Web-Based Disclosure About Value Creation Processes: A Monitoring Perspective

DENIS CORMIER, WALTER AERTS, MARIE-JOSÉE LEDOUX ANDMICHEL MAGNAN

Web-Based Disclosure About Value CreationProcesses: A Monitoring Perspectiveabac_321 320..347

Adopting a monitoring perspective, this study aims to explain how and whyfirms provide web-based disclosure about their value creation and itsunderlying processes. We rely on the balanced scoreboard approach tomeasure disclosure. Our results suggest that costs incurred by capitalmarkets’ participants as well as monitoring by the board and the mediadrive disclosure. Moreover, we argue and document that a firm’s disclosureis actually a part of its governance configuration and influences some boardprocesses.

Key words: Corporate disclosure; Corporate governance; Monitoring;Voluntary disclosure; Web reporting.

This paper addresses two complementary research questions. First, to what extent domonitoring considerations drive a firm’s web-based disclosure about value creationprocesses? For that purpose, monitoring refers to financial market monitoring, gov-ernance monitoring and media monitoring. Second, how do disclosure, board effec-tiveness and media coverage interact with one another? In that context, we arguethat disclosure represents a facet of a firm’s governance configuration.

Corporate managers view strategy formulation and implementation in a multi-dimensional way, focusing on different performance or value creation metrics (e.g.,Simons, 2000).Therefore, effective monitoring of a firm’s management decisions andactions implies that boards of directors, financial markets participants and the mediaget access to a comprehensive information set that reflects such underlying valuecreation initiatives and actions. In that regard, we argue that a firm’s disclosurecomplements its governance and monitoring mechanisms. The mapping betweennon-financial measures and value creation, as well as the importance of these mea-sures, has been widely recognized by financial analysts, especially in industries wherethere are sizable intangibles assets (e.g., Dempsey et al., 1997; Healy et al., 1999).

Denis Cormier ([email protected]) is a Professor in the School of Management, University ofQuebec at Montreal (ESG UQÃM); Walter Aerts a Professor in the Department of Accounting andFinance, University of Antwerp; Marie-Josée Ledoux a Professor in the School of Management, Uni-versity of Quebec at Montreal; and Michel Magnan a Professor in the Department of Accountancy,Concordia University.We acknowledge financial support from the Social Sciences and Humanities Research Council of Canadaand Fonds Québecois de recherche sur la société et la culture (FQRSC), l’Autorité des marchés financiers(Québec), PriceWaterhouseCoopers and KPMG.

ABACUS, Vol. 46, No. 3, 2010 doi: 10.1111/j.1467-6281.2010.00321.x

320© 2010 The AuthorsAbacus © 2010 Accounting Foundation, The University of Sydney

Moreover, the management accounting literature is replete with findings showingthat balanced scorecard-based metrics are reflective of a firm’s future financialperformance.

The challenge for an organization is to disclose information about its value cre-ation in a cost-efficient fashion while maximizing its reach. Most organizationstypically disclose non-financial information through traditional media vehicles (e.g.,annual report) or intermediaries (e.g., press releases to be picked up by the media).However, the advent of the World Wide Web (Web) brings firms to reconsider theirdisclosure strategies as it allows for direct communications with—current andpotential—stockholders, irrespective of their location and without the need forintermediaries. Moreover, there is essentially no marginal distribution cost if addi-tional information is conveyed. Such a context implies that the stewardship relationbetween a firm’s management and its stockholders becomes more direct, dynamicand interactive.

In that regard, the balanced scorecard literature provides a useful template tocapture the various dimensions of value creation processes, which derive fromsuccessful management of a firm’s financial resources, customer relations, internalprocesses and human capital (e.g., Kaplan and Norton, 2004). In this paper, we relyon a comprehensive measure of disclosure, which emphasizes content, an approachthat is consistent with prior work on financial/non-financial disclosure (e.g., Gibbinset al., 1990; Lang and Lundholm, 1993, 1996; Botosan, 1997; Healy et al., 1999;AIMR,2002). Our disclosure measure comprises only information that is on a firm’s websiteand in an HTML format. It excludes mandated corporate documents which arelinked to the website (e.g., audited financial statements in PDF). The decision todisclose on the Web is not mandated by regulatory agencies. Moreover, while regu-lators have oversight responsibilities over a firm’s disclosure activities, their over-sight is bound to be less tight for disclosures when there is no specified form orcontent to rely upon.

