Recent Researches in Applied Economics and Management - Volume I

Comparative analysis of voluntary Internet Financial Reporting for selected CEE countries

MARIJANA BARTULOVIĆ Accounting and Finance Department University of Split, Department of professional studies Kopilica 5, 21000 Split [email protected]

IVICA PERVAN Accounting Department University of Split, Faculty of Economics Cvite Fiskovića 5, 21000 Split CROATIA [email protected]

Abstract: Comparative research on the issue of voluntary Internet financial reporting was conducted on the sample of 91 companies whose securities are listed on one of the following capital markets: Stock Exchange, Ljubljana Stock Exchange, Belgrade Stock Exchange, Sarajevo Stock Exchange and Banja Luka Stock Exchange. The purpose of this research was to determine the achieved level of voluntary Internet financial reporting on the observed capital markets. The highest level of Internet financial reporting measured through IFR score was reported in Slovenia and it amounted 23.25, than it is followed by Croatia with an average IFR grade of 21.27. Quite lower values of IFR score were noticed on the last three capital markets. For example, IFR score equals 9.75 on the Serbian capital market, on the Sarajevo Stock Exchange the average IFR score was 6.74 and the lowest level of transparency is noticed on Banja Luka Stock Exchange where the IFR score was only 3.61. The differences of the arithmetical means of the IFR scores for the observed countries were tested using KruskalWallis test and conducted analysis indicates that among five countries there is a statistically significant difference in the level of Internet financial reporting measured through IFR score.

Key-Words: voluntary reporting, Internet, comparative analysis, trends

1 Introduction a small number of papers dealing with Internet Financial statements are the primary source of financial reporting on the emerging capital markets publicly available information on listed company’s of Central and Eastern Europe. A basic performance and its business activities. Therefore, characteristic of these markets during the last transparent financial reporting is crucial for efficient decade is that they have been growing rapidly, functioning of capital markets. According to modern attracting a large number of domestic and foreign accounting frameworks the aim of financial investors so it is interesting to analyze the achieved reporting and disclosure is to provide useful level of Internet financial reporting on these information about company’s financial position, markets. Comparative Internet financial reporting profitability and cash flows. analysis is conducted on a sample of listed Today, in modern business environment internet companies that list their securities on the following and its applications are unavoidable tools for markets: Ljubljana Stock Exchange, Zagreb Stock disseminating financial information to investors and Exchange, Banja Luka Stock Exchange, Sarajevo other users. Since Internet is widely used for Stock Exchange and Belgrade Stock Exchange. informing investors and other users about business The basic purpose of this paper is to determine activities and financial performance of listed the achieved level of Internet financial reporting companies there is a large number of scientific measured through IFR score and compare it among papers which analyzed Internet financial reporting five selected markets. practices of listed companies in USA and EU. However, it is important to notice that there are still

