Int. J. Business Excellence, Vol. 3, No. 2, 2010 125

The relationship between information transparency and firm value: evidence from Taiwan

Chin-Fang Chao Department of Finance, Ling Tung University, No. 1, Lingtung Road, Nantun District, Taichung City, 408, Taiwan, R.O.C. and Graduate Institute of Business, Feng Chia University, No. 100 Wenhwa Rd., Seatwen, Taichung City, 407, Taiwan, R.O.C. Fax: 886-426390859 E-mail: [email protected]

Chung-Cheng Hsu* Department of Finance, Ling Tung University, No. 1, Lingtung Road, Nantun District, Taichung City, 408, Taiwan, R.O.C. Fax: 886-426390859 E-mail: [email protected] *Corresponding author

Ho-Sheng Yeh Department of Management Information System, Yuh Chang Biotech Corporation, No. 126, Zili Rd., Wuqi Township, Taichung County, 435, Taiwan, R.O.C. Fax: 886-426390859 E-mail: [email protected]

Abstract: This study uses the indicators released by the Taiwan Securities & Futures Institute to re-score by hand the 262 listed companies in Taiwan’s electronics industry as measurements of those companies’ information transparency. In addition, we adopt book value per share, modified Tobin’s Q, stock price and return on equity as measured variables of firm value to explore the influence of information transparency on firm value. Based on structural equation model (SEM) analysis and path analysis with observed variables (PA-OV), we find that information transparency is positively correlated with firm value, indicating that the more transparent a firm’s information, the higher the firm value. We also find that the timeliness of information disclosure is the most important factor in information transparency and that it has a positive relationship with both stock price and return on equity.

Copyright © 2010 Inderscience Enterprises Ltd.

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Keywords: information transparency; firm value; Taiwan.

Reference to this paper should be made as follows: Chao, C-F., Hsu, C-C. and Yeh, H-S. (2010) ‘The relationship between information transparency and firm value: evidence from Taiwan’, Int. J. Business Excellence, Vol. 3, No. 2, pp.125–141.

Biographical notes: Chin-Fang Chao is a Lecturer in the Department of Finance, Ling-Tung University, Taiwan. She is also a PhD candidate at the Graduate Institute of Business, Feng Chia University. She has taught at the university level on intermediate accounting, financial statement analysis, and bond markets. Her major is accounting.

Chung-Cheng Hsu is an Associate Professor in the Department of Finance, Ling-Tung University, Taiwan. He earned his PhD at the Graduate Institute of Management at Dayeh University. His research interests are corporate governance (especially for the high-tech industry), securities investment valuation, and industry analysis.

Ho-Sheng Yeh works at the Department of Management Information System, Yuh Chang Biotech Corporation. He earned his Master’s at the Graduate Institute of Finance at the Ling-Tung University and has particular expertise in computer programming and electronic commerce.

1 Introduction

Several corporate failures and accounting scandals in recent years have made corporate governance a popular issue in both developed and developing countries, but cases like Continental Flight and Rebar Group continue to occur in Taiwan. Chhaochharia and Grinstein (2007) found that firms that are less compliant with the provisions of the Sarbanes-Oxley Act earn positive abnormal returns compared to firms that are more compliant. These emerging events have cast doubt on the effectiveness of promoting corporate governance and have raised questions concerning whether increasing firms’ transparency through corporate governance mechanisms can help to reveal the true value of a firm. Based on the agency perspective (Jensen and Meckling, 1976), the agent (managers) should pay more attention to providing useful information to the principals (shareholders) in order to reduce the information asymmetry between insiders and outsiders. Using such full disclosure, the shareholders can monitor whether managers’ behaviour is maximally aligned with the interest of the shareholders. On the other hand, the shareholders should consider the validity of management’s unwillingness to share proprietary information when it is operating in an environment where information is valuable and competitive advantage may dissipate quickly (Chahine and Filatotchev, 2008). Thus, the shareholders sometimes face in the dilemma of maintaining competitive advantage or demanding full disclosure in order to reduce monitoring cost. The first step in overcoming this dilemma is to clarify whether transparent information could reveal the true value of a firm.

