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Digital reporting in Eastern Europe: An empirical study

Enrique Bonsn , Toms Escobar

University of Huelva, Plaza of the Merced, s/n., 21002 Huelva, Spain

Received 14 May 2004; received in revised form 14 September 2006; accepted 28 September 2006

Abstract

In the recent years, the European Union (EU) has developed a series of norms with the objective of

increasing the transparency of both companies and the financial markets, as well, through the diffusion of

company information via the Internet. The incorporation of countries of Eastern Europe into the EU raises

the need to determine the impact of their incorporation on the transparency of the markets. In effect,

incorporation into the EU implies the need for companies from those countries to adopt the practices of

transparency promoted by the EU.

The objective of this article is to determine the distance or differences existing between the information

currently supplied by the companies of Eastern Europe that have recently joined the EU or are now in the

process of joining and the information required according to the initiatives of the EU. Furthermore, it

attempts empirically to identify the variables that could have some influence on the amount of information

disclosed.

To this end, data from companies of each of the following countries have been collected: Bulgaria,

Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia

and Turkey. Results show a statistically significant relationship between the extent of information

disclosure on the Internet and a) company size, b) the company's activity being in the financial sector, and

c) the fact of employing one of the world's Big Four accountancy firms for auditing the company's books.

2006 Elsevier Inc. All rights reserved.

Keywords:Digital reporting; Voluntary disclosure; Internet

1. Introduction

During recent decades, the developments taking place in the information and communication

technologies have changed the ways that companies relate to their shareholders, clients, suppliers,

International Journal of Accounting Information Systems

7 (2006) 299318

Corresponding author.

E-mail addresses: [email protected](E. Bonsn),[email protected](T. Escobar).

1467-0895/$ - see front matter 2006 Elsevier Inc. All rights reserved.

doi:10.1016/j.accinf.2006.09.001
mailto:[email protected]:[email protected]://dx.doi.org/10.1016/j.accinf.2006.09.001http://dx.doi.org/10.1016/j.accinf.2006.09.001mailto:[email protected]:[email protected]


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institutions, etc. In this respect, the accounting function has been called upon to play a key role in

the use of the new technologies in general, and of the Internet in particular, to keep the external

users informed of such information.

Greater requirements have been imposed on accounting information systems through the increasedtransparency of the financial markets, and these are motivating companies to increase voluntarily both

the quantity and quality of information provided by their corporate servers. In addition, there are other

reasons for this trend, associated with the need to offer an image of modernity, that are driving

companies to provide information via the Internet as a way of establishing their own identity in the face

of all the other economic agents in the current technological environment.

Using the Internet allows a company to provide on-linea large volume of information which users

can access on demand, in function of their particular area of interest. Some of the companies that first

created their Web pages mainly for reasons of corporate image are coming to realise the possibilities of

obtaining competitive advantages from their use, and this is reflected in the continuous growth in the

number of companies world-wide that are beginning to utilize their Web pages to distribute accountinginformation, thus appreciably improving both the quantity and quality of the information provided.

In the recent years, the EU has developed a series of norms with the object of increasing the

transparency of companies, and therefore that of the financial markets also, through the diffusion

of company information by Internet. The incorporation of countries of Eastern Europe to the EU

raises the need to determine the impact of their incorporation on the transparency of the markets.

In effect, the incorporation of those countries into the EU implies the need for their companies to

adopt the practices of transparency promoted by the EU.

This study has two main objectives. The first is to determine the distance existing between the

information currently supplied by companies of the countries of Eastern Europe that have recently

joined the EU or are now in the process of joining, and the information required by initiatives ofthe EU. To this end, we establish the current level of utilization of Internet for the voluntary

disclosure of information by the principal companies based in the countries of Eastern Europe, by

analyzing the content of their Web pages. The second is to identify empirically the factors that

explain the different attitudes of companies toward using the Internet for investor relationships.

2. Corporate disclosure by internet

The disclosure of corporate information by Internet is attracting the attention not only of the various

accounting bodies but also of researchers. In recent years the principal accountancy bodies have

published several studies analyzing the possible repercussions of this practice of corporate reporting onthe accounting profession. Some of these studies represent a first attempt towards establishing

standards to harmonize both the content and the format of such digital information. In the following

paragraphs the principal studies conducted are briefly outlined, in order of date of publication.

In 1997, the Institute of Chartered Accountants in England and Wales (ICAEW) published a

report (Spaul, 1997) analyzing the principal implications that the new technologies may have on

the distribution of accounting information, and indicating the changes that must be made to the

current system of reporting in the light of the challenges presented by the digital economy. In a

second report, theICAEW (1998)made a proposal regarding the content and format that digital

information should have, so as to meet the needs of the capital markets.

The International Accounting Standards Committee (IASC), now the International Accounting

Standards Board (IASB), has published a study (Lymer et al., 1999) that identifies the reasons that

have encouraged the distribution of corporate information via the Internet, provides evidence of

the corresponding practices of 660 companies in 22 countries (Debreceny et al., 2002), suggests

300 E. Bonsn, T. Escobar / International Journal of Accounting Information Systems 7 (2006) 299318


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the development of an integral approach to assist with the development of standards that would

ensure both the accuracy of reports and the flexibility necessary for future innovations, and at the

same the time discusses the opportunities, changes and implications of the digital distribution of

accounting information on the accounting profession and the IASC.In 1999, the Canadian Institute of Chartered Accountants (CICA) published a report in which

reviewed and analyzed the existing literature and digital reporting practices of 370 companies

quoted on the New York, NASDAQ and Toronto stock exchanges. This report addresses a variety

of interesting topics including the convergence between Financial and Management accounting,

information overload, utilization of intelligent software agents, the integrity, security and con-

fidentiality of information, multimedia communications, corporate governance, the quality of

information, the democratization of corporate reporting, the utilization of international standards,

and corporate dialogue and the impact of on-line reporting on current accounting models.

