Minimum corporate website disclosure levels and information asymmetry: Evidence from Johannesburg Stock Exchange small-cap companies

Abstract

The use of corporate websites as communication medium may contribute to good governance and specifically transparency as one of the basic principles of governance, mitigating the effect of the agency problem. The primary objective of this study was to ascertain the link between voluntary corporate website disclosure and information asymmetry for the smallest JSE-listed companies. Rule 26, as issued by the LSE for its AIM-listed companies, was used as proxy for disclosure while the bid-ask spread stood as a proxy for information asymmetry. The results of a content analysis showed that the majority of smaller listed JSE companies are not on par with their UK counterparts. Using agency theory, it was argued that if information voluntarily disclosed by companies on their corporate websites is useful to investors, it should theoretically decrease information asymmetry. Although empirical evidence of a negative relationship between disclosure and the bid-ask spread was found, the relationship changed to not significant once controlled for market capitalisation. Besides the bid-ask spread, the association between disclosure and both share price volatility and share turnover (both as alternative proxies for information asymmetry) was tested, and both were found non-significantly related to disclosure. The results reported do suggest that the Rule 26 minimum corporate website disclosures may not be sufficient in persuading investors to change their trading behaviour. Although there has been no research on the voluntary compliance and effect of Rule 26 website disclosure on information asymmetry using JSE small-cap data, a major limitation of this study is that generalisation of results is limited to small listed companies.

Keywords:

• Rule 26
• corporate website disclosure
• voluntary disclosure
• information asymmetry
• bid-ask spread

Notes

1 The Technology Acceptance Model is an information systems theory developed by Davis in the 1980s to predict and explain the use of technology. The model suggests that when users are presented with a new technology, two important factors will influence their decision about the use thereof, namely: perceived usefulness and perceived ease-of-use (Davis, 1989).

2 In the context of this study, ‘published’ refers to being available on the corporate website of a company.

3 The 18-month listing criterion was set to ensure the availability of financial statement information and the 40 days trading requirement to improve the reliability of the bid-ask spread calculation.

4 Although it was initially considered to include only companies listed on the AltX, the set criteria to satisfy the study information needs would have resulted in a population of only 21 AltX listed companies. Using a guideline of 5–10 companies per variable in a multiple regression analysis, a study size of 83 companies should be sufficient.

5 Two attributes required by Rule 26 were only applicable to dual-listed companies and were therefore not included for comparison and robustness purposes (seven of the 83 companies were dual listed).

6 Admitting that some studies (e.g. Abdelsalam, Bryant, & Street, 2007) used a 5% threshold to define block shareholding, it should be noted that as only one company in the defined population didn’t have a single shareholding exceeding 5%, and therefore the 5% threshold was deemed impractical.

7 Although 10 companies were initially measured (as a pilot study) by both authors to finalise the measurement conventions (as described in Appendix A), all companies in the defined population were subsequently measured by only one of the authors.

8 The strong correlation between share price and market capitalisation is however not unexpected, given the calculation of market capitalisation, and may be offered as a possible explanation for share price being insignificant once controlled for market capitalisation.

9 In the share price volatility model, the disclosure coefficient of −0.014 implies that a 1-point increase in the disclosure score is associated with a 1.40% decrease in share price volatility (although not statistically significant with p = 0.17). In the share turnover model, however, the disclosure coefficient was found as 0.000, implying the absence of any economic or statistical significance (p = 0.99).