2012 Internet financial reporting Turkish companies adapt to change

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Managerial Finance

Int ernet f inancial report ing: Turkish companies adapt t o change Aslihan E. Bozcuk

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Aslihan E. Bozcuk, (2012),"Internet financial reporting: Turkish companies adapt to change", Managerial Finance, Vol. 38 Iss 8 pp. 786 - 800

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Internet financial reporting:

Turkish companies adapt

to change

Aslihan E. Bozcuk

Akdeniz University, Antalya, Turkey

Abstract

Purpose– The purpose of this paper is to explore the sophistication of internet financial reporting (IFR) for Turkish listed firms and explore firm-specific drivers.

Design/methodology/approach– The study surveys the web sites of all firms listed on the Istanbul Stock Exchange (ISE) during December 2009 using a well-established scoring system to measure IFR.

Findings– It is found that size, auditor and corporate governance effects, as measured by a multivariate regression analysis framework, affect the sophistication of IFR. However, in extending the analysis by running separate regressions for small and large firms, these effects prevail only for large firms. Evidence also supports the industry effect for both small and large firms. Overall, large firms, audited by large international auditors, and included in the Corporate Governance Index of the ISE, are more likely to use sophisticated disclosure formats such as audio and video files, internal search engines and hyperlinks inside their annual reports.

Originality/value– Using a unique data set, this paper provides a snapshot of how well Turkish companies adapt to change in IFR. Its novelty lies in its addressing the issue of IFR sophistication and the impact of firm-specific factors, such as profitability, growth prospects, firm size, ownership, corporate governance environment and industry effects, for the first time as they apply to Turkish firms.

KeywordsTurkey, Financial reporting, Internet, Corporate governance, Internet financial reporting, Sophistication, Istanbul Stock Exchange

Paper typeResearch paper

1. Introduction

Beginning in 2005, internet financial reporting (IFR) became mandatory for all firms in Turkey that have web sites and are listed on the Istanbul Stock Exchange (ISE). These firms are required to make annual reports, annual and interim financial statements and audit reports publicly available in an accessible format for at least the last five years. This regulation was introduced as part of the integration process with the European Union, but whether it has had the desired effects of improved transparency and investor access to financial information is debatable.

Although firms have clear guidelines on the exact content and time period of the financial information they are required to disclose, they are free to present it in any electronic format they elect. Hence, there is a broad variation in online presentations of listed firms in Turkey.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0307-4358.htm

The author would like to thank the Editor and two anonymous referees whose comments led to substantial improvements in the paper. Financial support from Akdeniz University-Scientific Research Projects Unit is gratefully acknowledged.

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Received August 2010 Revised April 2011, October 2011, January 2012

Accepted February 2012

Managerial Finance Vol. 38 No. 8, 2012 pp. 786-800

q_{Emerald Group Publishing Limited}

0307-4358

DOI 10.1108/03074351211239405

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The internet makes it possible for potential and current investors to access corporate financial information in ways that would not be possible through printed media. For example, investors can access financial data in processable format from the corporate web sites to conduct further analysis, without having to type in the numbers themselves. The presentation format used can also help firms increase the transparency of their disclosures[1] (FASB, 2000) and their financial statements[2] which in turn can affect how different groups of investors process and use the information.

Hodge et al. (2004) also suggest that alternative presentation formats can help improve investors’ understanding of financial information. They explain that technology can help alleviate cognitive processing difficulties involved in investment related judgements and decisions, especially for nonprofessional investors, by bringing together pieces of seemingly unrelated information. For example, eXtensible Business Reporting Language (XBRL) labels each piece of financial data with a unique identification tag according to its content and structure. When users select the type of information they would like to analyze, an XBRL-compatible search engine can automatically acquire that information regardless of where it is placed inside the financial statements, footnotes and the annual report. Hence users can quickly access all relevant information, including those that might get overlooked due to lack of links among related items (Maines and McDaniel, 2000) or dispersed placement within a vast body of information (Hodgeet al., 2004).