Subsequently, the Financial Accounting Standards Board (FASB) introduced two reports. The

first report (FASB, 2000) indicates the advantages offered by the Internet for disclosing ac-counting information, while drawing attention to certain aspects related to the homogeneity and

quality of digital information. The second (FASB, 2001) provides evidence of the current use of

the Internet for disclosing information, while giving some examples that companies could utilize

to improve the quality of the information provided on their corporate servers.

The International Federation of Accountants (IFAC) published Financial Reporting on the

Internet (2002) which presents, among other contributions, a series of considerations on the control

mechanisms that companies should implement when using the Internet to disclose information to

investors, analysts and other users. Recently, ICAEW (2004) published Digital Reporting: A

Progress Report that identifies two levels of digital reporting. Basically, Level 1 discusses

publication of company's existing reports on the Internet, so that these are disseminated morewidely. In turn, Level 2 involves standardization of the format in which the information is stored,

thereby facilitating and improving the process of analysis and exchange with other systems.

Further, the digital distribution of accounting information has also been studied intensively by

researchers in recent years. Gray and Debreceny (1997) studied the use of the Web by US

companies listed in the Fortune 50. Later,Debreceny et al. (1999)stated that approximately 80%

of the leading US corporations include financial information in their Web pages. The FASB

(2000)presented the results of the analysis made in January 1999 on the current status of the

digital distribution of financial accounting information by the 100 companies included in the

Fortune 100 index. The practices of voluntary dissemination of information via the Internet by

North American companies has also been analyzed more recently byEttredge et al. (2002a,b),who distinguish the information required by the U.S. Securities and Exchange Commission from

that which is not requested by that regulatory body.

There are many descriptive articles indicating the information that the principal companies of the

various European countries supply viathe Internet. Researchers have concentrated their attention on the

countries that comprise the EU. In June 1997, Lymer (1998)analyzed how the 50 most important

companies listed on the UK capital market utilized the Internet. Later, in July 1998, also in the United

Kingdom,Craven and Marston (1999)analyzed a sample of 206 companies obtained from the FTSE

100 index and the companies with the largest stock market capitalization in January 1998, according to

the Financial Times. In respect to Germany,Deller et al. (1998)analyzed a sample of 100 companies

obtained from the DAX index. Recently, Marston and Polei (2004) examined the use of the Internet for

the disclosure of financial and investor-related information by German companies between two points

of time (2000 and 2003) and revealed that significant improvements in the amount and the presentation

of information at corporate Web sites have occurred.

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Using the companies quoted on the Helsinki stock market, Lymer and Tallberg (1997)

analyzed the situation of Finnish companies. Hedlin (1999) studied a sample of 60 Swedish

companies compiled from theStockholm Stock Exchangeindex. Several similar studies have also

been conducted in Spain. In 1998,Gowthorpe and Amat (1999)examined 379 companies quotedon the Madrid market. Later,Larrn and Giner (2002) made a study of 144 companies on the

Spanish continuous market in October/November 2000.

Other studies have been undertaken that consider Europe as a whole. On this scale, Bonsn

et al. (2000)analyzed the digital reports of the 50 European companies that comprised the Dow

Jones Eurostoxx 50 Index. Later, Bonsn and Escobar (2002) conducted a study on a sample

comprising the 20 companies with the largest stock market capitalization in each of the member

countries of the EU.

As can be appreciated, the majority of these studies have been limited to the analysis of the

reporting practices via the Internet of companies located in the United States (US) and the

countries of the EU. On this point,Marston and Polei (2004: 307)state that in future research theymight extend the scope of their study by including comparative studies with other countries.

Although there are a few studies like those ofOyelere et al. (2003)orLont (2003)who analyze the

determinants of Internet financial reporting by New Zealand companies or that of Xiao et al.

(2004)who analyze the factors behind Chinese listed companies' voluntary adoption of Internet-

based financial reporting, more studies are needed that examine companies that are located in

other countries to enable analyses of the information divulged using the Internet, together with the

determining factors.

Although interest in this topic of research has clearly increased in recent years, no evidence

exists on the situation of companies in countries that have recently joined the EU or are now in the

process of joining. In fact, a certain degree of maturity has now been reached in research conductedto date on the use of the Internet to disclose company information to external users; but little

attention has been given by researchers to the companies located in the East European countries.

One of the basic principles of the EU is the free movement of capital between the member

countries. In order to facilitate the movement of capital in the European financial market and

increase the security of such movement, the EU has developed a series of norms to increase the

transparency of companies and, consequently, of the financial markets. The incorporation of

Eastern European countries into the EU raises the need to determine the impact of their

incorporation on the transparency of the markets.

In effect, the incorporation of those countries into the EU implies the need for their companies

to adopt the practices of transparency promoted by the EU. The need to increase the transparencyof information has been given a dramatic boost by the financial scandals that rocked the financial

markets of North America and Europe from the end of 2001. In this context, the principal

European companies have for years taken advantage of the numerous possibilities offered by the

Internet in order to improve their corporate image and to report to their shareholders and other

investors.

In consequence, the resort to new technology, and in particular to the Internet, is not a novel

practice, since the quoted companies with informative policies that are more committed to

transparency have resorted to it since the second half of the 1990's. The novelty, in this case, is

that the regulators of the principal financial markets have incorporated these practices into their

regulations and are aware of the potential profits for investors.

In the US, after successive corporate scandals that reached their zenith with the Enron case, the

SarbanesOxley law was passed in July 2002. This law particularly addressed (1) auditor

independence, (2) creation of a regulator for audit firms and audit standards, (3) regulation of



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companies' audit committees in order to improve corporate social responsibility, (4) certification

of the annual accounts, and (5) inclusion of special standards for improving financial information.

Normative development has also taken place in Europe. Diverse studies carried out in relation

to the transparency of companies were included in the Winter Report 2002, which provided theinspiration for the EU Action Plan of Company Law. In Germany the Cromme Report was

approved, and Italy and France revised their codes of practice in 2002. The Higgs and Smith Report

of 2003 proposed modifications for the British Code, too. In 2004 the OECD's Principles of

Corporate Governance were approved. One of the countries that has taken this European initiative

and developed it in a more detailed form is Spain, where after the production of various reports, a

series of standards were approved that specify the information that Spanish companies should

include in their Web pages, as well as make it obligatory to simultaneously include in the Web

page, all the information provided to the National Commission for the Securities Market (CNMV).