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Most of the research in this area has been based on data from Anglo-American firms (e.g., Chhaochharia and Grinstein, 2007; Abdelsalam and Street, 2007; Chahine and Filatotchev, 2008), but there have been relatively few studies of Asian firms. Because business and institutional environments, as well as the ownership structure of Asian firms, differ from those of Anglo-American firms (Claessens et al., 2000), the findings based on Anglo-American firms may not generalise to firms in Asian countries. Further, Taiwan’s electronics industry has an important leadership position in the global manufacturing market for original equipment. According to statistical data of 2007, 11 of Taiwan’s related products have the largest market share in the world. Taiwan’s output value of electronic products amounted to $3.3 trillion in 2007. Thus, the firms in the information technology industry are thought to have ‘deeper pockets’ and more resources with which to provide investors timely information than do other industries. Therefore, we utilise data from Taiwan electronic firms to empirically test the first research question: whether information transparency would significantly affect firms’ value. The investigation, ‘Transparency and disclosure’ by Standard & Poor’s in 2001 showed that Taiwan Semiconductor Manufacturing Company Limited, the best enterprise in Taiwan, scored only four out of ten in the transparency of its financial and operating information, indicating that the transparency and quality of Taiwan’s financial reports have considerable room for improvement if they are to catch up to international standards. This evaluation is consistent with the opinions of some scholars (i.e., Johnson et al., 2000; Mitton, 2002; Baek et al., 2004), who have suggested that the opacity or lack of transparency in corporate information was a significant element in the Asian financial crisis of the late 1990s. The timely disclosure of corporate information can check corporate fraud and earnings manipulation, reduce agency costs and signal firm value. PricewaterhouseCoopers (PWC), the global professional consultant firm, investigated the relationship between information transparency and cost of capital in 2000 and showed a significantly negative relationship between these two factors. In addition, increasing the shareholder rights to information could reduce agency costs and enhance firm value (Chi, 2005). Moreover, profitable companies usually disclose more information than less profitable ones do (Hassan et al., 2006). In other words, the more transparent a firm, the lower its cost of capital and the more likely the true value of the firm is to be revealed. Thus, we examine Taiwan’s electronic firms to explore the second research question: whether all indicators of information transparency positively affect their firm values. In order to encourage the voluntary disclosure of corporate information, the Securities & Futures Institute (SFI), entrusted by the Taiwan Stock Exchange Corporation (TSEC) and GreTai Securities Market (GTSM), launched its Information Disclosure and Transparency Ranking System (IDTRS) to evaluate the transparency of all listed or OTC listed companies in Taiwan since 2003. We use the fifth information disclosure indexes released by the SFI to assess information transparency. However, this transparency evaluation is ranked in only five grades and lacks detailed scores. In order to increase the evaluation’s explanatory power, this study uses the previous indicators to re-score by hand the 262 listed companies of Taiwan’s electronics industry in 2006. In addition, we adopt book value per share, modified Tobin’s Q, stock price and return on equity as proxies for firm value. To eliminate endogeneity among the variables, we utilise the

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structural equation model (SEM) analysis and the path analysis with observed variables (PA-OV). Based on the empirical results, we find that information transparency is positively correlated with firm value, indicating that, the more transparent a firm’s information, the higher the firm value. We also find that the timeliness of information disclosure is the most important factor among the indicators of information transparency, and that it has a positive relationship with both stock price and return on equity. The rest of this paper is organised as follows. In Section 2, we discuss prior research on information transparency and transparency’s effect on firm’s value. In Section 3, we state our hypotheses, describe our proxy for transparency and firm value, and discuss our research design and data. Section 4 presents the results of empirical analysis, and Section 5 concludes the paper.