In an emerging markets context, there are a number of studies that examine the incidence, scale and scope of IFR for Turkish listed firms as well as unlisted large industrials. These studies are exploratory in nature and focus mainly on “what” is disclosed rather than “how” it is disclosed. Hence, IFR is viewed merely as an extension of traditional paper-based means of disclosure. However, scholars today are well aware of the opportunities and challenges that IFR brings. Issues such as IFR timeliness (Ezat and El-Masry, 2008; Abdelsalam and El-Masry, 2008) and boundaries of auditor responsibility (Khadaroo, 2005) present intriguing research questions regarding online disclosures. Another area of concern is the sophistication of IFR to assess and enhance the readability, accessibility and understandability of financial information provided on corporate web sites (FASB, 2000). However, this issue of variation in online presentation has never been addressed before for Turkey.

In order to fill this gap in the literature, this study describes the existing online reporting and explores the drivers of sophistication of IFR for Turkish listed firms. The study is unique in investigating the association between IFR sophistication and firm-specific factors such as profitability (short, medium, and long term), growth prospects, firm size, ownership, corporate governance environment and industry effects for the first time as they apply to Turkish firms.

In the study, sophistication of IFR refers to the disclosure presentation format used in corporate web sites, including features that allow users to search, view, navigate, and process the financial data and access dynamic graphic images, audio and video files. It also refers to whether firms promote investor relations communications through subscription to e-mail alerts and direct e-mail. The use of sophisticated web technologies translates into sophisticated IFR.

Section 2 outlines prior work on IFR with a special focus on the sophistication issue. Section 3 describes the data and methodology used, Section 4 outlines the findings and Section 5 concludes.

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2. Background 2.1 Prior work

Many studies on IFR take descriptive, exploratory, normative and country-based perspectives[3]. Ashbaugh et al. (1999) were the first to document IFR practices and actually ask why firms choose to disseminate corporate information on their web sites. However, the theoretical underpinning of IFR is far from trivial. Early studies (Lang and Lundholm, 1993) base their empirical analysis on a survey of theoretical and empirical literature, rather than rely on any particular model. Later on, Debrecenyet al. (2002) employ the Berle and Means (1932) framework and use the notion of information asymmetry between management and ownership to generate their hypothesis. Kelton and Yang (2008) draw on agency theory to investigate a link between IFR presentation format and corporate governance. Xiaoet al.(2004, p. 198) combine economics-based theories (such as agency theory and signalling theory) and institutional theories (such as innovation diffusion and isomorphism) to come up with testable hypothesis in an effort to “produce a richer understanding of IFR”.

In their review of recent literature, Beyeret al.(2010, p. 296) suggest that “the corporate information environment develops endogenously as a consequence of information asymmetries and agency problems between investors, entrepreneurs, and managers”. The current study also adopts this view.

In terms of research design, Debrecenyet al.(2002), Xiaoet al.(2004) and Kelton and Yang (2008) empirically examine not only the content but also the presentation methods of disclosure involved in IFR. Debrecenyet al.(2002) examine IFR of 660 large firms in 22 countries and conclude that IFR presentation is related to the level of technology and disclosure environment of the firm. Xiaoet al.(2004) use a multi-dimensional framework of IFR: content, presentation methods, mandatory items, and voluntary items. They develop a disclosure index of 82 items, 24 of which are related to presentation format[4]. They report that firm size, leverage, the proportion of independent directors on board, and being an information technology firm all have a positive impact on the IFR presentation of Chinese listed firms. Kelton and Yang (2008) find a positive and significant relationship between firm size and more advanced forms of disclosure formatting (dynamic graphic images, audio and video files, etc.) for large US firms. Alyet al.(2010), however, report mixed results for the top 100 Egyptian listed firms.

Studies on IFR in Turkey focus mainly on listed non-financial firms (Durukan and O¨ zkan, 2003; Do¨nmezet al., 2007; Turel, 2010) and the top 500 industrial firms (Aslan, 2004; Arzova and Aslan, 2005; Bozcuket al., 2011). A common thread in both groups of studies is the “expectation gap” (Turel, 2010, p. 94), which refers to the low level of voluntary disclosure despite a high adoption rate of IFR among Turkish firms[5]. Since firms are not provided any guidelines regarding IFR presentation format, they voluntarily decide how technologically advanced they want their disclosures to be. Hence, it is crucial to describe the existing level of IFR presentation format and look at its determinants, in order to understand the workings of IFR in Turkey. This provides the main motivation for the current study.

