether the association between corporate governance and Inter-
net disclosure holds for firms on other exchanges. Although we include several variables
shown to be associated with disclosure choices, we may not have identified all potentially
correlated omitted variables.
Another issue future research could examine is whether corporate governance is also
associated with various characteristics of IFR, such as information quality and reporting
frequency. The increasing use of IFR creates new challenges to management, regulators,
and investors as there is no definitive guidance on this subject. In the US, auditors are
not required to read or verify the integrity and completeness of financial information
posted on corporate websites. As regulators begin to leverage the Internet for disclosure
purposes, future IFR research should continue to provide insight for policy makers on
approaches to ensure the reliability of financial information distributed via corporate
websites.
Acknowledgements
We would like to thank Bruce Behn, Don Bruce, Joe Carcello, Glen Gray, Margarita
Lenk, Elaine Mauldin, Chet Schriesheim, Ron Shrieves, two anonymous reviewers, and
participants at the 2006 AAA Annual Meeting, the second annual Journal of Information
Systems New Scholars Research Workshop and the Corporate Governance Center Re-
search Forum at the University of Tennessee for helpful comments and suggestions.
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The Impact of Corporate Governance On Internet Financial Reporting

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Journal of Accounting and Public Policy 27 (2008) 62–87

The impact of corporate governance

Keywords: Internet ﬁnancial reporting; Corporate governance; Disclosure transparency

2. Prior research on IFR

The primary objective of this paper is to investigate whether corporate governance

Transparent disclosures provide more information regarding a ﬁrm’s activities. A ﬁrm’s

Blockholders refer to entities holding more than 5% of a ﬁrm’s outstanding shares.

Board independence is an important element in monitoring the corporate ﬁnancial

4. Sample and variables

4.2. Measurements of Internet ﬁnancial reporting

4.3. Assessment of validity of IFR scale

4.4. Explanatory variables

5.1. Main ﬁndings

5.2. Additional analysis of ﬁrm size

Interestingly, although we ﬁnd that composition of the board of directors is associated

5.3. Sensitivity tests: Alternative weighting for disclosure items

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