2 Prior literature and hypothesis development

2.1 Information transparency

The experience of countries with large and active equity markets shows that disclosure can have a powerful influence on the behaviour of companies and on protecting shareholders. A strong disclosure regime can attract investment and strengthen the capital market, whereas non-transparent practices can result in unethical behaviour and poor allocation of resources. Therefore, the revised OECD principles of corporate governance note that “The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.” Material information is information whose omission or inaccuracy could change the users’ decision. All information should be prepared in accordance with high standards of accounting and financial and non-financial disclosure. In addition, the channel through which information is disseminated should ensure that users have equal, timely and cost-efficient access to that information. Prior research (Botosan and Stanford, 2005; Harris, 1998) suggests that a company’s disclosure decision may be affected by the desire to conceal profitability from its competitors, so such companies may choose to withhold or delay disclosure of sensitive information. But, some research argues that managers of larger companies have incentives to reduce audit and reporting delays because they may be monitored more closely by investors, unions, and regulatory agencies, thereby facing greater external pressure to disclose earlier (Abdulla, 1996; Ashton et al., 1987; Ashton et al., 1989). In fact, Taiwan’s information technology industry possesses both large size and fear of leaks of business secrets. Therefore, this study first would like to explore what would affect disclosure transparency through an analysis of companies in Taiwan’s information technology industry.

2.2 Relationship between information transparency and firm value

The effect of corporate information transparency on firm value is an important topic among corporate and market participants and regulators. Some researchers contend that corporate information transparency will increase firms’ operating costs and disclosure

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risks by possibly leaking important information to the competition, leading to passive participation and, ultimately, to higher transaction costs. For example, Cheng and Lo (2006) described disclosure risk as the cost of litigation that arises from management forecasts that prove to be inaccurate ex post. Botosan and Stanford (2005) evidenced that managers of firms may withhold segment information to protect profits and the proprietary costs of segment disclosure exist. Bushee and Noe (2000) argued that disclosure also attracts transient institutions, which exacerbate a firm’s stock return volatility because of those firms’ short investment horizons and aggressive trading strategies. Chahine and Filatotchev (2008) examined the effect of information transparency on French firms and found that extensive disclosure may damage the firm’s competitive advantage. At the same time, most researchers have argued that introducing more timely and accurate disclosure mechanisms for firms will facilitate deterrence and detection of fraud and manipulation and will improve the efficiency of the stock market, leading to higher firm value. Hunton et al. (2006) provided evidence that more transparent reporting requirements will reduce attempts at earnings management. Healy and Palepu (2001) argued that firms have an incentive to trade off the costs and benefits of voluntary disclosure and to produce an efficient amount of information for investors in the economy. La Porta et al. (2002) also found, using Tobin’s Q, that the protections of shareholders are positively associated with firm value. Hope (2003) and Cahan et al. (2005) indicated that analysts following are positively associated with the level of voluntary disclosure. Moreover, Schrand and Verrecchia (2005) showed that greater informative disclosure frequency could reduce under-pricing of initial public offerings. Lazarides et al. (2009) indicated that the synergies between corporate governance and information systems can lead to an improved organisational performance. In general, the information transparency of firms in Asian countries is insufficient. This condition is associated with the unique equity structure and legal environment in Asia. Claessens et al. (2000) documented that large, family-controlled firms in Korea, Singapore, and Taiwan feature a large wedge between ownership and control and that more than two-thirds of firms in East Asia are controlled by a single shareholder. Mitton (2002) found that East Asian firms with higher-quality disclosures, greater transparency, and greater outside ownership had better stock price performance during the Asian crisis. Baek et al. (2004) mentioned that Korean ‘chaebol’ firms are characterised by an extensive arrangement of pyramidal or multi-layered shareholding agreements, and that these firms experienced a larger drop in the equity value during the 1977 Korean financial crisis. Recent literature has provided more evidence that more transparent disclosures of a firm improve its market valuation. For example, Black et al. (2006) concluded that firms with high governance standards have higher Tobin’s Q and market price to book value ratios. Durnev and Kim (2005) found that firms with greater growth opportunities, greater needs for external financing, and more concentrated cash flow rights would disclose more, and that firms that score higher in governance and transparency rankings are valued higher in the stock market. Hasan et al. (2008) investigated the Asian emerging markets and concluded that improvement in corporate governance (including transparency) would mitigate the dependency of firm investment on their internal resources and facilitate access by firms to capital markets. However, more disclosures

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could not increase the market value of a firm with any certainty. Langberg and Sivaramakrishnan (2008) concluded that analysts are sceptical regarding disclosures of good news and that they tend to respond by increasing the level of scrutiny. The focus of this paper is the relationship between Taiwanese electronics firms’ information transparency and firm value. Based on the discussion of the literature, we develop the following hypotheses:

H1: Information transparency has a positive relationship with firm value. H2: Each measure of information transparency has a positive relationship with each measure of firm value.

