Web Information Disclosure and Reliance on Financial Service Industry

Shuching Chou Dept. of Graduate Institute of Finance, National Yunlin Univ. of Science and Technology

Touliu, Taiwan, chousc@yuntech.edu.tw Fengyi Lin

Dept. of Business Management, National Taipei University of Technology Taipei, Taiwan, linfengyi.tw@gmail.com

Yen-hui Kuo National Yunlin University of Science and Technology, Touliu,

Ministry of Finance, R. O. C., Taichung Customs Office, gaulove888@webmail.customs.gov.tw

Abstract—This study investigates how Web users build reliance on information disclosed by the financial service industry. Unlike most prior studies that focused on business’ incentives to dismiss information, this study collects Web users’ perceptions, using survey questionnaires on six information categories. The results show that risk-management-related information is positively related to Web user’s reliance. These findings imply that the financial service industry can rebuild public reliance through more transparent reporting on information regarding risk, especially after the turmoil resulting from the recent financial crisis.

Keywords-corporate governanc; information disclosure; risk management; reporting transparency

I. INTRODUCTION

Ever since the Enron case, corporate governance enforcement aimed at avoiding fraud and deception of listed companies has been an important issue. Since a bank’s operation is directly linked to the wealth of its depositors, investors, and other stakeholders, improving corporate governance in banking has been considered essential to maintain the safety and development of the capital market. According to Basel II, a bank’s information disclosure can reinforce external monitoring on its operation and this monitoring function is called as “Market Discipline”.

Most prior studies regarding banking information disclosure were derived from the point of view of the banks—the information provider. The information user’s view was seldom discussed. In Taiwan, individual investors are more than institution investors. However, the individual investors have less access to direct information from banking than institutional investors, as the latter can access companies directly through conferencing call or field visits. Thus, voluntary Web information provides a good communication medium between banks and the public.

This study examines the relation between investors’ reliance and disclosed information on the website of Taiwan’s financial service industry. To gain a better understanding of Web users’ perceptions, six information categories were included: regulatory items, non-regulatory financial information, business activities, corporate

governance, risk management, and Web management. The data was collected by survey questionnaires and analyzed by factor analysis and regression analysis.

The results show that the extent of risk management information is positively related to Web users’ reliance on Web information. The other five disclosure items are not significantly related to investors’ reliance. The findings imply that voluntary risk information disclosed on the Web can help depositors and investors to gather a company’s risk-related information, and thus build up their reliance in financial services companies. In view of the worldwide turmoil resulting from the recent financial crisis, the integrity of financial service industries has been questioned by public. The results of this study imply that a more transparent disclosure policy in risk-related activities by the financial service industry may rebuild the public’s reliance on, and enhance their relationship with the public.

II. LITERATURE REVIEW

A. Information function, Web disclosure and RelianceThe information integration theory [1] points out that

information value is derived from information integration that includes information collection, perception establishment, expectation formation, and behavior (as shown in Fig. 1). For the capital market, reporting transparency has been claimed to reduce information asymmetry between investors and companies [2]. Thus, companies with a higher degree of reporting transparency can benefit from the lower cost of capital [3].

One explanation for the advantage of transparent reporting is that it could enhance the public’s reliance on companies with aggressive reporting policies [4]. As mentioned by Garbarino and Johnson (1999) [5], reliance is the confidence in others or predictable perception. Zucker (1986) [6], Luhmann (1979) [7], and Zaheer, McEvily and Porrone [8] (1998) point out that trust is based on past interaction experience or historical reputation. Since a manager’s ability is considered private information, not available to the public, a higher extent of information disclosure could help curtail information asymmetry and build reliance between companies and public investors.

2009 International Conference on Information and Financial Engineering

978-0-7695-3606-4/09 $25.00 © 2009 IEEE

DOI 10.1109/ICIFE.2009.10

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Figure 1. Information Integration Value

Due to recent improvements in information technology, the Internet has emerged as a popular communication medium. To date, a number of studies have investigated firm characteristics relating to Web disclosure and find that firm size [9], firm performance [10] [11], firm growth [12] [13], and auditor type [14] may relate to Web disclosure. However, most of the studies have focused on the company side or the information provider, but the information recipient side has been seldom discussed.

B. Bank’s information disclosure Information disclosure by banks has long been criticized

for being inadequate [15]). Ross (1989) [16] pointed out that information asymmetry is prevalent in banking. This information asymmetry has caused difficulty in monitoring by outside parties and thus, has aggravated agency problems in banking [17]. To reinforce information disclosure by the banks, the Basel Committee [18] requires banking to enhance reporting transparency to meet investors’ and depositors’ needs in the public market. The purpose of this requirement is to establish a safe and sound banking environment.