The objective of this article is to determine the distance or differences existing between the

information currently supplied by the companies of Eastern Europe that have recently joined theEU or are now in the process of joining, and the information required according to the initiatives

of the EU towards increasing the transparency of companies, and consequently of the financial

markets, by the diffusion of company information via the Internet. Furthermore, it attempts

empirically to identify the variables that could influence the amount of information disclosed.

To this end, we have studied the use of the Internet for the voluntary disclosure of information

made by Eastern European companies, by analyzing the content of their websites. Specifically, we

have concentrated our study on thirteen countries: Bulgaria, Cyprus, Czech Republic, Estonia,

Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia and Turkey. An

additional objective was to identify empirically the factors that explain the different attitudes of

companies toward using the Internet for purposes of investor relationships.

3. Hypotheses and theoretical background

3.1. Theories and hypotheses

Corporate use of the Internet has evolved rapidly during recent years. Three distinct strategies

can be identified regarding the use of this medium of communication. At first, the objective was

the colonization of the new medium by their presence on the Web. The need to present a modern

corporate image drove many companies to take an early position, but they developed corporate

sites that offered hardly any type of financial information. But once their corporate pages wereavailable, managers began to provide their annual accounts to enable access to basic financial

information. Currently, many companies are complementing the financial information provided

via the Internet with the diffusion of voluntary information.

The voluntary disclosure of information by companies is not a recent practice. Companies

have traditionally supplied information voluntarily, either through the printed Annual Report

(Lang and Lundholm, 1993) or at general meetings of shareholders (Frankel et al., 1999), with the

object of influencing the behavior of investors, consequently achieving a reduction of the

asymmetry of information existing between the managers and investors (Healy and Palepu, 1995,

2001).

One of the most frequent reasons why companies appear disposed voluntarily to offer

accounting information by Internet is their interest in showing the more favorable aspects of the

company to the market, indicating, for example, that its value has increased or that its costs of

capital have been reduced (Botosan, 1997; Frankel et al., 1999; Sengupta, 1998). When investors



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have knowledge of information disclosed voluntarily by the company, combined with the

likelihood that they perceive the company to be more secure as a consequence of its greater

transparency, the company's costs of capital may decrease (Choi, 1974; Fishman and Hagerty,

1989; Healy and Palepu, 1993; Verrecchia, 1983) and stock market value may increase (Yeo andZiebart, 1995).

To obtain these beneficial effects, companies usually choose the most appropriate moment to

disclose their information in order to have the desired effect and impact ( Abbody and Kasznik,

2000; Frankel et al., 1995; Kasznik, 1999); in most cases the effect sought is the improvement of

the apparent results of the company (Dye, 1990). There are studies showing that the share prices

react more sharply when the information provided voluntarily by the company is negative rather

than positive (Skinner, 1994), which is understandable considering the generally conservative

nature of the majority of investors. Knowing this relationship, a company will decide the best time

to release both good and bad news.

Among the factors that are traditionally considered by the company in deciding whether itshould provide more information than that legally required is the calculated cost-benefit ratio of

the information (Kelly, 1983). This ratio is subjected to increasingly rapid modification with the

arrival of new communication and information technologies. In respect to the potential benefits,

the application of these new technologies to the corporate reporting systems allows companies to

have access to many more potential users, to personalize the information provided taking into

account different profiles, to facilitate its understanding for those users who may not be trained to

interpret accounting information, to increase its quantity and quality (comparability, relevance,

completeness, clarity, etc.), and to incorporate in their organizational structures elements of

modernity, so that the company can legitimately claim to be in the forefront of current technology

applications. In this context, the systems of digital reporting give companies a real opportunity tochange and modernize outdated and inefficient financial accounting methods. Furthermore, the

high costs of producing and distributing information paper formatare rapidly being reduced by

substituting the publication of information in digital format on their Web pages.

In addition to these economic-based theories, the use of interpretative approaches for

analyzing the reasons why companies adopt certain practices of transparency could help explain

the reporting practices of companies, especially in the more advanced stages of reporting by

Internet (Xiao et al., 2004: 198). From the institutional sociological perspective, attention shifts to

the institutional environment, which is seen as a source of cognitive and normative systems. Thus,

organizations exist immersed in a specific historic and cultural context ( Scott and Meyer, 1985)

and thus tend to reflect models or forms originating from the environment, by means of a processof institutionalization.

This implies that those organizations that have incorporated in their structure the key cultural

elements of their environment acquire more legitimacy than the rest (DiMaggio and Powell, 1983;

Meyer and Rowan, 1977; Zucker, 1977). The organization seeks a form of rationality that allows

it to acquire legitimacy within the social context that can be thought of as its host. It achieves

this by making a commitment to rationality, through the use of a language represented by its

accounts, which provide some techniques for controlling and organizing its activities, and offers a

vocabulary by means of which its organizational objectives, procedures and policies can be

established (Meyer, 1986; Miller, 1994).

Companies located in the Eastern European countries find themselves in a rather special

situation, because the entry of these countries into the EU means that they have to adapt to a new

cultural environment, and incorporate its symbols, rules, institutionalized beliefs and normative

systems. One of these is the need to adopt transparent reporting practices in consonance with the



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stipulations laid down in the European Directive. However, although many companies are

increasingly making more effective use of the Internet for the voluntary release of information, it

is also possible to find great differences between companies in respect of the information content

of their Web pages. The purpose of this study is to analyze empirically the information providedby the main companies of Eastern Europe via the Internet, in order to determine to what extent

they are adopting the same reporting practices as other companies of the EU and to identify the

reasons for the variation in the information that companies include in their systems of digital

corporate reporting. To do this, we employ the set of theories discussed here, and have postulated

four positively-directed hypotheses.

H1. There is an association between activity sector and the extent of information disclosure on

the Internet.

