THE IMPACT OF INTERNET FINANCIAL REPORTING ON
STOCK PRICES AND ABNORMAL RETURN
Lesli Mamaha Ruga
Grace T. Pontoh
Rahmawati HS
ABSTRACT
This paper focuses on three examining: the impact of Internet Financial Reporting
(IFR), the degree of information disclosure, and the scope of information through
internet on stock prices and abnormal return in Indonesian Stock Exchange. This
study compares stock prices and abnormal returns between companies with IFR
and without IFR, and between companies which disclose more information and
those which provide less information on their website. This study also compare
abnormal returns between companies that provide a large scope of information
disclosure and company that provides a small scope of information disclosure on
their website. This study use cross sectional data with event study methodology to
investigate all companies listed at the Indonesia Stock Exchange (IDX) until the
end of 2010. The result show first, that IFR by using Mann Whitney U test, has
significant impact on stock prices and abnormal returns. Second, the degree of
information disclosure through the internet, by using the Independent Sample t
test, also has significant impact on stock prices and abnormal returns. Finally, the
scope of information through the internet, by using Mann Whitney U test, has
insignificant impact on abnormal returns.
Keywords: Internet Financial Reporting, degree of information disclosure, scope
of information disclosure, stock prices, abnormal returns
1. Introduction
The rapid development of information technology has an impact in
people's lives. Information technology has become a key enabler for a
business environment, which means that the business needs information
technology to be survived in an increasingly competitive world. In the past
few years, internet has become a part of information technology development.
Internet has several characteristic and advantages such as pervasiveness,
timeliness, low cost, and accessibility (Ashbaugh et al., 1999). In addition,
internet can spread the information more quickly, effective and efficient.
Internet has been used as a communication tool to provide information
about a company. Recently, internet provides a new mode of information
dissemination, including the dissemination of financial information that called
as IFR (Internet Financial Reporting). IFR refers to the usage of company’s
website to disseminate information about the financial performance of the
company. IFR is considered as a tool to spread the information more quickly
and widely (easily accessible), and to reduce the cost of producing hard copies
of financial statements (Barac, 2004). In addition, the publication of financial
1
reporting through the internet is expected to provide significant benefits to
corporate reporting, including to facilitate access to potential investors and
stakeholders (Ashbaugh et al., 1999) . The disclosures of financial information
on the internet offer the same access for all investors (Wagenhover, 2003).
However, the internet financial reporting is a voluntary disclosure and
unregulated, which means, there is no compulsion to a company to disclose
their financial information on the internet eventhough the company has a
website. Lai et al., (2010) stated that there’s no international standard that
regulate the kind of IFR, which impact the differences in the content of
company website.
In Indonesia, The Indonesian Capital Market and Financial Institutions
Supervisory Agency (Bapepam-LK) has regulated the disclosure of
information or matters related to the public companies which may affect the
companies’ stock price in the Rule Number X.K.1: Disclosure of Information
that must be Made Public Immediately (Decision of The Chairman of
Bapepam No: Kep-86/PM/1996 on 24 January 1996). This rule is expected to
encourage the public listed companies to immediately announce the
information which has significant influence to their stock price, including the
financial reporting.
Most of the studies about IFR show that firms’ size is the most influence
factor to the information disclosure on the internet. Beside that, other factors
such as liquidity, leverage, and profitability have positif impact to the
information disclosure on the internet.
The study of Asbaugh et al., (1999), as one of the pioneer of IFR, found
that only firms’ size that influence in IFR practice and IFR is an effective
communication tool between firms and stakeholders. Craven and Matson
(1999), which researched large firms in England, concluded that firms’ size
has significant impact to IFR. There are some studies which have consistent
results to Craven and Matson (1999), such as Oyelere et al., (2000) on New
Zealand Stock Exchange, Larrán and Giner (2002) on Madrid Stock
Exchange, Bonsón and Escobar (2002) on 300 firms from many countries in
Eropa, and also Allam dan Lymer (2003) with firms in 5 developed countries.
In Indonesia, the study of IFR still has the same focus as the study abroad.
There are studies by Chariri and Lestari (2005) and Agustina (2008) which
result that firms’ size and type of industry are the most factors that influence
information disclosure on the internet. The other studies focus on
measurement of quality and content of financial and sustainability reporting
on firm’s website by Budi and Almilia (2009) that conclude that firms in
Indonesia have not optimize their website to disclose financial information.