In Taiwan, banking traditionally follows Taiwan GAAP NO. 28 “Banking’s Financial Reporting”and “Annual Reporting Requirement for Public Banks” to prepare financial reports. Beginning with the year 2000, in which Financial Holding Corporations were established due to deregulation, the supervision and obtaining of information from financial holding corporations has been gradually emphasized. In the years 2004, 2005, 2006, and 2007, the Securities and Future Institute, and the Financial Supervisory Commission have revised the “Annual Reporting Requirement for Public Banks” and issued the “Annual Reporting Requirement for Financial Holding Corporations”. The banks and financial holding corporations are not only required to have higher standard disclosure, but also need to disclose information regarding boards, supervisors, and high-level managers. All of these requirements are aimed to reinforce reporting transparency and improve the soundness of local capital markets.

III. METHODLOGY

A. Survey Analysis The study utilized survey questionnaires to collect Web

users’ perceptions on Web information, and applied regression analysis to investigate the relation between Web information content and investors’ reliance on the underlying information. Two rounds of questionnaires were mailed between November 2007 and April 2008. The first round was conducted to ascertain the adequacy of the

design of the survey questions. The initial questionnaire includes 40 questions and was sent to 100 individuals. The survey questions included six dimensions of information:

(1) Regulatory items: the required disclosure items on annual reports and other information periodically required by government agencies.

(2) Financial reporting: monthly sales and related footnotes.

(3) Business activities: company’s policies, important business activities, and news.

(4) Corporate governance: board structure, shareholder’s meetings, dividend information.

(5) Risk management: risk management policy, risk department structure, risk information.

(6) Web management: recent Web update date, Web user statistics, multiple languages on the Web.

After modifying the survey questions based on the results of the first round of questionnaires, 240 second round questionnaires were sent. The collected data were analyzed using Statistical Package for Social Science (SPSS). Factor analysis was utilized to determine the underlying structure of the survey questions.

B. Regression Analysis Multiple regression analysis was employed to

investigate the relation between the six dimensions of information content and the Web user’s reliance on Web information. Model 1 investigates how the six information categories affect reliance on a company’s Web information,

ii6i5i4i3

i2i10i

�WebRiskGovernanceBusinessFinancialRegulatoryReliance

��������

�������

(1)

, where Regulatory denotes required financial filings or other required disclosure by the government; Financial denotes financial reporting items; Business denotes business activities; Governance denotes corporate governance; Risk denotes risk management activities; and Web denotes Web management. The detail description of each category is listed in section 3.1.

Since enforcement of a company’s Web management has received attention in recent years, the relation of Supervision on Web disclosure and user’s reliance was also observed. Model 2 is

ii7i6

i5i4i3

i2i10i

nSupervisioWebRiskGovernance BusinessFinancialRegulatoryReliance

���������

���������

(2)

, where Supervision denotes official supervision on Web information.

Finally, we further added user’s Education and Occupation as control variables in our analysis:

ii9

i8i7i6

i5i4i3

i2i10i

OccupationEducationnSupervisioWeb

RiskGovernanceBusinessFinancialregulatoryReliance

�����

������

�����

������

. (3)

Information Conception Expectation Behavior

Information value

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IV. RESULTS AND ANALYSIS

A. Factor Analysis for Survey Results The responses of the questionnaires are summarized

in Figure 2. For the initial questionnaire, the response rate was 88 percent. Using principal component analysis with orthogonal varimax rotation, 40 survey questions were analyzed in order to identify the factors in the six dimensions of Web information disclosure. The Cronbach alphas for the six dimensions are 0.775 to 0.850, indicating consistency of the survey content. These factors accounted for 74.794% of the variance. The number of questions on the second round survey was reduced from 40 to 24, according to the results of the initial responses. The returned questionnaires from the second round survey numbered 220 (92%), containing 183 (83%) valid responses and 37 (17%) invalid responses.

The results of second round returned questionnaires were showed in Table 1. The Risk management item had the highest mean rating 3.669, indicating users’ concerns on risk-related information. The Business activities category had a lower mean rating with the highest standard deviation 1.008, indicating users’ inattention to the activities reported on the Web (Table 1). Factor analysis on the 24 questions identified six factors as shown in Table 2. These factors accounted for 73.27% accumulated variance. Each category had a Cronbach alpha of 0.6 to 0.8, indicating consistency of the survey questions (Table 2).

Figure 2. Mailed and returned survey questionnaires

Table 1. Rating score for web disclosure

*Rating scale:1=very unimportant, 2=unimportant, 3=uncertain, 4=important, 5=very important.

Table 2 Component loadings of web information content

B. Correlation Analysis Table 3 measures the strength of the relation between

each information disclosure item and the Web user’s reliance on the information. The significant positive signs of Regulatory items, Financial reporting, Business activities, Risk management, and Web management show that a company’s Web information has direct relationship on a user’s reliance. However, the correlation coefficient of Corporate Governance is not significant. The results also show positive relation between the Supervision category and user’s reliance. In summary, the correlation analysis shows that the degree of needs in various information, government’s supervision, and Web user’s reliance have a positive relation.

