The impact of corporate governance on internet financial reporting: evidence from Turkey.

Author:Erer, Mert

    The Internet provides companies with numerous opportunities for distributing financial information to their investors and creditors. FASB (2000) specifies the motives for Internet financial reporting as "reducing the cost of and time to distribute information, communicating with previously unidentified consumers of information, supplementing traditional disclosure practices, increasing the amount and type of data disclosed and improving access to potential investors for small companies". Investors and creditors also reap benefits from Internet financial reporting. Firstly, they can access information almost any time, and from almost anywhere. Secondly, the cost of gathering information is lower compared to more traditional methods. Furthermore, the financial information disclosed via the Internet is mostly up-to-date and is presented in various multimedia formats, making the information easier to use in decision-making (Wagenhofer, 2003).

    In current practice, corporate disclosure of financial information via the Internet is mostly voluntary. Lymer and Debreceny (2003) examine the regulations established by security regulators and audit standard setters, and argue that the actual regulations are unable to respond to challenges presented by current as well future Internet reporting technologies. The content and format of the financial information disclosed via the Internet differs greatly among countries and companies. Hanafi et al. (2009) argue, despite this lack of uniformity, that decision-makers still use the information disclosed on corporate websites for decision-making purposes. Thus, internet financial reporting may also be regarded as an important tool for attracting investors.

    The recent empirical work of Chen and Jaggi (2000), and Eng and Mak (2003), provides evidence for the link between corporate governance and disclosure in traditional financial reporting. Chen and Jaggi (2000) find that the proportion of independent non-executive directors is related positively to the level of information in mandatory financial disclosures. On the other hand, Eng and Mak (2003) find that the proportion of outside directors, decreases with increasing corporate disclosure, and that lower managerial ownership, and significant government ownership, are also associated with greater corporate disclosure.

    Xiao et al. (2004) shift the focus to corporate governance's impact on Internet financial reporting. They find that the amount of Internet-based disclosure varies positively with legal person ownership and the proportion of independent directors. Kelton and Yang (2008) find that the use of the Internet to disseminate information to investors is associated with weaker shareholder rights and a higher proportion of independent directors.

    In this paper, we analyze the influence of corporate governance on the Internet financial reporting practices of Turkish companies listed on the Istanbul Stock Exchange. We develop a disclosure index based on prior studies. This disclosure index captures the level of Internet financial reporting by the sample companies in terms of format and content, where the latter is divided into three categories, namely general information, required information, and information on corporate governance. We measure corporate governance using board composition, ownership structure, foreign listing, and corporate governance rating.

    We find that the proportion of independent directors and corporate governance rating are positively and significantly associated with the extent of Internet financial reporting. We do not find a significant association between Internet financial reporting and the following: board size, percentage of free floating shares, managerial ownership, institutional ownership, and foreign listing.

    In Turkey, the minimum requirements for financial disclosure on the Internet are established by the Capital Markets Board, which requires companies to publish annual and interim financial reports as well as independent audit reports on their websites, only after public disclosure by the stock exchange. Furthermore, the reports should also be easily accessible to financial statement users and remain disclosed publicly for at least 5 years. Companies with multiple websites are required to disclose the information on their most widely known website. Nevertheless, our examination shows that some companies do not disclose even the minimum amount of information on the Internet, as required by the Board.

    A number of significant motivations exist for this paper. First, and to the best of our knowledge, prior studies have not addressed the impact of corporate governance on Internet financial reporting in Turkey. The results of this paper, therefore, should increase the awareness of owners and managers concerning corporate governance and Internet financial reporting in Turkey, and, our empirical findings should also help policy makers and regulators establish new corporate governance and Internet financial reporting guidelines.

    The ultimate owners of Turkish-listed companies have an information advantage over minority shareholders because of the highly concentrated, pyramidal, family-based ownership structures, substantive inter-corporate shareholdings, and dual class shares. This information asymmetry leads to low float rates and dividend payments (Aksu and Kosedag, 2006). Recent research suggests that shareholders having better access to quality accounting information should be able to protect themselves more effectively against self-serving managers and to make better decisions concerning the purchase of new equity issues (Berglof and Pajuste, 2005). The quality, extent and accessibility of financial disclosure play a crucial role in closing this information gap and thereby reducing the costs of detecting expropriation by large shareholders (Ararat and Yurtoglu, 2006). Indeed, Turkish Corporate Governance Principles recommend using the company's website for disclosure in both Turkish and English, as the firm's website constitutes an inexpensive and easily accessible medium for local and foreign investors alike (Nilsson, 2007). The second motivation for this paper, therefore, is to examine the role played by Internet financial disclosure in the corporate governance of firms whose minority investors are often at a distinct informational disadvantage relative to majority shareholders.

    Some studies argue that the method of presenting information affects the amount of information used by decision makers, their decision-making processes, and ultimately, their decisions (Dull et al., 2003; Rose et al., 2004). Our paper addresses this issue by using different forms of information presentation to measure the extent of Internet financial reporting. Therefore, the study also provides useful information to regulators about the presentation formats companies can employ when disclosing financial information via the Internet, in order to protect investors' interests more effectively.

    The remainder of the paper is organized as follows. Section 2 gives an overview of the Istanbul Stock Exchange. Section 3 reviews the prior research and develops the hypotheses. Section 4 describes the method, sample and data. Section 5 presents the results and analysis. Section 6 compares the results with those of prior studies on big emerging markets. Finally, Section 7 presents the concluding remarks.


    In 1993, the U.S. Department of Commerce identified ten countries offering the greatest potential for economic growth as "Big Emerging Markets", and made them a major focus of national export strategy. These countries were China (including Hong Kong and Taiwan), Indonesia, India, South Korea, Mexico, Argentina, Brazil, South Africa, Poland and Turkey (U.S. Department of Commerce, 1994). The goal was to facilitate trade with these countries in order to increase U.S. exports, which, in turn, would create jobs in the U.S. (Garten, 1996). For the stock exchanges in these big emerging markets, Table 1 shows the total value of shares trading, the number of listed companies, the domestic market capitalization, the stock market's significance in the national economy, the price-earnings (P/E) ratio, and the inflation rate.

    Turkey's economic growth has accelerated over the past two decades, due to the country's entry into a customs union with the EU in 1995, and the 2004 EU decision to start accession talks with Turkey. These developments led to an increase in foreign direct investment flows into Turkey from 1.8 billion USD in 2003 to 22 billion USD in 2007 (Izmen and Yilmaz, 2009). In the last decade alone, the gross domestic product of Turkey has grown from 70 billion USD to 636 billion USD, and foreign trade volume from 67 billion USD to 243 billion USD. The Turkish economy has thus become one of the 20 largest economies in the world (IMF, 2010).

    The Istanbul Stock Exchange (ISE) was established in 1985 to provide trading in a wide variety of securities, namely, stocks, exchange traded funds, government bonds, treasury bills, money market instruments, corporate bonds and foreign securities. It is a public organization whose members are banks and brokerage houses. The Istanbul Stock Exchange is subject to the scrutiny and supervision of the Capital Markets Board of Turkey.

    In 1993, the U.S. Securities and Exchange Commission recognized the ISE as a "designated offshore securities market". In 1995, The Japan Securities Dealers Association designated the ISE as an "appropriate foreign investment market for private and institutional Japanese investors" and in 2000, the Austrian Ministry of Finance approved ISE as a regulated market in accordance with the regulations of the Austrian Investment Fund Act (ISE, 2010).

    Three important features of The Istanbul Stock Exchange are worth noting. First, there are no restrictions on foreign portfolio investors trading in the Turkish...

To continue reading