The relationship existing between the sector in which the company operates and the voluntaryprovision of information by traditional mechanisms has been analyzed previously; and in some

cases, the existence of a certain dependence has been found (for example,Amernic and Maiocco,

1981; Bazley et al., 1985; Wagenhofer, 1990). In respect to Internet usage,Ettredge et al. (2001:

153)demonstrated that the presence of a company on the Internet, in other words, the fact that the

company has a corporate server, was related directly with its activity sector.

In accordance with institutional theory, this hypothesis is based on the view that different

sectors could have particular information practices (e.g. due to the need to present a particular

corporate image) and these practices could have a decisive influence on the information that

companies in that sector provide voluntarily. The need that companies have to acquire legitimacy

from their environment drives them to adopt similar practices of communicating information byInternet to those existing in their activity sector.

From a more economic perspective, by means of signaling theory (Oyelere et al., 2003),

similar Internet reporting practices of companies belonging to the same economic grouping could

also be explained as a rational response; a company that did not provide similar information might

not be considered competitive or might be hiding unfavorable information. Firms from a

particular sector seem to adopt similar disclosure practices and, if a firm does not follow these

practices, it could be interpreted by market as a signal ofbad news(Giner, 1997). On the other

hand, the theory of political costs suggests that the industrial affiliation could affect the political

vulnerability of companies (Craven and Marston, 1999). Companies operating in sectors that are

more vulnerable politically may utilize voluntary disclosure to minimize the political costs, suchas regulation, dissolution of the company/sector, etc.

With the object of identifying the activity sector to which the company belongs, the FTSE

Global Classification System has been employed. Thus, ten dichotomous variables have been

created to represent the different economic groupings covered by the FTSE Global Classification

Index; the variable takes the value 1 if the company belongs to that grouping and 0 if it does not.

These variables are the following:

EG0: basic resources

EG1: basic industries

EG2: general industry

EG3: cyclical consumer goods

EG4: non-cyclical consumer goods

EG5: cyclical services



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EG6: non-cyclical services

EG7: energy, gas and water

EG8: financial

EG9: information technologiesH2. There is an association between the region of origin of the company and the extent of

information disclosure on the Internet.

The existence of differences in culture between countries has a direct influence on the amount

of information disclosed by companies (Baydoun and Willett, 1995; Fecher and Kilgore, 1994).

In this context,Hofstede (1991, 2001)analyzes the relationship between culture and accounting

and enunciates four dimensions or factors associated with national culture: distance from centre of

power, avoidance of uncertainty, individualism, and masculine predominance.

The differences in the information needs of investors in function of their nationality, the

reporting practices specific to certain countries (Saudagaran, 2001), etc., could all be factors to

take into account as possible conditions of the voluntary disclosure of information. In this respect,

earlier studies (for example, Craven and Otsmani, 1999; Gray, 1988; Gray et al., 1995) have

already considered this explanatory variable for the information provided voluntarily, and in some

instances, a positive association has been found.

However, for the case of Eastern European companies, others factors exist that could influence

any relationship between the region of origin of the company and the extent of information

disclosure on the Internet. The integration of these companies in a new economic environment

implies that the particular reporting practices of these countries take second place to the virtual

obligation of adopting the reporting practices established in the EU. In this respect, EasternEuropean companies find themselves in a rather special situation, because the entry of these

countries into the EU means that they have to adapt to a new cultural environment, and

incorporate its symbols, rules, institutionalized beliefs and normative systems.

To identify the country to which the company belongs, thirteen dichotomous variable have

been created to represent the various countries studied (Bulgaria, Cyprus, Czech Republic,

Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia and Turkey).

The variables take the value 1 if the company belongs to that country and 0 if it does not.

H3. There is a positive association between the firm size and the extent of information disclosure

on the Internet.

The association between company size and the extent of financial disclosure has been widely

studied. The size of the company is a variable for which a significant association has been found

with respect to the information provided voluntarily (for example, Adams and Hossain, 1998;

Aitken et al., 1997; Chow and Wong-Boren, 1987; Craven and Marston, 1999; Craven and

Otsmani, 1999; Lang and Lundholm, 1993; Mckinnon and Dalimunthe, 1993). There are several

reasons that could be put forward for including this explanatory variable in our study. First, large

companies are under greater pressures to provide information as a consequence of more actual

and potential investors with interests in its evolution. Larger companies are more visible and,

consequently, have higher political costs (Watts and Zimmermann, 1978). Also, agency costs tend

to increase with the size of the company (Hossain et al., 1995). The disclosure of information

voluntarily can reduce the costs of monitoring. High agency costs can be borne more easily by

larger companies relative to those of smaller size (Oyelere et al., 2003, p.41). As a result, large

companies have stronger incentives to disseminate information by Internet if this is understood as



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a way of trying to reduce their costs. Managers of larger companies are more likely to be aware of

the benefits of voluntary disclosure, such as greater facility in the financing of the company

through the issue of shares, bonds and other securities (Singhvi and Desai, 1971).

Further, the cost of preparing and producing information relative to company size and thepossibility of having access to more financial markets when seeking capital, etc., are other reasons

that may drive these companies to increase their degree of transparency. In this respect, as the

costs of producing and disclosing information increase, larger companies are able to meet the

costs of disclosure, and as a result, the benefits may increase in line with company size (Oyelere

et al., 2003). Against this, larger companies tend to be more complex, therefore their relative costs

of disclosure may be higher, but they may need to disclose more information due to their

complexity, to enable current and potential investors to take more efficient investment decisions

(Marston and Polei, 2004).

In the case of Eastern European companies, this motivation is reinforced because access to the

single market of the EU greatly increases the number of potential investors and stakeholders withinterests in their evolution, therefore increasing their political costs. In addition, the greater

number of potential users of the information reduces even further the relative costs of preparing

and disseminating the information.