3 Methodology

Well-known financial service or research institutions continually release studies and ratings of corporate information transparency in expectation of encouraging firms to improve their voluntary disclosures through external mechanisms beyond the regulatory requirements. However, the design of the evaluations or investigations implemented by these international organisations cannot be used to evaluate the level of information disclosure by Taiwan companies. Therefore, few years ago, the Securities & Futures Institute (SFI) of Taiwan formulated the IDTRS to rank the information transparency of Taiwan companies.

3.1 Measures of information transparency

One general measurement of information transparency is the disclosure index. The disclosure index may result from the disclosure grade assigned by professional ranking institutions or from content analysis. Several professional rating agencies measure corporations’ information transparency, including the Financial Analysts Federation (FAF), PricewaterhouseCoopers (PWC), Standard & Poor’s (S&P), and Credit Lyonnais Securities Asia (CLSA). Taiwan has the IDTRS of the Securities & Future Institute. IDTRS was created by the SFI to encourage corporations’ voluntary disclosures and to implement corporate governance. With the exception of companies with inadequate data or those under regulatory inquiry, all TESC/GTSM-listed companies are covered by IDTRS. In order to assess the transparency of companies, IDTRS identified five categories, totalling 100 items, as evaluation criteria:

1 compliance with the mandatory disclosures (11 items)

2 timeliness of reporting (19 items)

3 disclosure of annual report (five items)

4 disclosure of financial forecast (50 items)

5 corporate website disclosure (15 items).

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SFI uses IDTRS to rank listed companies annually and releases the full ranking results from Grade A+ to Grade C–. In consideration of the lack of explanatory power, we use the IDTRS to re-assess each of Taiwan’s 262 listed companies in the information technology industry from 2006 data. Our evaluation method is that each disclosure item is in the form of a ‘yes’ or ‘no’ question to ensure objectivity, with each ‘yes’ worth one point and each ‘no’ zero points. We focus on the presence or absence of each disclosure item and do not endeavour to assess the accuracy of the information. A higher score in any one of the five categories indicates more transparency.

3.2 Measures of firms’ value

All of the evaluation models of firm value have their own assumptions, advantages and weaknesses; no single evaluation model of firm value can be applicable to all research and circumstances. Thus, the variables of firm value in the study focus on book value per share, modified Tobin’s Q, stock price, and return on equity.

3.2.1 Book value per share Firms’ value can be evaluated by net realisable value after subtracting total debt from the total revaluated value. That is, after a company sells all of its assets and liquidates all of its debts, the net asset value is the amount that shareholders receive. Because it is difficult to acquire revaluations of all assets in a company, they are empirically replaced by the book value of assets. Therefore, this study utilises book value per share as one proxy for firm value in order to discuss the relationship between information transparency and firm value.

3.2.2 Modified Tobin’s Q Tobin’s Q is the most common index for measuring a firm’s market performance (Morck et al., 1988; Cho 1998). Replacement cost of a firm’s assets must be acquired when calculating Tobin’s Q, but it is impossible to acquire replacement cost in practice. Thus, book values are used to stand for the replacement costs of firm assets (i.e., modified Tobin’s Q). This study adopts modified Tobin’s Q as a proxy for firm value in order to investigate the effect of information transparency on firm value.

3.2.3 Stock price La Porta et al. (2000) and Ball et al. (2000) indicated that firms’ stock prices are more significantly associated with earnings information in the common law countries because the demand for accounting information there is more intense and the legal protection of minority shareholders is stronger. Morck et al. (2000) determined that the impact of corporate information on stock price is less in countries where laws provide weaker protection for investors’ rights. Since stock prices generally reflect a company’s expectations, its market values are unlikely to deviate substantially from the true value of a firm if the firm can provide sufficient relevant information. The less the deviation in stock price, the lower the investment risks. However, the volatility of stock price has a significant influence on investment decisions, so this study adopts market value of stocks as a proxy for firm value.

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3.2.4 Return on equity Kasznik and Lev (1995) found that the likelihood of issuing a warning increases with the size of the earnings surprise, and the larger the impending earnings surprise, the more quantitative and earnings-related the warning. Therefore, the level of information disclosure is likely to be associated with financial performance. Return on equity (ROE) can be used to assess the profitability of equity, so we utilise ROE as one of proxies for firm values, calculated as net income after tax divided by shareholder equity.