There are many studies about IFR, but still a few studies that focused on
the relation between IFR and stock prices. There was a study by Lai et al.,
(2010), who compared the firms with IFR and without IFR on Taiwan Stock
Exchange. The study concluded that IFR has significant impact on stock
prices and abnormal returns. In Indonesia, studies which focused on the
relation between IFR and stock prices carried by Hargyantoro (2010) that
concluded that IFR has significant impact on stock frequency. Another study
by Yulia (2011), that concluded that The Degree of Information Disclosure
has significant impact on stock prices.
2
This study replicate the study of Lai et al., (2010). The reason of the
replication because there is still a little study about the impact of IFR on stock
prices in Indonesia and to re-examine the theory with different samples and
location whether the result is similar to previous study.
2. Theoretical Foundation and Hypotheses Development
2.1 The Theory of Efficient Markets
The efficient markets hypothesis was first developed by Fama (1970). This
theory believes that there is perfect information in the stock market, which
means that stock prices reflect all available information. According to Beaver
(1968), market efficiency is a relation between information and stock prices.
Useful information will be highlighted by many stakeholders such as
managements, investors, and policy makers (government and capital market
supervisory agency) and auditors.
Those information must be on time and relevan, because the decision
making by investors depend on how far and how fast those information can
influence the market that reflected by the change of stock prices. Haugen
(2001) in Gumantri dan Utami, 2004) divided information into 3 groups: (1)
information in past stock prices, (2) all public information, (3) all available
information including inside or private information. Each group of
information reflects the level of market efficiency.
2.2 The Signaling Theory
Information is an important element for investors and businesses. The
complete, accurate and timely information, are required by investors in capital
markets as analysis tool to make investment decisions. The signaling theory
explains about how a company should be give the signal to the user of
financial reporting. This signal contains information about what the
management has been done to accomplish the owner desires. One of the
signals is given by the company through the disclosure on the company's
website.
2.3 Internet Finacial Reporting
Internet Financial Reporting refers to the usage of company website to
disseminate information about the financial performance of the corporations
(Lai et al., 2010). International Accounting Standards Committee (IASC) in
Venter (2002: 213) has identified three stages in the presentation of financial
reporting on the Web, namely (1) Duplication of the printed financial
statements in “electronic paper” format, (2) Conversion of paper reports into
HTML format, (3) Progression beyond the printed paper format by using
ornamental that is not possible with paper. According to the study of Allam
and Lymer (2002), the most popular format to purposes of reporting financial
information is HTML and PDF.
The Steering Committee of the Business Reporting Research Project
(2000: 1) has identified several motives of companies in presenting
information through the internet:
1. Reduction of the cost involved in and the time required for the distribution
of information.
3
2.
3.
4.
5.
Communication with previously unidentified users of information.
Supplementation of traditional disclosure practices.
Increase in the extent and types of data disclosure.
Improvement of the access that small companies have to potential
investors.
2.4 The Impact of Internet Financial Reporting on Stock Prices and
Abnormal Return
Efficient market hypothesis predicts if markes are efficient, then, in
equilibrium, the stock prices will respond to any information that enters the
market. On the investment market, useful information usually causes investor
to take an action which lead to redistribution on investment return that can be
changed the balance of market. Investors react quickly and fully to new
information encounter the market, causing the immediate adjustment of
shares’ price. This is consistent to Beaver (1968) and Fama (1970) that the
stock’s price will move when the useful information enters the market.
The literature shows that firms get benefits by doing voluntary disclosure
(reducing capital costs, agency fees or contract costs and enhance enterprise
value). Voluntary disclosure will reduce the information asymmetry between
investors and management regarding the company's financial condition and
operations, so that the information disclosed through the IFR as a voluntary
disclosure is quickly available to the investors and shorten the delay of
information accessibility. Therefore, the response speed of the companies
stock price that apply IFR will be different from companies that do not apply
IFR. Therefore, the hypothesis is as follows.
Hypothesis 1: There are significant differences in stock prices between
companies with IFR and those without IFR
Hypothesis 2: The abnormal returns of companies with IFR will be higher
than those without IFR
2.5 The impact of the degree and scope of information disclosure on stock
prices and abnormal return.
The important point of signaling theory is that without transparency of
information between buyers and sellers, buyers will bid up to the lowest price
so the sellers must lower the product quality to maintain profitability. This
economy behaviour, will lead to the loss of sellers with high quality goods.
This phenomenon is called selective admissions (Spence, 1973).
To avoid such situations in the investment market, Beaver (1968) stated
that the company will disclose as much information so investors are able to
distinguish between good companies and bad companies. Voluntary disclosure
of additional information that reveals both financial and non-financial services
through the internet will ultimately create greater transparency of information.