C. Regression Analysis Results Table 4 presents the results of the regression analysis for

Model 1 to Model 3. All three models have significant F statistics. The VIF values of variables are below 10 and are not reported for brevity, demonstrating no significant collinearity between variables. The second column, where only 6 disclosure items are considered, shows that Risk information is positively related to the Web user’s reliance (coefficient = 0.243, p = 0.064).

Considerations No. of questions

Eigenvalue

% of variance

Cronbach’�

Regulatory Items 5 1.884 16.383 0.735

Financial Reporting 3 1.665 10.474 0.698

Business Activities 4 1.390 9.514 0.695

Corporate Governance 10 1.208 4.730 0.704

Risk Management 2 1.016 3.700 0.691

Web Management 2 1.001 3.002 0.735

Considerations Obs. Mean * Min. Max Std.Dev.

Reliance 183 2.874 1.00 5 0.742

Supervision 183 2.672 1.00 5 0.927

Regulatory items 183 3.567 2.00 5 0.779

Financial reporting 183 3.626 2.00 5 0.877

Business activities 183 3.563 1.83 5 1.008

Corporate governance 183 3.562 1.75 5 0.734

Risk management 183 3.669 2.00 5 0.899

Web management 183 3.429 1.00 5 0.811

First round questionnaires mailed 100

First round questionnaires returned 88 (88%)

Second round questionnaires mailed 240

Valid questionnaires 183 (83%)

Invalid questionnaires 37 (17%)

Second round questionnaires returned 220 (92%)

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Table 3 Correlation between web information and reliance

Anticipated reliance on web disclosure

Regulatory Items 0.185** (0.012)

Financial Reporting 0.153** (0.038)

Business Activities 0.189** (0.010)

Corporate Governance 0.122

(0.100)

Risk Management 0.211** (0.004)

Web Management 0.182** (0.014)

Supervision on web disclosure

0.267*** (0.000)

*, **, *** indicate significance at 10 percent, 5 percent, and 1 percent respectively.

In the third column, where government supervision is considered, the results show that the Governance disclosure item has a significant negative coefficient (coefficient = –0.244, p = 0.098), and that Risk has a significant positive coefficient (coefficient = 0.256, p = 0.043). In the fourth column, Web user’s characteristics, including the Education and Occupation variables, are added. The results show that both the Risk and Supervision categories have significant positive coefficients (coefficient = 0.274, p = 0.030 for Risk; coefficient = 0.203, p = 0.001 for Supervision). The Governance category still has a negative relation with the Web user’s reliance (coefficient = –0.250, p = 0.089).

In general, the regression results of the three models show that risk information is positively related to investors’ reliance. The findings indicate that information regarding risk management of the financial service industry will affect Web user’s reliance on Web information.

V. CONCLUSION AND IMPLICATION

This study investigates how Web users build reliance on information disclosed by the financial service industry using six categories of Web information. The results show that risk management related information is positively related to Web users’ reliance. The other five information types, including mandatory information, non-mandatory financial information, business activities, corporate governance, and Web management are not significantly related to a Web users’ reliance. Two reasons are considered to explain this phenomenon. First, most Web users are either depositors or investors, or playing dual roles. This means that their wealth is directly linked to the performance of the industry. Since bank’s risk management has become an essential concern in recent years, most Web users are much more concerned about risk issues than the

other information categories. Second, some information, like Regulatory items, Financial reporting, Business activities, and Corporate governance are available in companies’ annual reports, government-assigned websites, or other media. In contrast, the public currently does not have much access to the details of risk information of the financial service industry. Since risk management-related information is a comparatively new issue and still vague to Web users, the voluntary risk information disclosed on the Web can help depositors and investors gather a company’s risk information, and thus establish their reliance on corporations which disclose more clear risk information.

The interpretation of our results indicates that risk information is an important medium to establish reliance between Web users and the financial service industry. In particular, the recent worldwide financial crisis has caused public concern on the integrity of financial services. A more transparent disclosure of risk management policies and risk management-related activities may rebuild the public’s reliance on, and enhance their relationship with the financial service industry.

Table 4 Information disclosure content and reliance

Model 1 Model 2 Model 3

Constant 2.047***

0.0001.467***

0.0002.078***

0.000

Regulatory 0.047 0.727

0.124 0.344

0.1320.315

Financial-0.094 0.526

-0.111 0.435

-0.136 0.342

Business 0.139 0.340

0.104 0.460

0.0990.482

Governance -0.228 0.137

-0.244* 0.098

-0.250* 0.089

Risk management0.243* 0.064

0.256 ** 0.043

0.274** 0.030

Web management0.127

(0.119) 0.099

(0.207) 0.108

(0.167)

Supervision -0.049 0.323

0.203** 0.001

Education -0.180* 0.061

Occupation 0.0070.868

Obervations 183 183 183

Durbin-Watson 1.768 1.845 1.783

Adjusted Rsquare 0.274 0.387 0.408

F statistics 2.832** (0.031)

4.390*** (0.000)

3.843*** (0.000)

Note: The dependent variable is the rating of reliance on web information*, **, *** indicate significance at 10 percent, 5 percent, and 1 percent respectively.

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