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2 Prior research own Web site while only 48.33% of them use these The development of Internet technology and the pages for financial reporting. expansion of its use for voluntary financial reporting In another type of studies, so called comparative have stimulated a large number of academic studies research, authors analyze and compare Internet in this area. Research related to Internet financial financial reporting practices for two or more reporting can be classified in the following three countries. Use of Internet for investor relations was, categories: research related to practical application among others, analyzed in studies conducted by of Internet financial reporting in individual Deller et al. [6] and Geerings et al. [9]. Deller et al. countries, research related to comparison of Internet [6] analyzed the role of Internet in investor relations financial reporting practices between different and research was performed on a sample of largest countries and research into the factors that affect US, UK and German corporations. According to the financial reporting on the Internet in individual research results 91% of US corporations used the countries. Internet for investor relations and this practice is The first type of research, so called descriptive little less common for UK and German corporations research is focused on examining general where 72 or 71% of the companies has Investor characteristics of the use of Web for financial relation via the Internet. reporting in individual countries. Within the Comparative research for companies from five research results the authors provide data about the countries (USA, Canada, UK, Australia and Hong percentage of corporations that use Internet financial Kong) for the years 2001 and 2002 was carried out reporting, the types of financial reports issued by Allam and Lymer [1]. This study showed that (balance sheet, profit and loss account,...), the most of the companies (96100%) published their frequency of publishing the reports (annually, half balance sheet, profit and loss account and cash flow yearly,...) and the format of published reports (pdf, report. Furthermore, the authors provided data that Excel,...). An example of an early study related to PDF was the most frequent format for the this topic is the research conducted by Brennan & presentation of reports while formats suitable for Hourigan [5] on a sample of Irish corporations. calculations (such as Excel) were found only in 12% According to the research results only 37% of listed of the observations. Geerings et al. [9] conducted Irish companies published their financial reports on research at a sample of 50 largest companies from the Internet. , Holland and Belgium quoted on Euronext. Hedlin [11] founded out that the majority of According to the research results companies from Swedish firms listed on Stockholm stock exchange France and Holland use the Internet for investor did use financial reporting on the internet. Similar relations purposes more than Belgian companies. results have been reported by Hurtt et al. [12]. Furthermore, companies from all three countries Namely, at the sample of 100 biggest corporations presented their basic financial reports on the Net in the USA (Fortune 100) authors came to the result very frequently while some of the advantages of that 93 companies had their own Web site. Internet reporting (such as formats suitable for Furthermore, 74% of companies publishes balance calculations, mailing lists and multimedia) were less sheet on their Web pages and 70% of companies frequently used by Belgium companies. announces profit and loss account as well as cash Third type of studies dealing with Internet flow statement. financial reporting is focused on factors affecting As examples of descriptive research conducted in corporate decisions concerning their level of the world studies that were conducted by Internet financial reporting. As example for this type Gowthorpe & Amat [10] and Ettridge et al. [8] can of research, study conducted by Pirchegger and also be pointed out. In 2005 Pervan [15] conducted Wagenhofer [18] for Austrian and German quoted a research on a sample of 38 Croatian listed companies can be pointed out. Firstly, authors companies, and according to the research results evaluated the quality of website based on financial only 39.4% of the observed companies voluntary and nonfinancial criteria and then achieved grades published a set of five financial reports on their web for each company were used in regression analysis pages. Research on Internet financial reporting as the dependent variable. As independent variables practices for Romanian companies whose shares are the size of the company and the percentage of shares quoted on a stock exchange in Bukurest was traded on stock exchange were used. The research conducted by Bogdan et al. [2] and as the most results showed that for the sample of Austrian important research results authors provide the data companies Internet financial reporting quality was that 76.66% of the observed companies has their positively and significantly correlated with both independent variables while for the German sample