Given that significant differences in accounting regulation exist between the different countries

analyzed, it is not considered appropriate to use accounting magnitudes as surrogate variables for the

business size. In addition, since the companies analyzed belong to diverse sectors of activity, each with

its particular characteristics, it was not thought advisable to use volume of assets or turnover as a

measure of size, since these are conditioned, at least in part, by the characteristics of the individual

sector. Consequently, stock market capitalization of the companies was used as surrogate variable for

company size. Thus, the variable LMV was created by taking the natural logarithm natural of the stockmarket capitalization.

H4. There is an association between the auditor firm and the extent of information disclosure on

the Internet.

The relationship existing between the auditor firm and the extent of information disclosure on

the Internet can be explained by several different reasons. From an agency theory perspective, the

key purpose of auditing is to reduce the conflicts between the managers and owners (i.e. the

shareholders) of a company. Thus, companies that appoint one of the big international auditing

firms could have higher agency costs (Giner, 1997) and would therefore try to reduce these costsby submitting them to the most rigorous auditing scrutiny (on the assumption that the big firms

provide better auditing) (Chow, 1982; Francis and Wilson, 1988; Jensen and Meckling, 1976).

On the other hand, these big auditing firms usually require clients to demonstrate greater

transparency, for the purposes of preserving their auditor's reputation. In effect, the Big Four audit firms

are interested in sending the market signals on the quality of their auditing procedures, through an

increase in the information provided by their clients; if they did not do so, the market might think that

the lack of information was associated with low quality auditing (DeAngelo, 1981). On this point,

Craswell and Taylor (1992) suggest that the choice of an auditor is related to the quantity of information

that the company intends to provide to the different groups of stakeholders.

As in the previous case, these motives are reinforced with the actual or prospective entry of

countries into the EU. The larger number of potential users together with greater visibility of these

companies combines to persuade those companies with higher agency costs to choose one of the

Big Four audit firm, which in turn will demand a greater degree of transparency from the



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company. Thus, the existing literature indicates that companies audited by one of the Big Four

audit firms could divulge a greater quantity of information by means of the Internet. To identify

the audit firm used by these companies, we have created the dichotomous variable Big4, which

takes the value 1 if the company is audited by one of the Big Four and 0 if it is not.

3.2. Disclosure Index (DI) and sample

The evaluation of the relative quantities of information offered by companies can be made by

utilizing some type of index (Marston and Shrives, 1991). Thus, having defined the objective of this

study and the hypotheses that we wish to test, we shall move next to a description of the index of

transparency (henceforth, the DI) employed. In order to develop the index, the first step is to identify the

variables that will comprise the surrogate for business transparency utilized. The second step is to

define the formulation to be adopted in calculating the index employedin other words, determine the

values that the variables can take and whether these variables should be given some form of weighting.The identification of the variables that will comprise the DI requires a prior process of

consideration to determine which aspects or characteristics of the information could be sufficiently

relevant for the users of accounting information and, therefore, configure the index employed.

Given that the object of this research is related to the transparency of Eastern European companies

from the point of view of their entry in the EU, we have considered that the DI employed must be

based on the framework established by the European directives. Therefore, given that this directive

has been developed relatively comprehensively in Spain, we shall utilize as the basic nucleus of the

DI, the information that Spanish companies should include in their Web pages.

In Spain, the first reference to the transparency of companies appears in the Olivencia Report

(1998), which emphasizes the responsibility of the management to the shareholders. This reportincludes a series of recommendations for constituting a code of good governance, to be adopted

voluntarily by companies, on the hopeful assumption that the market would reward or punish

companies depending on how they complied with those standards of good behavior, under the

philosophy of ethical codes. The Law 44/2002 of Measures for the Reform of the Financial

System regulates the company's audit committee, the duty to communicate relevant facts,

transparency in the company's linked operations, and the use of privileged information (the Law

of the Securities Market was adapted to the Market Abuse Directive).

In January 2003 the Report of the Special Commission for the Promotion of Transparency and

Security in the Markets and Quoted Companies, better known as the Aldama Report, foresaw the

need for obligatory standards in three fundamental aspects: the duties to provide information andtransparency, the definition and regime of the duties of the managers, and the need to implement

rulings for the conduct of Boards of Directors and the General Meetings of shareholders. These

principles inspired the Law 26/2003, known as the Transparency Law, which incorporates, among

other matters, the consideration of para-social pacts and the obligatory status of the annual report

on corporate governance. From this same report, recommendations were implemented in more

depth in the Circular CNMV 1/2004 and Order ECO 3722/2003, which explicitly states what

information Spanish companies should include in their Web pages.

Thus, we developed a DI based on the Spanish regulation on corporate transparency as an

advanced example with further reference to the studies by AICPA (1994), Botosan (1997),

Debreceny et al. (2001),Ettredge et al. (2001)andXiao et al. (2004). Spain was one of the first

European countries to apply the demands for transparency that the EU is in the process of requiring

of all its listed companies. The work of theAICPA (1994)demonstrates the information needs of

investors and lenders. Botosan (1997) uses a disclosure index based on the information firms provide



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in their annual reports to shareholders to test the effect of disclosure level on the cost of equity capital.

Debreceny et al. (2001) conducted an empirical study to determine the informational attributes most

in demand by users of the information provided by companies through their corporate servers.

Ettredge et al. (2001) utilize a check list to evaluate the information provided by a group ofcompanies. Xiao et al. (2004)analyzes the factors behind Chinese listed companies' voluntary

adoption of Internet-based financial reporting, as well as their extent of disclosure. The 44 variables

taken into consideration are listed inTable 1.