The current study’s distinctiveness from previous studies lies in its analytical structure. It uses a well-established model proposed by Debrecenyet al.(2002) based on the Berle and Means (1932) framework. It extends this model to measure the dependent variable using an up-to-date index previously used by Kelton and Yang (2008) to test hypothesis with a corporate governance focus.

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2.2 IFR sophistication

Debrecenyet al.(2002, p. 372) first used the word “sophisticated” to describe the web tools and technologies that facilitate communicating financial data in ways not possible with paper-based media. Measuring the use of dynamic forms of presentation, user interaction, hyperlinks from financial to product and sales information pages, and multimedia sound and video files has been part of IFR research from the beginning[6]. The IASC (1999, p. 53) proposed a three-stage classification of IFR. According to this classification, in the first stage, IFR comprised just another distribution channel for existing financial reports. In the second stage, IFR comprised web-friendly information that allowed search engine interaction. In the third and final stage, IFR comprised interactive tools for examining the information disclosed. Hence, this classification inherently implies that the third stage is the most sophisticated by definition.

Similarly, Ashbaughet al.(1999) adopted a three-stage approach and defined a firm as engaging in IFR if its web site offers either a full set of financials, a link to the annual report, or a link to the US Securities and Exchange Commission’s (SEC) Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.

The FASB (2000) coined the terms “content” and “presentation” to define the level of a firm’s IFR. According to their classification, “presentation” (IFR-P) encompassed information from the printed annual report to “enhancements not available in the paper paradigm (for example, hyperlinks, animated graphics, interactivity, downloadable spreadsheets, etc.)” (FASB, 2000, p. 25).

Debreceny et al. (2002) adopt the FASB (2000) framework and propose a model where the IFR presentation (IFR-P) variable takes on a value of 1 if the web site is static and 2 if the web site is dynamic (0 if no web site). They posit that IFR-P is determined by a range of firm-specific and environmental factors. In their model:

IFRf ¼afþbiFCiþ...þbiECiþ...þj ð1Þ

IFRfis IFR-P (or IFR-C) of firm f, FCiis a firm-specific characteristic that influences IFR and ECiis an environmental characteristic that influences IFR (Debrecenyet al., 2002, p. 377). The ECi variable reflects differences among countries in terms of internet penetration and disclosure environment.

The current study adopts the Debrecenyet al.(2002) definition of IFR sophistication and empirically tests the model above. However, rather than using a dichotomous measurement scheme (dynamic vs static), IFR-P is measured using a disclosure index as Section 3 explains. The model includes six firm-specific factors (FCi), plus 22 dummy variables to account for the environmental characteristics (ECi). The discussion of these variables and the relevant hypotheses are provided in the following sections.

2.3 Firm-specific factors

The firm-specific characteristics employed in the current study and their theoretical background are as follows.

Size. Lang and Lundholm (1993) report a positive association between firm size and disclosure. Similarly, Ashbaugh et al. (1999) suggest that economies of scale could explain why larger firms tend to disclose more financial information on their corporate web sites. Kelton and Yang (2008) report a statistically significant positive relationship between firm size and disclosure presentation format index (FORMAT). Following their methodology, to fully capture the size effect, the current study

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conducts a further analysis by splitting the sample based on size and by running separate regressions. Based on these arguments the first hypothesis is:

H1. There is a significant relationship between firm size and IFR-P.

Profitability. Agency theory suggests that managers of profitable firms may be more inclined to disclose information in order to boost investor confidence, support their compensation contracts (Maloneet al., 1993; Wallaceet al., 1994), and decrease the costs of raising capital (Marston and Polei, 2004). However, empirical evidence is mixed. Marston and Polei (2004) report that profitability is not associated with internet reporting. Similarly, Kelton and Yang (2008) fail to find a significant relationship between profitability and IFR (both content and format). However, Alyet al.(2010) detect a positive and significant relationship between profitability and IFR presentation format, using ROE as a proxy for profitability.