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positive and significant correlation was confirmed sectors and market capitalization while the other 55 between Internet site quality and size of the factors are grouped in five categories. All factors company. Bonson & Escobar [3] analyzed voluntary together constitute an Internet Reporting Index. The disclosure on the Internet using a sample of 300 EU average Index value for the companies quoted on companies. The sample was formed out of the 20 Athens Stock Exchange was 30.30 and weighted largest companies by market capitalization from average score was 49.71. Also, among other, each EU country. Based on 23 criteria authors research results have shown that market formed a transparency index (TI). Research results capitalization is positively related to IFR score. showed that TI was statistically related to country of origin, since companies from the North and Central Europe have higher TI in comparison with 3 The structure of the research companies from South Europe. Also, variables industry sector and company size were positively correlated with TI. 3.1 Sample description Marston [13] analyzed the Internet reporting Comparative analysis of Internet financial reporting practice of the 100 largest Japanese companies. was conducted on the selected capital markets from Using the KruskalWallis test it was concluded that Central and Eastern Europe countries. Sample size was significantly related with the Japanese Web includes capital markets from the following site status, while this relation was less clear for the countries: Croatia, Slovenia, Bosnia and level of disclosure. The analysis of internet financial Herzegovina and Serbia. The sample includes reporting for German listed companies was countries that are characterized by a similar conducted by Marston & Polei [14]. For German development path of transition countries and the sample the level of the Internet financial reporting challenges of establishing an efficient capital was positively related with foreign listing status in market. It is important to point out that the markets 2000 and 2003. The free float variable was included in analysis are characterized by weak significant only in 2000. Bonson & Escobar [4] market activity and there is no active trading for a analyzed the differences in Internet financial large number of listed shares. Therefore, it was reporting for 13 countries from Eastern Europe useful to make a selection and include in this based on 44 criteria which formed the Distance research only those companies whose shares were Index (DI). Research was conducted on a sample of actively traded in 2012. For the selection a simple 1.543 companies and according to the research criterion was used – share turnover in 2012. results DI was positively correlated with the Big By subjective decision of the research authors Four Auditor, financial sector and company size. only those companies whose share in total turnover Pervan [16] analyzed voluntary reporting on the of shares in 2012 was at least 0.5% were included in and Slovenia and research results the sample. Different criteria for the formation of showed that the Slovenian companies are more the sample might have resulted in different sample transparent in comparison with Croatian companies. and different conclusions so the way of forming the Namely, the measure of Internet financial reporting sample should be taken into account when (IFR score) was 6.85 for Croatian sample and 17.63 interpreting research results. However, it should be for the Slovenian sample. In 2010 Pervan & Sabljić noted that this way of forming the sample resulted [17] analyzed trends and influential factors of in the coverage of the largest and most liquid voluntary Internet reporting for the listed companies companies on the observed capital markets. in Croatia. Research results have shown that extent Therefore, the sample includes listed companies of voluntary disclosed information has significantly that realized the above mentioned criteria for the increased in comparison with early research. year 2012 and in order to increase the sample Furthermore, market capitalization and official homogeneity and comparability of results among listing were identified as factors that positively countries financial institutions were eliminated from influence the level of voluntary Internet disclosure. the sample since these institutions are characterized Research on Internet financial reporting on the by certain specificities related to preparation and Athens Stock exchange was performed by Despina presentation of financial statements. & Demetrios [7]. Research was conducted on a By complying research criteria a sample for each sample of 302 companies listed on the Athens Stock of the selected capital markets was formed and Exchange and the authors considered 57 factors finally it consists of 91 companies. Number of which reflect the level of Internet financial companies for each of the observed markets is reporting. First two factors are related to industry shown in table 1.

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Table 1 Sample overview for the selected capital remuneration markets 21. Statement of managements responsibility for Number of the financial reports Capital market observations 22. Code of corporate governance Zagreb Stock Exchange 26 D) User support Ljubljana Stock Exchange 12 23. Special part of the Web for investors Belgrade Stock Exchange 16 24. Internal Web page search Sarajevo Stock Exchange 19 25. Email address Banja Luka Stock Exchange 18 26. Mailing lists Total number of 91 27. Ability to download reports observations 28. Format of reports suitable for calculations 29. Web page in English 30. English version of financial reports 3.2 Research hypothesis The level of voluntary Internet Financial Reporting In forming the overall Internet financial reporting can be measured using Internet Financial Reporting score each group of criteria and each individual score (IFR score) developed by Pervan [16]. In his criterion has an equal weighting. It is important to research Pervan developed IFR score which consists notice that there are different approaches in the out of 30 elements. Criteria for the formation of the literature (for example [14], [18]) but in order to overall IFR score are divided into four groups: avoid subjectivity in criteria authors have chosen information from the financial reports (11 equal weights for all the criteria. Finally, total elements), other useful information (5 elements), Internet financial reporting score is calculated by transparency of management and supervisory board simple summing grades for each criterion. Grade for (6 elements) and user support (8 elements). Detailed each criterion can be 1 (criterion is met) or 0 content of each group of criteria is shown in table 2. (criterion not met). The maximum possible IFR score can be 30. Table 2 Criteria for the formation of Internet The aim of this research is to determine IFR financial reporting score score or the achieved level of Internet financial A) Information from the financial reports reporting for each of the observed markets and then 1. Balance sheet compare the differences in the levels of Internet 2. Profit and loss account financial reporting for all the markets included in 3. Cash flow statement research. More precisely, in order to compare the 4. Changes in shareholder equity statement levels of Internet financial reporting it is necessary 5. Audit report to test out the statistical significance of the 6. Notes to the financial statements differences between the average values of IFR 7. Accounting policies scores for all the markets included in this study. 8. Segment reports Differences in the level of Internet financial 9. Quarterly reports reporting are expected because of the differences in 10. Halfyearly reports corporate governance practices and reporting, in the role of institutional investors and different level of 11. Reports from previous years capital markets development and finally because of B) Other useful information the macroeconomic differences among observed 12. Last share market price countries. Based on the above mentioned first 13. Press and public releases working hypothesis is formed as follows: 14. Management analysis of operations 15. Analysis of main business risks H1: There are differences in the level of Internet 16. Supervisory board report financial reporting among observed countries from C) Transparency of management and the Central and Eastern Europe. supervisory board 17. Data about the management Namely, it is possible to hypothesis that a higher 18. Information about management level of GDP per capita and a stronger role of remuneration institutional investors create greater demand for 19. Supervisory board data shares and indirectly, a greater demand for financial 20. Information concerning supervisory board and other kind of information on company's