Table 1

Variables comprising the disclosure index

V01 Balance sheet of current year

V02 Balance sheet of past years (at least, the last 2 years)

V03 Income statement of current year

V04 Income statement of past years (at least, the last 2 years)

V05 Cash flow statement of current year V06 Cash flow statement of past years (at least, the last 2 years)

V07 Notes to financial statements of current year

V08 Notes to financial statements of past years (at least, the last 2 years)

V09 Quarterly report of current year

V10 Quarterly report of past years (at least, the last 2 years)

V11 Half-year report of current year

V12 Half-year report of past years (at least, the last 2 years)

V13 Financial ratios

V14 Audit report of current year

V15 Audit report of past years (at least, the last 2 years)

V16 Segmental reporting by line of business in current year

V17 Segmental reporting by line of business in past years (at least, the last 2 years)

V18 Annual report of current year

V19 Annual report of past years (at least, the last 2 years)

V20 Number of shares

V21 Classes of shares (if there are different types)

V22 Securities markets on which it is quoted

V23 Schematic chart with the evolution of the authorised capital

V24 Shareholder structure (composition)

V25 Communication channels used to reach shareholder/investor (e-mail, telephone,)

V26 Investor calendar (dates of main events)

V27 Information on dividends

V28 Section on relevant events

V29 Press releases updated information about the presence of the company in informative media

V30 Information about managers, at least the identity and curriculum vitae of executives

V31 Environmental information

V32 Information on intellectual capital

V33 Information on corporate strategy

V34 Corporate social responsibility

V35 Direct link to investor relations (specific item to access information for investors and shareholders)

V36 Management discussion and analysis (changes in financial figures)

V37 Projected information

V38 Frequently asked questions

V39 Link to the information of the company in data bases of supervisory bodies

V40 Financial data in processable format (such as Excel)V41 Sitemap

V42 Internal search engine

V43 Mailing lists

V44 Date when site was last updated



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With reference to the second question, each of these 44 variables may take a value of 1 or 0

depending on whether or not the company provides the class of information specified by the variable

(Giner, 1997). With respect to the possible weighting of the variables, we have discounted the use of

a weighted index because, in order to obtain the correct weighting coefficients, it would be necessaryfirst to identify the relative importance of each information category for each particular group of

usersin other words, different weightings would be required as a function of the user profile

considered. Thus, on the understanding that the information provided is going to be employed by

various types of users, each for different purposes, following Giner (1997) we have opted to

construct our index by simple aggregation, in such a way that the value of the index utilized is the

result of summing the scores assigned to each category of information. This type of non-weighted

index, with dichotomous variables (taking the value 1 or 0), has been utilized previously in studies

associated with the evaluation of information provided by companies via the Internet (e.g., Ettredge

et al., 2001; Larrn and Giner, 2002; Pirchegger et al., 1999).

Consequently, the DI that we have employed has a maximum value of 44 and a minimumvalue of 0, in accordance with the following formulation:

DI Xi44

i1

Vi

This DI will enable us to determine the distance existing between the information that the

companies currently provide via the Internet and the information that will be required by the EU

through the initiatives that are being developed. The greater the value of DI, the smaller the

distance that exists, providing evidence that the companies are complying more closely with the

transparency requirement through the Internet.To achieve our objective and be able to determine first the current disclosure practices used in

the Eastern European countries and then the influencing factors, we analyzed the information

contained in the Web pages of a sample of companies located in those countries. To select the

sample, we first drew up a list of all the listed companies on the capital markets of each of the

thirteen countries. We found a total of 1543 companies, of which only 805 had a Web page. Next

we identified the Web pages that were available in the English language; this reduced the

population of the study to 630 companies.1 From these companies, employing a maximum

admissible error of 5% and a confidence level of 95%, an optimum sample size of 266 companies

was obtained. To determine the optimum size of the sample, a stratified random sampling was

employed, taking the 13 different countries. Then having calculated the optimum size of thesample to determine how many companies from each country to include in the sample, a

proportional sharing was made as a function of the number of companies that had a Web page in

English. Lastly, the specific companies from each country were randomly selected. The results

obtained are shown inTable 2.

To obtain the information required to test the hypotheses previously postulated, the Web page

of each company was visited and analyzed. To ensure the maximum degree of temporal

1 The use of the Internet by companies to disseminate information means that literally anyone may obtain that

information. Therefore, in addition to the medium employed, companies would have to divulge their information in a

language that does not limit the use of that information to those users whose language is that of the country of origin. This

fact is especially important for companies of those countries whose language is not well-known outside their borders. For

this reason, although it could be a limitation of the study, we consider that those companies that do not give the user the

possibility of obtaining the information in English are seriously limiting access to their information in the total European

context.



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comparability, the collection of data was performed over a minimum period of time, from mid

February to mid March 2005. To find the Internet address of the different companies, the

following forms were initially entered: www.company_name.com or www.company_name.

country_indicator. In those cases where the Web page was not located by this method, it was

necessary to resort to the securities markets of the corresponding country or to general search

engines to obtain the Web address of the companies.

4. Results

4.1. Descriptive statistics

Table 3 gives a summary of the results with respect to the publication by Internet of the

information classified according to the 44 variables. The column Variablespecifies the variable

analyzed; the column % of Companies gives the percentage of companies that provide that

category of information; and, lastly, in the column Order, the variables are ranked in order of

importance (from high to low) as a function of the number of companies that provide this

information.Taking into account the results obtained in the published studies reviewed in part 2, in general

terms, the results obtained for the Eastern European companies are appreciably lower than those

obtained for the US companies or for those countries that already formed part of the EU. The best

results correspond to items related to the use of the Internet as a channel to facilitate the relationship

of the company with investors (V25, V35). The Annual Report (V18) is published by 34.5% of the

companies analyzed, which is a much better result than that for the Financial Statements

individually. Unlike the picture in other countries with a longer tradition in the use of the Internet as

a medium for disseminating financial information, financial information does not form the nucleus

of digital reporting. In some cases, the balance sheet and the profit and loss account are

complemented by the cash flow statement and the audit report. Another relatively notable finding

is the use made of the Internet to communicate the general lines of company strategy (V33), and to

echo the coverage of the company appearing in the press and other news media (V29). However, it

is still fairly rare to find information provided in processable format (V40).