The current study uses three different variables (ROE09, NIgrw09, ROE3yrAvg), to measure profitability and to explicitly test whether the conflicting results in the literature are due to the different measures used to proxy profitability. Hence the second hypothesis is:

H2. There is a significant relationship between profitability and IFR-P.

Growth prospects. Firms with high growth prospects are at a disadvantage when their performance is assessed using traditional measures (Lev and Sougiannis, 1999). To mitigate the information asymmetry, high growth firms usually make disclosures through alternative channels such as IFR and conference calls (Frankelet al., 1999). But the flip side of the coin is the increase in proprietary costs as a result of increased levels of disclosure (Verrechia, 1983). Especially for high growth and highly “intangible” companies, the additional information disclosed could lead to competitive disadvantage (Debreceny et al., 2002). Debreceny et al. (2002) find a significant and negative relationship between growth prospects proxied by the market-to-book ratio (MV2BV) and IFR-P in their reduced model. Therefore, the third hypothesis is:

H3. There is a significant relationship between growth prospects of a firm and IFR-P.

Ownership structure. Marston and Polei (2004) suggest that companies with diffuse ownership (widely held companies) are more likely to disclose more information on their web sites to keep their shareholders well informed. However, empirical evidence is mixed. Following Ezat and El-Masry (2008), the ratio of a firm’s stock actively traded on the market to its total stock value (FreeFloat) is used to proxy concentration of ownership. Hence:

H4. There is a significant relationship between ownership structure and IFR-P.

2.4 Environmental characteristics

The environmental characteristics employed in the current study and their theoretical background are as follows.

Corporate governance. Kelton and Yang (2008, p. 66) posit that corporate governance is relevant in “monitoring and determining a firm’s overall disclosure policy”. In describing the corporate governance environment of a firm, prior studies frequently use auditor size. Xiaoet al.(2004) argue that large international auditing firms are in a better position to advise their clients on the advanced technologies involved in IFR.

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Both agency and signalling theories imply a positive association between the level and quality of disclosure and the hiring of a large audit firm. However, Alyet al.(2010) report no significant association between auditor size and IFR presentation format of Egyptian firms. Similarly, Wallaceet al.(1994) find no significant association between auditor size and IFR of Spanish firms. In contrast, Inchausti (1997) reports a positive relationship between Spanish firms hiring a large auditor and their levels of disclosure.

Xiao et al. (2004) find that the extent of internet corporate disclosure is greater among Chinese companies audited by the Big-Five (now Big-Four) firms. Kelton and Yang (2008) report positive association for the overall level of IFR for firms traded on the NASDAQ National Market. Therefore, despite geographical variations reported in a few studies, it is fair to say that audit firm size is positively associated with voluntary disclosure (Ahmed and Courtis, 1999).

The current study uses two variables to proxy for the corporate governance environment of Turkish firms. Both are dichotomous variables that take on a value of 1 if the firm is being audited annually by one of the Big-Four auditing firms (BIG4) and if the firm is included in the ISE-Corporate Governance Index[7] (XKURY), and zero otherwise. Based on the above arguments, the fifth hypothesis is:

H5. There is a significant relationship between a firm’s corporate governance attributes and IFR-P.

Industry effects. Ashbaughet al.(1999) report a significant relationship between online disclosure and a firm’s industry. However, Craven and Marston (1999) report an insignificant relationship. Xiao et al. (2004) suggest that failure to address the information technology (IT) industry separately may explain why some studies report an insignificant relationship. They offer a number of reasons to support their argument. For example, they explain that, IT firms are in a better position to use more advanced methods of IFR-P due to their expertise in the field. Prior studies have used similar lines of reasoning for manufacturing innovations (Bigoness and Perreault, 1981) and for organisations’ absorptive capacity, i.e. prior related knowledge (Cohen and Levinthal, 1990). The current study includes a total of 20 dummy variables in the regression analysis to control for the industry effects. Hence, the last hypothesis is:

H6. There is a significant relationship between a firm’s industry and IFR-P.