In addition, we put forward the view that disclosure is an important facet in itsown right of a firm’s governance configuration, as it facilitates monitoring by exter-nal parties of value creation processes and outcomes. On the one hand, we arguethat a firm’s propensity to provide information to capital markets is conditionedby (a) the extent of monitoring costs that investors face; (b) its governance struc-ture, particularly at the board level; and (c) media coverage, reflecting its need todefend and legitimize its purpose and the value of its activities to a broader com-munity. On the other hand, we expect the board to rely on disclosure to enhancemonitoring of managers and to be concerned as to how the firm is perceived bythe media.

Our sample comprises Canada’s largest publicly traded firms representing close to80% of its total stock market capitalization. There are some advantages in usingCanadian data. First, regulators, corporations and investors have been relying on theWeb as a disclosure platform for many years now. For instance, since 1997, allcorporate documents for publicly traded firms must be posted on the SEDARwebsite, which is administered by Canadian securities regulators. Second, whileCanadian capital markets evolve within a legal and regulatory regime that is similar

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to U.S. ones, Canadian firms exhibit governance characteristics that are closer toEuropean and Asian firms, notably in terms of ownership and board structures(Morck et al., 2000; Roe, 2003).

Results are consistent with financial market, board and media monitoringdriving web-based disclosure about value creation. This paper extends priorresearch in several ways. First, there are extensive literatures on the determinantsof financial performance disclosure (e.g., Healy and Palepu, 2001) and environ-mental disclosure (e.g., Berthelot et al., 2003; Aerts and Cormier, 2009), eithermandated or voluntary. However, from governance and strategic perspectives,managers must consider many other dimensions of organizational performance,the balanced scorecard being one tool to achieve that objective. In that regard,there is limited evidence on the broad-based comprehensive voluntary disclosurethat firms provide with respect to the many aspects of their internal performancemanagement. Second, early work on Internet reporting focuses typically on finan-cial statements (e.g., Ashbaugh et al., 1999). More recently, there have been someattempts to investigate corporate social responsibility disclosure (e.g., Patten, 2002;Unerman and Bennett, 2004; Cormier et al., 2009a). We consider that Internetreporting encompasses other dimensions such as intellectual capital. Third, ourdisclosure measure takes into account all relevant information available on afirm’s website, not only its investor relations web pages (e.g., Bollen et al., 2006).Finally, we argue that a firm’s governance and disclosure practices are closelyintertwined, with governance affecting disclosure and disclosure being a gover-nance mechanism (e.g., Markarian et al., 2007).

Our study extends prior work by Cormier et al. (2009b) on several dimensions.First, in contrast to Cormier et al. (2009b) who adopt an uni-dimensional perspective,the current paper argues that monitoring considerations, either by internal (e.g.,board) or external (e.g., market participants) parties, underlies a firm’s disclosureprofile, thus providing a more comprehensive and integrated view of disclosuredetermination. Second, we put forward the view that disclosure is an important facetin its own right of a firm’s governance configuration. Third, we explicitly take intoconsideration the interrelations between disclosure, governance and the media.More specifically, directors’ monitoring role seems to be influenced by media expo-sure. This suggests that directors perceive themselves to be accountable to a wideraudience than just investors. Finally, by controlling for lagged disclosure, we arecognizant of the fact that disclosure evolves incrementally over time.