Table 2

Distribution of the sample by countries

Country No. of companies

Bulgaria 5Cyprus 16

Czech Republic 13

Estonia 5

Hungary 13

Latvia 6

Lithuania 14

Malta 3

Poland 74

Rumania 23

Slovakia 15

Slovenia 8

Turkey 71Total 266

http://www.company_name.com/http://www.company_name.country_indicator/http://www.company_name.country_indicator/http://www.company_name.country_indicator/http://www.company_name.country_indicator/http://www.company_name.com/


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Having identified the classes of information most frequently provided, the systems of digitalreporting used by the 266 companies analyzed have been scored, utilizing the proposed DI. The

values are shown inTables 4 and 5.

The scores attributed to the companies are concentrated in the lower values of the index with a

large number of companies obtaining a score close to zero points. The zero score is because they

Table 3

Information variables corresponding to the companies analyzed

Variable % of companies Ranking Variable % of companies Ranking

V01 BSheet Current 16.28% 21 V23 Chart Cap. 12.40% 26V02 BSheet Past 17.83% 17 V24 Share Struct. 31.78% 8

V03 Income St Current 17.44% 19 V25 Communication 86.43% 1

V04 Income St Past 18.60% 15 V26 Calendar 12.40% 27

V05 CashFlow Current 8.14% 32 V27 Dividend Info' 13.18% 25

V06 CashFlow Past 7.36% 34 V28 Events 26.74% 11

V07 Notes Current 6.20% 37 V29 Press releases 48.45% 4

V08 Notes Past 6.98% 35 V30 Managers 25.58% 12

V09 QR Current 11.63% 29 V31 Environ. Inf. 18.60% 16

V10 QR Past 10.85% 30 V32 Int. Capital 3.88% 42

V11 Half Yr Current 13.95% 23 V33 Corp. Strat. 64.73% 2

V12 Half Yr Past 13.18% 24 V34 Social Resp. 12.40% 28

V13 Ratios 5.81% 38 V35 Invest. Relations 55.81% 3V14 Audit R. Current 6.59% 36 V36 Manag. Disc. 28.68% 9

V15 Audit R. Past 5.81% 39 V37 Proj. Inf. 7.75% 33

V16 Segment R Current 0.39% 43 V38 Questions 10.47% 31

V17 Segment R. Past 0.00% 44 V39 Link Sup. 5.04% 41

V18 Annual R. Current 34.50% 6 V40 Proc. Format 5.43% 40

V19 Annual R. Past 27.91% 10 V41 Sitemap 33.33% 7

V20 N. Shares 17.44% 20 V42 Search Engine 36.82% 5

V21 C. Shares 14.73% 22 V43 Mailing Lists 21.71% 14

V22 Markets 23.26% 13 V44 Updated 17.83% 18

Table 4

Distribution of the DI scores

Score % of Companies analyzed Score % of Companies analyzed

0 4.65% 17 1.16%

1 7.36% 18 5.04%

2 8.91% 19 1.16%

3 10.08% 20 1.55%

4 9.30% 21 0.78%

5 5.43% 22 0.78%

6 3.49% 23 0.78%

7 5.43% 24 1.94%

8 3.49% 25 0.39%

9 2.71% 26 0.39%

10 5.04% 27 0.78%

11 1.94% 28 0.39%

12 5.43% 29 0.78%13 3.10% 30 0.00%

14 2.71% 31 0.00%

15 3.88% 32 0.39%

16 0.78%



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do not provide any of the classes of information sought. The mean value of the DI for the

companies analyzed is relatively low. Despite some companies obtaining good results, the mean

value of the DI is of 8.66 points.

Table 6 gives the DI descriptive statistics for the different sectors. Significant differences

between the results obtained for different sectors can be seen. For example, economic groupings

like General Industry (6.21) and Cyclical Consumer Goods (6.10) obtain relatively low values inthe DI. On the other hand, sectors such as Non-cyclical Services (10.29), Energy, gas and water

(14.00) Financial (16.17) and Information technologies (11.27) show results that are in some

cases much higher than the mean.

The geographic location of the company seems to be another variable that could influence

the information provided via the Internet. Table 7 presents the descriptive statistics for the

companies located in the different countries. Attention is drawn to the large differences found

between the mean values of the DI for the different countries. There are countries whose

companies offer relatively complete information-Estonia (16), and Lithuania (14.14), in

contrast to others in which there is almost no disclosure of information-Romania (3.86),

Slovakia (5), and Cyprus (5.5).

4.2. Statistical analysis

For the joint testing of the hypotheses put forward, a multiple regression analysis by the

stepwise method was performed. This method was employed to evaluate the global dependence

of the DI variable with respect to a set of independent variables. The relationship between the

dependent variable DI and the set of independent variables that represent the economic

groupings or sectors (EG0, EG1, EG2, EG3, EG4, EG5, EG6, EG7, EG8, EG9), the various

Table 5

Statistics of the DI

No. of companies 266

Arithmetic mean 8.66

Standard deviation 7.10Minimum value 0

Maximum value 32

Table 6

DI descriptive statistics by economic grouping

SECTOR Companies Mean DI Minimum DI Maximum DI S.D. DI

EG0: Basic resources 11 10.82 0 24 6.22

EG1: Basic industries 50 7.20 0 24 6.49

EG2: General industry 39 6.21 0 24 5.79

EG3: Cyclical consumer goods 29 6.10 0 29 6.89

EG4: Non-cyclical consumer goods 41 8.44 0 24 6.20

EG5: Cyclical services 46 7.89 1 27 6.42

EG6: Non-cyclical services 7 10.29 4 22 7.23EG7: Energy, gas and water 8 14.00 3 26 7.46

EG8: Financial 24 16.17 3 32 7.93

EG9: Information technologies 11 11.27 3 25 6.76

Total 266 8.66 0 32 7.10



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countries analyzed (Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania,

Malta, Poland, Romania, Slovakia, Slovenia and Turkey), the size measured as the natural

logarithm of the stock market capitalization (LVM), and the fact that the company is or is not

audited by one of the four large international auditing firms (Big4), is defined in the following

form:

DI a b1X1 b2X2 b3X3 N N

b25X25

where

Xi the independent variables

constant

i coefficients of partial regression of each independent variable

In the multiple regression model, the coefficient of partial regression indicates the change that

the dependent variable undergoes with a unit change in the independent variable, taking into

consideration the effects produced by the rest of the independent variables. By utilizing thestepwisemethod, the model selects one by one the independent variables that have a stronger

association with the dependent variable (DI), such that all the variables that meet the criterion