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operations. At the same time, a higher level of The first results of the analysis of Internet corporate governance and an equal treatment of all financial reporting indicate that there are obvious shareholders should result in better transparency and differences in the IFR scores among observed a higher level of financial reporting. Taking into countries. In order to test the statistical significance account all the above mentioned it can be assumed of the noticed differences KruskalWallis test was that companies listed on Slovenian capital market applied. Here it is important to point out that the should have the highest level of Internet financial normality of the variable IFR score was tested using reporting, while the lowest level, because of the KomolgorovSmirnov test, which comes with the general business and macroeconomic statistical program SPSS. According to this test, the characteristics, can be expected at the capital IFR variable did not follow a normal distribution markets in Bosnia and Herzegovina, i.e., on Banja which is why the testing of the differences of the Luka and Sarajevo Stock Exchanges. arithmetical means of IFR scores was conducted using KruskalWallis test. The results of KruskalWallis test show that 4 Research results there are significant differences between Research on the Internet financial reporting arithmetical means of IFR scores among observed practices was conducted at the end of 2012 at a countries since empirical significance equals 0.0001 sample of 91 companies whose shares were listed on and hypothesis that there are significant differences one of the following capital markets: Zagreb Stock between arithmetical means of IFR scores among Exchange, Ljubljana Stock Exchange, Belgrade different countries is accepted. Results of Kruskal Stock Exchange, Sarajevo Stock Exchange and Wallis test are presented in table 4. Banja Luka Stock Exchange. IFR scores and characteristics of the level of Internet financial Table 4 Testing the differences between the reporting are shown in table 3. arithmetical means of IFR score using Kruskal Wallis test a, b Table 3 Basic characteristics of IFR score Test statistics Number of IFR score Capital market IFR score observations ChiSquare 55.719 Zagreb Stock Df 4.00 26 21.27 Exchange Asymp. Sig. 0.0001 Ljubljana Stock a. KruskalWallis test 12 23.25 Exchange b. Grouping variable Belgrade Stock 16 9.75 Exchange Sarajevo Stock 19 6.74 5 Conclusion Exchange The results of conducted research indicate that Banja Luka 18 3.61 there are significant differences in the level of Stock Exchange Internet financial reporting between five observed countries. The highest level of Internet financial The research results indicate that the level of reporting is noted for Slovenian companies and IFR Internet financial reporting is the highest in Slovenia score amounts 23.25 for the Slovenian sample. A since IFR score for the sample of companies whose little lower level of transparency is evidenced for shares are listed on Ljubljana stock exchange equals Croatian sample since measured IFR score equals 23.25. Slovenia is followed by Croatia, which has 21.27. slightly lower IFR grade and it equals 21.27. In Quite lower level of Internet financial reporting three other observed countries IFR score is rather was measured for Serbian sample and IFR score low and it amounts 9.75 for Serbia, while according amounts 9.75. Companies listed on Sarajevo and to expectations the lowest IFR score was measured Banja Luka Stock Exchanges have IFR scores at at capital markets in Bosnia and Herzegovina. So level of 6.74 or 3.61 meaning that transparency of the IFR score for the sample of companies listed on companies listed on these two stock exchanges is Sarajevo Stock Exchange equals 6.74, and for the quite lower in comparison to companies listed on companies listed on Banja Luka Stock Exchange the other stock exchanges in the region. IFR score equals only 3.61. The reasons for the observed differences and lagging behind other Stock Exchanges can be found

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