3.3 Sample

Since relatively little research on corporate governance is based on Asian firms, our study extends the literature by using Taiwan’s IT industry to explore the effect of information transparency on firm values. Taiwan’s IT industry has a relatively higher market share, and the firms in this industry have more internal and external resources with which to provide investors with timely information than other industries do. In addition, this industry is the most important in Taiwan’s capital market. Therefore, we examine the 277 IT companies listed on the Taiwan Stock Exchange (TSE) for 2006. After deleting firms with missing key information, we obtain a final sample of 262 firms for the empirical analysis. The related data sources are as follows: 1 the evaluation of information transparency with detailed scores is collected by hand by means of the fifth scoring table of information disclosure indexes released by SFI 2 variables of firm value are collected from annual reports of sample companies in 2006 and the database of the Taiwan Economic Journal Co., Ltd.

3.4 Research design

The analysis of this study proceeds through two dimensions, using structural equation modelling (SEM) analysis and SEM’s path analysis with observed variables (PA-OV). In the SEM theoretical constructs proposed by Jöreskog (1970), the most important concept consists of two parts: The first is the measurement model, which reveals the relationship between observed and latent variables. Latent variables are proxied by observed variables that can be sorted into independent observed variables and dependent observed variables. This mathematical model is composed of confirmatory factor analysis. The second part of the SEM construct is the path analysis which, through the structure model, focuses on establishing the relationship among latent variables (Chiou, 2003). Latent variables such as information transparency and firm value cannot be scaled directly, so they are likely to be inferred from observed variables such as disclosure of financial forecast, corporate website disclosure, book value, and ROE. A measurement model can explain the relationship between latent variables and observed variables, and the structure model can be used to explore the causality among variables. The SEM analyses the cause-and-effect relationship among latent variables, so the validity of the measuring model of latent variables is critically important, and we should test the effect of measurement model before analysing structure models.

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Under PA-OV, all variables in the analysis are observed variables, which are specifically measured. The higher the coefficient, the stronger the measured strength of the variable. PA-OV is an exceptional application of the structural equation model without any latent variables. In the path diagram of SEM, variables are represented by squares (Chiou, 2003). We can determine the relationship among observed variables of different categories through the analysis of PA-OV so as to inspect the influence of information transparency of different items on the corresponding items of firm values. Thus, the structural equation model PA-OV can be used to discuss the relationship between the information transparency of different items and corresponding items of firm values.

4 Empirical result and analysis

4.1 Descriptive statistical analysis

The measured variables of information transparency are compliance with the mandatory disclosures, timeliness of reporting, disclosure of annual report, disclosure of financial forecast, and corporate website disclosure. Table 1 presents the descriptive statistics for the information transparency variables. Compliance with the mandatory disclosures score is significantly higher, indicating that the majority of firms comply with the ordinance, since it is mandated. However, the corporate website disclosure score is relatively lower and indicates that firms, on average, have insufficient channels via the internet.

Table 1 Descriptive statistics for information transparency

Variable n Mean Maximum Minimum Variance St. dev.

Compliance with the 10.82 262 11 1 0.293 0.543 mandatory disclosures (11)* 11.94 Timeliness of reporting 262 16 5 3.169 1.780 (19)

Disclosure of financial 3.26 262 5 0 1.130 1.063 forecast (5)

Disclosure of annual 33.92 262 47 1 46.859 6.845 report (50) Corporate website 4.44 262 15 0 15.964 3.996 disclosure (15)

Notes: *Score are based on different point scales in the parentheses, with higher score indicating higher compliance with the mandatory disclosures, timeliness of reporting, etc.

Table 2 presents the descriptive statistics for the variables of firm value. Modified Tobin’s Q has the least deviation and ROE has the widest dispersion.

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Table 2 Descriptive statistics for firm value

Variables N Mean Maximum Minimum Variance St. dev. Book value per 262 18.8238 97.63 –1.82* 110.260 10.5005 share Modified 262 2.0429 12.72 –1.48 2.213 1.4876 Tobin’s Q Stock price 262 44.9826 645.62 0.01 4980.5 70.6009 Return on 262 30.1419 690 –77.26 7011.755 83.7362 equity

Notes: *Only one firm in the sample had more debts than assets in 2006. We include it since it is still listed and does not bias our results.