According to Ashbaugh et al. (1999), an essential element of IFR is the
degree or level of disclosure. The higher levels of information disclosure in
quantity or transparency will impact to decisions of investor. Easley et al
(2004) concluded in their study that investors are given more relevant
information to achieve higher return on their investment. This shows how the
quantity and quality of information affects stock prices.
4
In addition, the channels of information’ disclosure, can be expanded in
scope on the internet by connecting multiple sites into one integrated reporting
system. Each website on internet provides information about the performance
of subsidiaries, divisions, or strategic business units. Thus, the network not
only provides information about the overall performance of the entity, but also
the performance of individual business units. Therefore, the hypothesis is as
follows.
Hypothesis 3: There are significant differences in stock prices between
companies that provide more information and those that
provide less information on website
Hypothesis 4: The abnormal return of companies that provide more
information will be higher than those that provide less
information on website
Hypothesis 5: The abnormal return of companies that provide a large scope
of information disclosure will be higher than those that
provide a small scope of information disclosure on website.
The research model in this study is represented in figure 1.
Internet Financial Reporting
H1
H2
Degree of Information Disclosure
H3
H4
H5
Stock Prices
Abnormal Return
Scope of Information Disclosure
Figure 1 Research Model
3 Research Methodology
3.1 Research Approach
This study is conducted to test the hypothesis (hypothesis testing) by
performing comparative testing of all the variables studied. This study is an
event study and literature research which carried out in cross-sectional that
involves a certain time with lots of samples that only can be used once within
a period of observation to test the comparative and relationships via the
internet publication of financial reporting, the degree of information disclosure
on websites and scope of information disclosure on websites on stock prices
and abnormal returns.
3.2 Population and Sample
Population of this research is all public listed companies on the Indonesian
Stock Exchange (IDX) until the end of 2010. The sampling method used in
this research is purposive sampling, with the following conditions for the
companies:
5
1.
2.
3.
4.
5.
Have been listed on the Indonesia Stock Exchange until the end of 2010
Have websites and disclose financial reporting on their websites
Have exact dates of IFR publication on the websites;
Have complete data from IDX
Companies with significantly stable β for the periods before and after the
event window
6. Companies with matched companies (non IFR)
Of all 419 companies listed on the Indonesian Stock Exchange until the
end of 2010, there are 276 companies have websites but only 190 companies
that provide financial and non financial information on their websites. Of 190
firms disclosing financial and non-financial information on their websites,
only 32 firms are included in the final sample of the IFR companies and 32
samples of non IFR companies as control grup. Non IFR companies are
companies without website or with website but did not post financial
information.
The distribution of sample for each hypothesis is as follows.
a) For hypothesis 1 and hypothesis 2, the number of sample used are 64
companies consisting of 32 companies which have implemented IFR and
32 companies which have not applied IFR.
b) For hypothesis 3 and hypothesis 4, the number of sample used are 32
companies which have implemented the IFR. They are divided into two
groups, namely (1) TPI1: companies which have more information
disclosure on the website (> 20) containing of 17 companies and (2) TPI2:
companies which have less information disclosure on the website (<20)
containing of 15 companies.
c) For hypothesis 5, the number of sample used are 32 companies which have
implemented the IFR. They are divided into two groups, namely (1) LPI1:
the companies which have more scope of information disclosure on the
website (> 1) containing of 10 companies and (2) LPI2: the companies
which have less scope of information disclosure on the website (<1)
containing of 22 companies.
This study use 111 trading days consisting of 100 days estimation period
and 11-day period covering 5 days before the event day, an event day (the day
of financial statements publication) and 5 days after the event day. That period
is used to indicate whether or not there is an advantage signal in the short term
and in the liquidity of stock trading due to the publication of financial
statements. Period 5 days before the event day is used to determine whether
there is a information leakage within the company while the period of 5 days
after the event day to determine the speed of market reaction, as presented by
Ghufron (2006) in Yulia (2011).
3.3 Measurement
1. Stock prices: stock prices are used for hypothesis 1 and 3. Stock prices are
calculated by cummulative ratio of stock prices’ returns in 5 days after event
window. Here is the formula for calculating the return of stock prices
6
Where, Rit is the return of security I during period t, measured as the change
of current stock price (Pt) to the previous closing price (Pt-1 ) and divided by
previous closing price.