The section below explains the data and methodology used.

3. Research approach

The study surveys web sites of all firms listed on the ISE-All Share Index during December 2009. The disclosure items come from full corporate web sites’ specific pages containing financial reporting items and, where available, investor relations webpages. Following Debrecenyet al.(2002), IFR-P proxies for the level of IFR sophistication. For each firm in the sample (311 firms), the IFR-P variable is the sum of the scores from a 12-item disclosure presentation format index based on Kelton and Yang’s (2008) work [8]. To come up with this index, Kelton and Yang (2008) use the woks of Xiaoet al. (2004), Ettredgeet al.(2002) and Debrecenyet al.(2002). The index looks specifically at IFR presentation formats and options provided on a company’s web site that are not available in the traditional paper paradigm.

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Following Kelton and Yang (2008), for each disclosure index item, 1 denotes the presence of the specific presentation formats and 0 otherwise. The IFR-P variable takes on a value between 0 and 12 depending on the presentation format items on corporate web sites. Table I lists these items, along with the percentage of firms employing each item.

The ISE is the data source for all firm-specific variables, except those based on firm webpage attributes. To ensure accuracy, data is cross-checked, using other investor web sites.

Based on the Debrecenyet al. (2002) model described in equation (1) above, the current study proposes the following multiple regression model.

Basic model:

IFR – P¼ aþb₁ Sizeþb₂S

TProfitabilityþb3 M

TProfitabilityþb4 L

TProfitability

þb₅ Growth Prospectsþb₆ Ownershipþj

ð2Þ

where:

Size ¼ firms size measured as the natural logarithm of market capitalisation (LnMktCap).

S/T Profitability ¼ short-term profitability measured by return on equity (ROE09).

M/T Profitability ¼ medium-term profitability measured by net income growth from previous year (NIgrw09).

L/T Profitability ¼ long-term profitability measured by three-year average of the return on equity (ROE3yrAvg).

Growth Prospects ¼ measured by the ratio of market value of the firm to its book value (MV2BV).

Ownership ¼ concentration of ownership measured by percent of free float (FreeFloat).

j ¼ the error term.

Disclosure items Percent of firms disclosing

Financial data in processable format 87

Drop-down navigational menu 74

Hyperlinked table of contents 69

Annual report in multiple file formats 62

Dynamic graphic images 56

E-mail alerts 47

Direct e-mail to investor relations 44

Hyperlinks to data on a third party’s web site 42

Hyperlinks inside the annual report 38

Internal search engines 34

Video files 26

Audio files 16

Table I.

Measurement scheme of IFR-P score

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The full model extends this basic model to include variables reflecting the corporate governance environment of the firm. It also includes a number of dummy variables to take into account the industry effects. This two-step specification allows us to detect the incremental explanation power of environmental characteristics including corporate governance and industry effects. The following section outlines the current state of IFR sophistication for Turkish listed firms, explores firm-specific drivers using a multivariate regression analysis framework, and extends the analysis based on the size effect.

4. Findings

Table I describes the current state of IFR sophistication of listed Turkish firms. It ranks the percentage of firms disclosing each of the items included in the IFR-P score. The most popular disclosure item is financial data in a processable format[9] (87 percent of the firms), followed by drop-down navigational menus (74 percent of the firms), hyper-linked tables of contents (69 percent of the firms) and annual reports in multiple file formats (62 percent). The four least popular items are hyperlinks inside the annual report (38 percent), internal search engines (34 percent of firms), video files (26 percent) and audio files (16 percent).

The average IFR-P score is 5.57 (over 12) for the sample. Comparing this figure with those of other countries is problematic because of the different time periods involved. However, to give a rough idea, the corresponding figure for firms traded on the NASDAQ is 6.38 (Kelton and Yang, 2008). Adjusting for the difference in measurement scale, Turkish firms’ average IFR-P score (1.39 over 3) is higher than those for Emerging Markets (1.04), Latin (1.10), Asian-Colonial (1.21), and Nordic (1.38) groups and lower than those for Franco-German-Japanese (1.51) and Anglo-American (1.61) groups, as reported by Debrecenyet al.(2002)[10].