4.2 Structural equation model (SEM) analysis

This study applies the SEM in order to discuss the relationship between information transparency and firm value. The structure of SEM includes a confirmation model orientation and a development model orientation. In the confirmation model orientation, the hypothesis and model have been proposed by researchers and verified by empirical data while, in the development model orientation, researchers propose the experimental stage model first, and revise it until the model fits the data and the parameters make sense. This study has a confirmation-model orientation (i.e., the SEM analysis is performed with LISREL software, whose functions can be used to deal with the cause-and-effect relationship and verify the model). The relationship model of information transparency and firm value will be established first, followed by model verification analysis and testing of the study’s hypotheses.

4.2.1 Measurement model analysis The study performs confirmatory factor analysis on the two constructs of information transparency and firm value in order to verify goodness of fit of the models on the constructs of measured models.

4.2.1.1 Confirmatory measurement model of information transparency We first verify that using the five observed variables (compliance with the mandatory disclosures, timeliness of reporting, disclosure of annual report, disclosure of financial forecast, and corporate website disclosure ) to measure the latent variable (information transparency) is valid and reliable. As Figure 1 shows, the chi-square and RMSEA of this model approximately equal zero, which means that the model approaches perfect goodness of fit. Among the observed indicators of information transparency, the timeliness of reporting plays the most influential role. From the perspective of outside shareholders, timely financial reporting could be interpreted pessimistically as an escape from a vital crisis or optimistically as a signal of the managers’ confidence in

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their performance. Corporate website disclosure has the weakest effect of the five variables, possibly because most of the listed companies in Taiwan’s IT industry belong to original equipment manufacturers; investors can acquire more information from the Taiwan Market Observation Post System and so have fewer demands from the corporate website. In addition, the supervisory authority does not emphasise the importance of corporate internet reporting, which results in less effort on the company’s website operations.

Figure 1 Confirmatory factor analysis for information transparency

Notes: *denotes p<0.05; chi-square = 0.00; RMSEA = 0.00

4.2.1.2 Confirmatory measurement model of firm value As shown in Figure 2, the chi-square and RMSEA also equal approximately zero. Thus, the four observed variables of book value per share, stock price, ROE and modified Tobin’s Q as the indicators of measuring firm value are fine and fit. In particular, stock price has the highest coefficient among the observed variables, possibly because the stock price of a firm is a relatively timely outsiders’ evaluation of a firm. This is consistent with the findings of Dehning and Richardson (2002).

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Figure 2 Confirmatory factor analysis for firm value

Notes: *denotes p<0.05; chi-square = 0.00; RMSEA = 0.00

4.2.2 Structure model analysis We use LISREL to examine and test the hypothesised structural model, and Table 3 presents the structure model’s statistics. All fit indices are above the recommended cut-off values. Firstly, among the absolute fit measures, the value of GFI, AGFI, and SRMA are 0.94, 0.92, and 0.02, respectively, and meet the required values of fitness at the level of ‘fine’, with the exception of the RMSEA value, which is at the level of ‘satisfactory’. Secondly, each of the comparative fit measures is more than 0.90, indicating that adding another variable into the hypothetical model could not increase its explanation power. Thirdly, as to parsimonious fit measures, each variable meets the required values of fitness so that the model ought not to delete any variables. In a word, the results provide evidence that the hypothetical model is fit and acceptable. Figure 3 presents the significant paths of the structure model and shows that the standardised parameter estimates for all of the hypothesised relationships are significant and in the predicted (positive) directions. With the exception of the relatively smaller coefficient of corporate website disclosure (0.01*), the other observed indicators show notably positive association with the latent factors (i.e., information transparency and firm value). According to these results, the five observed indicators of information transparency positively increase information transparency, and the four observed indicators of firm value are also positively associated with information transparency. Moreover, the results show that, on average, a one-unit increase in information transparency will increase firm value 0.32 units. In brief, all of the information transparency indicators are significantly associated with higher firm value. These results support H1.