Table 7

DI descriptive statistics by country

Country Companies Mean DI Minimum DI Maximum DI S.D. DI

Bulgaria 5 6.2 2 11 4.54Cyprus 16 5.5 0 16 4.50

Czech Republic 13 10.76 3 19 4.62

Estonia 5 16 4 24 7.61

Hungary 13 12.61 2 29 9.20

Latvia 6 7 0 12 5.05

Lithuania 14 14.14 3 27 7.97

Malta 3 11.33 7 15 4.04

Poland 74 10.81 0 32 7.68

Romania 23 3.86 0 11 3.50

Slovakia 15 5 1 18 4.88

Slovenia 8 9.13 2 15 5.14

Turkey 71 6.88 0 29 6.42Total 266 8.66 0 32 7.10

Table 8

Regression model

Variable Coefficient Std. error t-statistic Prob.

(Constant) 1.462493 3.218284 4.544327 0.0000

BIG4 6.838265 1.069161 6.395919 0.0000

EG8 4.540015 1.643959 2.761635 0.0063

LOG_CAP 1.263648 0.202493 6.240442 0.0000

R-squared 0.507736 S.E. of regression 5.072773

AdjustedR-squared 0.500567 Sum squared resid. 5,301.004

F-statistic 70.82480 Prob (F-statistic) 0.000000



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established (probability of F0.05) are included in the equation. By applying the stepwise

regression procedure to the 266 companies, utilizing the variable DI as dependent variable, the

results given inTable 8are obtained.

The coefficient of determination of the model is 0.5, from which the variables EG8, LMV andBIG4 explain 50% of the variance of the dependent variable (DI). The values of the tstatistic

indicate that the four independent variables selected by the model are significant to 5%.

All the variables included in the model have a positive effect on the quantity of information

provided by the companies on their Web pages. Thus, the largest sized companies, those

belonging to EG8, and those that are audited by one of the Big Four auditing firms obtain a higher

score on the DI. In reference to the explanatory power, being audited by one the Big Four and

belonging to the financial sector are the variables with greater explanatory power. With respect to

the influence of the country, no relationship has been detected between the country in which the

company is located and the quantity of information provided.

5. Conclusions

The Internet is providing companies with a new medium of enormous potential through which

they can voluntarily issue information to the various groups of external users. Through their

corporate servers, companies are providing large quantities of information, both financial and

non-financial, which users can easily access. Eastern European companies are no exception and

are participating in the trend currently seen towards the increase of transparency in companies'

finances.

However, the results illustrated by the descriptive statistics show that the distance that exists

between the information currently provided by Eastern European companies that have recentlyjoined the EU (or are in the process of joining) and the information required by the initiatives of

the EU is still significant. To increase the transparencies of these companies, and consequently

that of the financial markets, it is necessary that the companies analyzed should devote much

more effort to the use of the Internet as a medium for the disclosure of corporate information. In

the process of doing so, they must abide by the ruling regulations of their home countries and

respect the guidelines of the EU concerning the public disclosure of company information.

Other key results of this work are that the following variables have a significant influence on

the quantity of information that the companies of Eastern Europe currently provide by Internet:

(1) having been audited by one of the Big Four accountancy firms; (2) the company's activity

being in the financial sector; and (3) company size.The relationship existing between the auditor firm and the extent of information disclosure on

the Internet could be explained, as has previously been commented, as being due to several

different motives. Thus, the companies that have recourse to the largest auditing firms are those

that could have larger agency costs as a consequence of the conflicts existing between the

managers and the shareholders. Therefore they try to reduce these costs by submitting their

accounts to the most rigorous auditing scrutiny; by doing so, and as a result of the requirements of

the auditors themselves, this usually leads to more transparency, because this helps the auditors to

maintain their good reputation.

In respect of the activity sector, the classification of the company to the financial sector is

correlated with the quantity of information that it provides by Internet. The need to present a good

image to possible clients and investors by adopting practices of transparency similar to those of

the rest of the companies of its sector is a possible explanation. In this respect, the new threats and

opportunities that companies of the financial sector in Eastern Europe have to face as a



18/20

consequence of the free movement of capital existing in the EU almost obliges them to

disseminate information by Internet, so that the capital market does not interpret the absence of

information as a sign of bad news.

The relationship between company size (measured by volume of stock market capitalization)and the information provided voluntarily by Internet has also been demonstrated. In this case, the

pressures exerted on the largest companies for more information disclosure by the relatively larger

number of users of their accounting information, together with the lower relative cost for such

companies of maintaining their information on the Internet, seem be determining factors.

Among the future lines of research suggested by these results, it could be useful to repeat this

study in the future to analyze the evolution and check to what extent these countries that are

joining the EU increase the use that their companies make of the Internet for publishing

accounting information. Furthermore, the study could be extended to the analysis of other

relationships such as, for example, the relationship between transparency and the cost of capital,

the value of the beta coefficient, or the market value/book value of the company.In summary, this study shows that the principal companies of these countries are using the

Internet to provide a considerable quantity of information, and thus accept the importance of this

medium in the process of corporate reporting. The results obtained seem to indicate that the

information and communication technologies, in general, and the Internet in particular, have

modified the cost-benefit relationship of the voluntary information provided. Thus companies

seem to be taking advantage of the opportunities offered them by the Internet, in respect of the

greater number of potential users of the information they prepare, the reduced relative cost of

producing and communicating this information, the improvement of their corporate image, etc.;

this conclusion is clearly demonstrated in the progressive increase of the corporate presence on

the Internet and of the voluntary information disclosed through this medium.

Acknowledgements

The present paper was made possible by financial support from the Spanish Ministry of Science

and Technology. Research project BEC2001-3356. We would like to thank Francisco Flores and

Ana Jess, undergraduate students of the University of Huelva, for their work on Internet

information retrieval.

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