The driving forces behind the differences observed are explored through a multivariate regression analysis framework, as presented in Table II. The basic model includes all continuous variables, while the full model includes dichotomous variables to take into account corporate governance and dummy variables to account for the industry effects. In both regressions the dependent variable is the IFR-P score and both are run with all listed firms.

Basic model Full model

Coeff. p-value Coeff. p-value

Intercept 22.83 0.018 21.57 0.348

ROE09 0.15 0.337 0.21 0.164

NIgrw09 0.00 0.972 0.00 0.956

ROE3yrAvg ₂0.13 0.282 ₂0.03 0.829

MV2BV ₂0.09 0.047 ₂0.06 0.166

LnMktCap 0.71 0.000 0.46 0.000

FreeFloat 0.00 0.760 0.00 0.508

BIG4 0.86 0.011

XKURY 1.39 0.015

Industry ^ .0.050

AdjustedR2 0.239 0.347

F-value 16.4 0.000 6.8 0.000

Table II.

Multivariate regressions (all firms)

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In Table II, the basic model explains 24 percent of the variation in IFR-P and finds a significant relationship for a firm’s growth prospects (MV2BV) and size (LnMktCap). However, the MV2BV variable loses its significance in the full model.

The full model explains 35 percent of the variation in IFR-P and reports a significant and positive relationship for firm size and corporate governance variables (BIG4 and XKURY). Firms that are larger, audited by a Big- Four firm and included in the XKURY index of the ISE are more likely to use sophisticated reporting formats. None of the industry dummies are significant and are reported in the table briefly for space reasons.

Looking at the increase in adjusted R2, this study finds that the inclusion of corporate governance variables clearly increases the explanatory power of the model, from 24 to 35 percent.

To further investigate the size effect documented in the regression analysis above, separate regressions were run for large and small firms. Following Kelton and Yang (2008), a firm is classified as large if its market capitalization is greater than the median value and small otherwise[11]. The average IFR-P score is 6.56 (over 12) for large firms and 4.58 for small firms.

The regression models reported in the tables that follow use the forward stepwise method since it achieves the highest adjustedR2in the final step[12]. Table III presents the results of the basic and full models for large firms.

In Table III, the basic model explains 20 percent of the variation in the IFR-P score for large firms by including a firm’s growth prospect and size. However, as with the regressions including all firms, the MV2BV variable loses its significance in the full model.

The coefficient for the MV2BV variable is negative in both basic and full models for all firms and the subsample of large firms. This finding is consistent with Debrecenyet al.(2002). One possible explanation could be that Turkish firms with high growth potential tend to concentrate their efforts on performing and not necessarily on sophisticated reporting. Another explanation could be that they fear the possible consequences of more sophisticated reporting, since increased transparency could lead to a competitive disadvantage (Debrecenyet al., 2002).

The full model explains 37 percent of the variation in the IFR-P score for large firms. Large firms, audited by the Big-Four, included in the XKURY index and operating

Intercept 25.38 0.004 24.36 0.017

MV2BV 20.11 0.046 20.08 0.151

LnMktCap 0.91 0.000 0.75 0.000

BIG4 1.14 0.002

XKURY 1.30 0.022

SecDum: Manufac. 1.09 0.005

SecDum: Sports 23.01 0.014

SecDum: Food & Bev. ₂2.11 0.046

SecDum: Insurance 1.60 0.049

AdjustedR2 0.202 0.365

F-value 39.6 0.000 13.9 0.000

Table III.

Multivariate regressions (large firms)

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in the manufacturing or insurance sectors, are more likely to use sophisticated reporting formats. In other words, for large firms, as firm size increases, the tendency to use more sophisticated reporting also increases. On the other hand, large firms that operate in the sports, food and beverage sectors are less likely to use sophisticated reporting formats. This finding is not surprising since firms in the manufacturing and insurance sectors tend to be larger than those in other sectors.