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Table 3 Overall fit summary for the structure model

Types Index Evaluation standard Research result Goodness of fit Absolute fit Chi-square χ2 Insignificance shows fine 236.83 (P = 1.00) Yes index model goodness of fit GFI 0.90 0.94 Yes AGFI 0.90 0.92 Yes SRMR <.05 (Fine) 0.02 Yes 0.05~0.08 (Satisfactory) 0.08~0.10 (Moderate) >0.10 (Bad) RMSEA <0.05 (Fine) 0.08 Yes 0.05~0.08 (Satisfactory) 0.08~0.10(Moderate) >.10 (Bad) Comparative NFI 0.90 0.94 Yes fit index NNFI 0.90 0.92 Yes IFI 0.90 0.94 Yes CFI 0.90 0.94 Yes RFI 0.90 0.92 Yes Parsimony fit PNFI 0.5 0.68 Yes index PGFI 0.5 0.74 Yes CN >00 380.55 Yes

Figure 3 Structure model analysis for the relationship between information transparency and firm value

Note: *denotes p<0.05

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4.2.3 Path analysis with observed variable The PA-OV is used to examine whether each of the observed variables of information transparency correspond to each of the observed variables of firm value, as well as to delete insignificant variables. The results are as shown in Figure 4.

Figure 4 Path analysis with the observed variables of information transparency and firm value

Note: *denotes p<0.05

After the previous analysis, we delete the corporate website disclosures variable for assessing information transparency and the two variables (book value per share and modified Tobin’s Q) for assessing firm value because their empirical results are not significant. Figure 4 shows that, among the four observed variables, the timeliness of reporting (0.54*) has the strongest effect on stock price. In other words, the more a firm discloses its information in a timely manner, the higher its stock price will be. The disclosure of annual reports (0.41*) has a similar effect on stock price. Therefore, providing relevant and reliable information about a firm will help in accurately evaluating its market value. Although the coefficients of disclosure of financial forecasts and compliance with the mandatory disclosures are significant (0.06*, 0.27*, respectively), their effect on stock price is low. In view of ROE, the timeliness of reporting also significantly affects firm value (0.8*), possibly because firms are likely to announce good news early and to delay disclosure of bad news. Thus, the timelier a firm’s reporting, the more good news it includes. This finding is consistent with Hassan et al. (2006). The coefficient of disclosure of annual reports on ROE is as high as 0.91*, indicating that disclosure of annual reports presents the whole year’s operating results and has a direct and positive association with ROE. These results partially support H2.

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5 Conclusions

This study examines the effect of information transparency on firm value by using Taiwan’s listed electronics companies as the research objects, extending the prior literature, which had focused on Anglo-American countries. We find that compliance with mandatory disclosures is slightly associated with stock price (0.06*) but insignificantly associated with ROE (0.21). The majority of listed companies will comply with the mandatory disclosures in preference to incurring a large fine, so they cannot help but abide by the rules, regardless of the value of the firm. In addition, we find that the timeliness of reporting has a significantly positive association with firm value, particularly on the stock price and ROE, indicating that managers are likely to signal their good performance in order to gain investors. Consistent with Bushee and Noe (2000), the disclosure of financial forecasts is significantly associated with stock price. Moreover, our finding on the disclosures of annual reports supports the positive relationship between information transparency and firm value. Finally, we fail to find evidence that corporate website disclosures are significantly associated with firm value and attribute this result to the fact that most of Taiwan’s IT companies are original equipment manufacturers and that the supervisory authority has not emphasised the development of corporate internet reporting. What’s more, investors can acquire related information through the Taiwan Market Observation Post System, so their demands on the completeness of the companies’ specific website are lower. This finding has implications for Taiwan regulators and practitioners, who may want to put more emphasis on corporate internet reporting. The study has some limitations. The sample is drawn only from Taiwan’s IT companies, so caution is required in generalising the results to other industries. In addition, the disclosure transparency is examined for only a one-year period; given the dynamic nature of transparency, future research might extend this study to monitor changes in all items of the IDTRS based on time series studies. Finally, our scoring process focuses on the existence of each disclosure item without endeavouring to assess the accuracy of the information, and the possibility of misstatement cannot be entirely eliminated.

Acknowledgements

We are grateful to anonymous referees and the editorial office for helpful comments which improved the quality of this study.

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