2. Abnormal returns: abnormal returns are used for hypothesis 2, 4, and 5. An
abnormal return is calculated by using market-adjusted model that assumed as
the best formula to measure abnormal returns. This hypothesis use “event
study” during 11 days, with a 5 days before, 1 event day and 5 days after event
date. Here is the formula for calculating abnormal return.
Where, ARit is an abnormal return of security I during period t, Rit is the
return of security I during period t, and Rmt is the market index return on day
t. Rmt is computed by the change of current composite stock price index
divided by the previous composite stock price index. Cumulative abnormal
return is defined as:
3. Internet Financial Reporting
IFR and Non IFR are category scale, then we called dummy variable. Value of
a IFR company is “1” and value of a non IFR company is “0”.
4. The Degree of Information Disclosure
The method to measure the degree of information’ disclosure is adapted from
Ettredge et al. (2001) which is modified by Lai et al. (2010). The assessment
use 4-point scale that showed on table 2.
5. The Scope of Internet Reporting.
The Scope of Internet Reporting is defined as the extent by which the firm's
central website is linked to other websites within or outside of the firm to form
an inter- or intra-firm website structure (Lai at al., 2010). The other websites
are: (1) the Indonesian Stock Exchange, (2) subsidiary companies or major
divisions, (3) strategic business units, and (4) up-stream companies such as
suppliers and manufacturers, and down-stream companies such as
wholesalers, retailers, and other customers. Each type of linkage is assigned
one point and the total possible points for a firm are four points that show on
table 3.
4 Results
1. The relationship between IFR and Stock Prices
Hypotesis 1 is tested by normality test to determine kind of hypotesis
testing. Normality test shows if level of significance < 0,05, that means
distribution of data is not normal. Based on this result, we used Mann Whitney
U test. The result of Mann Whitney U test is significance (0,041<0,05), shows
that hypotesis 1 can be accepted.
2. The Relationship between IFR and Abnormal Return
Hypotesis 2 is tested by normality test to determine kind of hypotesis
testing. Normality test shows if level of significance < 0,05, that means
distribution of data is not normal. Based on this result, we used Mann Whitney
7
U test. The result of Mann Whitney U test is significance (0,003 < 0,05),
shows that hypotesis 2 can be accepted.
3. The Relationship between the Degree of information disclosed and Stock
Prices
Hypotesis 3 is tested by normality test to determine kind of hypotesis
testing. Normality test shows if level of significance > 0,05, that means
distribution of data is normal. Based on this result, we used Independent
sample t-test. The result of Independent sample t-test is significance (0,036 <
0,05), shows that hypotesis 3 can be accepted.
4. The Relationship between the Degree of information disclosed and Abnormal
return
Hypothesis 4 is tested by normality test to determine kind of hypotesis
testing. Normality test shows if level of significance > 0,05, that means
distribution of data is normal. Based on this result, we used Independent
sample t-test. The result of Independent sample t-test is significance (0,041 <
0,05), shows that hypotesis 4 can be accepted.
5. The Relationship between the Scope of Internet Reporting and Abnormal
return.
Hypotesis 5 is tested by normality test to determine kind of hypotesis
testing. Normality test shows if level of significance < 0,05, that means
distribution of data is not normal. Based on this result, we used Mann Whitney
U test. The result of Mann Whitney U test is not significance (0,640 > 0,05),
shows that hypotesis 5 can not be accepted.
Summary of the results are presented in table 1 below.
H1
H2
H3
H4
H5
Table 1 Summary of results
Hypothesis
There are significant differences in stock prices between
companies with IFR and those without IFR.
The abnormal returns of companies with IFR will be
higher than those without IFR.
There are significant differences in stock prices between
companies that provide more information and those that
provide less information on websites.
The abnormal returns of companies that provide more
information will be higher than those that provide less
information on websites
The abnormal returns of companies that provide a large
scope of information’ disclosure will be higher than
those that provide a small scope of information’
disclosure on websites.
Accepted
Accepted
Accepted
Accepted
Not
Accepted
8
6. Discussion
The test results will be discussed as follows.
1. The Results of Hypothesis 1 and Hypothesis 2
The test results regarding the influence of Internet Financial Reporting
(IFR) on stock prices and abnormal stock return show that there are
significant differences between stock prices and abnormal stock returns of
companies who applied IFR practices and those which not applied the IFR
practices. The results of this study support the results of research performed by
Lai et al. (2010)., which stated that the stock prices will move when there is
useful information entering the market.