Table IV presents the results of the basic and full model using forward stepwise regressions for small firms. The basic model explains 2.5 percent of the variation in the IFR-P score and reports a significantly negative relationship for the FreeFloat variable. Thus, for small firms, as the ratio of the firm’s actively traded stock to its overall stock value increases, the firm is less likely to use sophisticated reporting formats. However, this effect does not hold in the full model.

The full model explains 15 percent of the variation in the IFR-P score for small firms and the coefficient of the ICT sector dummy is significantly positive. Small firms that operate in the information/communications/technology sector are more likely to use sophisticated reporting formats. Alyet al.(2010) report a similar finding for Egyptian firms in the communications sector.

5. Conclusion

This study contributes to the IFR literature by investigating, for the first time in Turkey, the relationship among the sophistication of listed firms’ IFR and their profitability, growth prospects, size, ownership, corporate governance environment and industry sector.

Although Turkish firms’ average IFR-P score is lower than that reported for US firms (Kelton and Yang, 2008), on five disclosure items (out of 12) Turkish firms actually fare higher. Comparing with the Anglo-American group (Debrecenyet al., 2002), areas for improvement are the usage of search facilitating technology such as internal search engines and hyperlinks inside the annual report and contents pages, as well as e-mail alerts and direct e-mails to investor relations departments.

In a multivariate regression analysis framework, the study reports evidence supporting the size effect. Larger firms are more likely to use sophisticated IFR. Auditor and corporate governance effects are also supported. Overall, large firms audited by the Big-Four and included in the Corporate Governance Index (the XKURY) are more likely to use more sophisticated disclosure formats such as audio files, video files and hyperlinks inside the annual report. These three factors together explain 35 percent of the variation in IFR sophistication (ModelF-value: 6.8,p: 0.000).

Intercept 5.48 0.000 4.46 0.000

FreeFloat 20.02 0.032 20.01 0.349

SecDum: ICT 2.58 0.002

AdjustedR2 _0.025 _0.151

F-value 4.7 0.032 7.3 0.000

Note:ICT – Information communications technology

Table IV.

Multivariate regressions (small firms)

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Kelton and Yang (2008) report qualitatively similar findings. In the multivariate regression analysis for the full sample they also find positive and significant size and large auditor effects, which only hold for large firms.

Extending this analysis, regressions run separately for small and large firms based on median market capitalisation show that size, auditor and corporate governance effects continue to prevail for large firms. Large insurance and manufacturing firms are more likely to use sophisticated formats while large food and beverage firms and sports firms are less likely to use them.

However, for small firms, the industry sector is the only statistically significant effect in explaining IFR sophistication. Small firms in the ICT industry are more likely to use sophisticated IFR.

The findings for industry sector for large and small firms are parallel to the industry groupings and IFR-P scores reported by Debreceny et al. (2002) and to regression results reported by Xiaoet al. (2004). Additionally, they are qualitatively similar to those reported for Egyptian firms by Alyet al.(2010), especially for financial services and communications sectors.

These findings are useful for current and potential investors in the ISE, as well as market participants and market regulators. Overseas investors constitute the largest group of investors in the ISE. As of the end of March 2011, they held nearly 65 percent of the market at the ISE. By the sheer size of their holdings and vested interests, one would expect them to push for more sophisticated disclosure formats in the firms that they invest in. However, direct e-mails to investors and e-mail alerts are only provided by 44 and 47 percent of the firms, respectively. Since overseas investors are dominated by institutional holders, especially large fund managers, they may prefer conference calls or even direct calls to the investor relations department.

Another possible explanation could be that overseas fund managers simply prefer to use financial databases (such as those available through Thomson Financial) which provide in detail all the disclosure items required by the ISE and more, in addition to advanced analytical tools, charting and e-mail alerts for company news items.

From a regulatory perspective, the findings of this study also support the view that “regulation may not [always] be the best solution” (Bozcuket al., 2011, p. 321). Comparing the pre- and post-regulation periods, Bozcuket al.(2011) report a decline in the level of voluntary disclosures and underline the apparent reluctance of Turkish firms to disclose information other than the bare essentials. They find that, for example, the percentage of firms voluntarily providing interactive ratios goes down from 11 percent in the pre-regulation period to 7 percent in the post-regulation period. Interestingly, looking at the voluntary usage of video clips and slide shows, they find an increase from 3 percent in the pre-regulation period to 15 percent in the post-regulation period. However, they warn that this may not all be good news. A detailed assessment of these video clips reveals that management may be more inclined to disclose voluntary information “[...] when the firm

is performing well than when it is performing poorly” (Lang and Lundholm, 1993, pp. 248-9). Their findings support the signaling theory. Hence it may even be misleading for those users of financial information who find it tempting to watch a video on corporate performance rather than juggle with numbers. Therefore, it is fair to say that, adoption of a strictly content- focused regulatory viewpoint curtails the use of new and innovative ways of communication that IFR has to offer.

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The percentage of Turkish listed firms that disclose financial information on their corporate web sites increased from 38 percent in 2002 (Durukan and O¨ zkan, 2003) to 95 percent in 2010 (Turel, 2010). Therefore, Turkish companies have indeed come a long way in adapting to changes in their reporting environment. However, there is still a major room for improvement, especially in the investor relations area.

Study limitations

A main limitation of the study lies in the dynamic nature of web pages surveyed. It was possible to overcome this problem to a great extent by completing the data collection and substantiation stages during the month of December.

Another limitation of the study is the measurement of IFR sophistication. Although the literature supports calculating a score based on web page attributes, such as the one used in this study following Kelton and Yang (2008), there may be other ways of measuring sophistication from the investors’ and firms’ points of view.

Additionally, the study focuses only on firms listed on the ISE, which makes generalization of the results to non-listed Turkish firms problematic. But current regulation regarding IFR covers listed firms only.

In sum, this study posits a novel research question and presents evidence from a dynamic emerging market. Future research using alternative methodologies and perspectives will help improve our understanding of the issues involved.

Notes

1. Especially with respect to managers’ choice of recognition versus disclosure of stock option compensation, pension obligation and operating leases.

2. The FASB definition of transparency has two components. First, to be transparent, financial statements must accurately represent the underlying economics in an unbiased manner (Statements of Financial Accounting Concepts [SFAC] No.2, FASB, 1980, para. 63). Second, financial statements should be presented in a manner that is easily understood by individuals “who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence” (SFAC No. 1, FASB, 1978, para. 34).

3. Please refer to Abdelsalam and El-Masry (2008) and Ezat and El-Masry (2008) for a detailed review of the IFR literature.

4. Please refer to Xiaoet al.(2004, Table I), for a detailed account of the presentation format items that overlap with prior studies.

5. In 2010, 95 percent of Turkish listed firms disclosed financial information on their corporate web sites (Turel, 2010).

6. For example, Pirchegger and Wagenhofer (1999) develop a comprehensive checklist to measure IFR by Austrian listed companies based on four dimensions: content, timeliness, technology, and user support. Marston and Polei (2004) extend this checklist to include improved technological features available at German corporate web sites. For the sake of conciseness, the discussion in this section focuses on studies commissioned by standard-setting bodies or those including multi-country data. For a detailed account of what has been found so far in terms of IFR (format) at individual country-level studies please refer to the review of recent literature by Beyeret al.(2010).

7. The XKURY index was launched by the ISE on August 2007 and includes firms with corporate governance ratings above the required level. Firms in this index are bound by the

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same disclosure requirements as the rest of the quoted firms. However, they are required to undergo routine rating assessments by independent agencies in order to stay on this index. Therefore, they follow good corporate governance practices more meticulously (Bozcuk, 2010).

8. The current study uses this index to provide comparability with prior studies and established markets.

9. The term “processable format” refers to the file format the financial data is provided in. For example, if a balance sheet is provided on the webpage as an image file (.bmp,. jpeg, etc.) it will not be possible to copy and paste into Excel for further processing and analysis. 10. The scores reported for previous studies may be substantially higher today due to the time

frame involved, however a more up-to-date cross-country study was not available. 11. Alternative specifications to split the sample into small and large firms produce qualitatively

similar results (not provided here for space reasons) and do not change the statistical significances.

12. Using the Enter method in the regression does not alter the findings and only results in lower adjustedR2_{for the model.}

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