In accordance with the efficient market theory that if the market is
efficient and balanced, then the useful information would cause investors to
react quickly, as reflected in the stock price changes. The test results
performed on two groups of companies, companies that have applied and who
have not applied IFR, shows that the company's stock price is more responsive
after the publication of financial reporting via the Internet, so there are
significant differences between stock prices and abnormal stock returns of
companies who applied IFR practices and those which not applied the IFR
practices.
2. The Results of Hypothesis 3 and Hypothesis 4
The test results regarding the influence of Disclosure Level on stock
prices and abnormal returns show that there are significant differences
between stock prices and abnormal stock returns of companies that provide
more levels of disclosure of information via the Internet those which provide
fewer levels of information disclosure through the internet. The results of this
study support the results of research conducted by Ashbaugh et al. (1999) and
Lai et al. (2010).
According to Ashbaugh et al. (1999), an essential element of IFR is the
degree or level of disclosure. The higher the level of disclosure of information
in quantity or transparency, the greater the impact of disclosure on investor
decisions that will be reflected by changes in securities prices. While Lai et
al., (2010) concluded that the higher the degree of completeness of the
information presented in the company's website will cause an increase in
stock prices.
So it can be said that the higher level of disclosure in the company's
website will benefit the investors in obtaining relevant information in quick
time. It will make investors be more quickly in responding or taking action
against company’ stocks which will make stock prices move more quickly and
automatically enhances abnormal stock returns.
3. The Results of Hypothesis 5
The test results of the fifth hypothesis suggests that the scope of disclosure
does not affect significantly positive to abnormal stock returns of the
companies which have larger scope of information disclosure on their website
with a significance value of 0.640 where the value is greater than 0.05 (α =
5%). The results of this study do not support the results of the study Lai et al.
(2010), who found that there is no significant effect between the Scope of
9
Disclosure with the abnormal return. This shows that companies in Indonesia
have not considered the scope of the information disclosure on the website as
something important. It is characterized by abnormally low returns of the
companies which have broader scope of information disclosure than those
which have smaller scope of information disclosure.
5 Conclusion and Limitations of Research
5.1 Conclusion
This study focuses on examining whether the disclosure information
trough internet has impacts on stock prices and whether the degree of
information disclosure and scope of information disclosure have significant
impacts on stock prices and abnormal returns. The results are shown below.
1. There are significant differences in stock prices between companies with
IFR and those without IFR.
2. The abnormal returns of companies with IFR are higher than those without
IFR.
3. There are signficant differences in stock prices between companies that
provide more information and those with less information on websites.
4. The abnormal returns of companies that provide more information are
higher than those with less information on websites.
5. There are no significant differences in abnormal returns between
companies that provide a large scope of information disclosure and those
with a small scope of information disclosure on websites.
5.2 Limitations of Research
This study has limitations as follows.
1) The observation period is limited only for one year, which has less ability
to predict long-term results.
2) The method used to find the abnormal return in this study using the market
adjusted model.
3) Measurement of the degree of information disclosure used an adaptation of
Ettredge (2001) as modified by Lai et al. (2010) for research in Taiwan.
Thus not necessarily correspond to the measurement degree of information
corporate disclosure in Indonesia.
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Appendix
Measurement Items of The Degree of Information Disclosure
Information
Disclosure Type
Basic Profile
News
Item Operasional
Financial
Information
Stock
Information
Measurement Items
1
2
3
4
5
6
7
1
2
3
1
2
3
1
2
3
4
5
6
7
8
9
10
11
1
2
3
4
Score
Firm profile & history
Business cultures, operation policies & strategies
Products and services information
Firm’s organization and management team
Human resources information
Investment & conglomerate
Contact information
Industry information
Products and operations information
Finance–related news
Operation profile 1
Operation objective & outlook
Industry analysis & related research report
Selected financial information
Condensed quarterly financial reports
Condensed semi-annual financial reports
Condensed annual financial reports
Complete set of financial reports (quarterly)
Complete set of financial reports (semi-annual)
Complete set of financial reports ( annual)
Annual board of directors report
Monthly operational revenue information
Financial analysis
Financial forecast
Historical stock price and dividend information
Dividend policies
Current stock price information
Stock agent information
Total score
The Measurement Items of the Scope of Internet Reporting
Measurement Items
Link firm's website to stock market station of Indonesian Stock
Exchange
Link firm's website to major divisions or subsidiary companies
Link firm's website to strategic business units
Link firm's website to up-stream and down-stream companies
Total score
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
3
3
3
4
1
1
1
1
1
1
1
40
Score
1
1
1
1
4
12