CONCEPTUAL BACKGROUND

Value Creation for ShareholdersAccording to Kaplan and Norton (1996, 2004), the creation of long-term shareholdervalue encompasses four complementary phases that integrate financial and non-financial information: learning and growth, internal processes, customer and finan-cial. Within each phase, specific metrics reflect firms’ activities that ultimatelycontribute to value creation. The model put forward by Kaplan and Norton alsoimplies that value creation is sequential, with some metrics being leading indicators

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of value creation while others are confirmatory. For instance, the quality of a firm’shuman capital, which contributes to learning and growth within the organization,enables the firm to improve its various internal processes (e.g., innovation), thusproviding a better value proposition to customers. Higher profitability is the ultimateoutcome of this chain of actions.

The value creation mapping that underlies Kaplan and Norton’s (2004) model hasconceptual foundations in both economics (e.g., agency theory) and management(e.g., goal theory). It has been shown analytically that value creation can be inferredfrom both financial measures and non-financial measures that reflect the differentperspectives of managerial action (e.g., Holmstrom, 1982; Locke and Latham, 1990).There is also growing empirical validation of the Kaplan and Norton framework. Forexample, from a learning and growth perspective, Lin and Lin (2006) show thatemployee learning and training as well as teamwork are key drivers underlyingcustomer value creation in firms.

From an internal perspective, Clarkson et al. (2004) show that better environmen-tal performance, a key process for society, ultimately translates into value-addedcapital expenditures by pulp and paper firms. In terms of innovation, Xu et al. (2007)show that biotech firms with more extensive drug development portfolios haveenhanced revenue opportunities and, consequently, higher stock market valuations.

From a customer perspective, recent findings suggest that customer satisfactionand loyalty are useful predictors of a firm’s future financial performance and, ulti-mately, value creation. Smith and Wright (2004) report that product value attributesdirectly and differentially influence levels of customer loyalty as well as the prevail-ing average selling prices. Furthermore, measures of customer loyalty explain levelsof relative revenue growth and profitability, and relatively high customer loyaltyengenders a competitive advantage in the PC industry. In a multi-industry context,Ittner and Larcker (1998) show that customer satisfaction leads to increased rev-enues and, finally, to enhanced share values.

From a financial perspective, the findings of Said et al. (2003) support the conten-tion that firms employing a combination of financial and non-financial performancemeasures in their compensation contracts have significantly higher mean levels ofreturns on assets and higher levels of market returns. Moreover, within the contextof a financial institution, the results from Magnan and St-Onge (2005) indicate thatthe adoption of a profit-sharing plan leads to cost reductions, better asset utilizationand enhanced revenue growth, which then lead to higher returns on assets.

Disclosure About Value CreationFor investors to assess if there is value creation within an organization, and fullyvalue a firm’s shares, there needs to be reliable and relevant disclosure by theorganization. Thus, a critical question is why do firms choose to disclose, or notdisclose, specific aspects of their value creation process.

Prior research on corporate disclosure comprises three main streams: voluntaryfinancial disclosure, mandated financial disclosure, and non-financial disclosure suchas social and environmental disclosure.Voluntary disclosure research focuses on thedeterminants that drive firms to release specific financial information about their




underlying value to capital markets participants, typically either management earn-ings forecasts (Clarkson et al., 1992, 1994; Gramleich and Sorensen, 2004) or finan-cial statement footnotes (Scott, 1994). Most of these studies adopt an informationcosts and benefits approach to understand firm’s disclosure practices. Research onmandated disclosure focuses on how firms react to new disclosure standards ormanage their disclosure in relation to mandatory requirements. For example, Balsamet al. (2003) find that the nature of the disclosure, that is, mandated or voluntary, doesmake a difference in how firms measure stock-based compensation expenses, anitem that significantly affects earnings and, ultimately, firm value (Aboody et al.,2004). Finally, there is an extensive literature that investigates the content anddrivers underlying corporate social and environmental reporting. Such disclosure isusually voluntary and non-financial in nature. In a review paper, Berthelot et al.(2003) conclude that the determinants of environmental disclosure relate to firmsize, the extent of information needs by a firm’s shareholders and potential litigationcosts surrounding environmental obligations. However, Gray and Bebbington(2007) highlight that a relatively small proportion of firms that are listed worldwideprovide corporate social responsibility (CSR) disclosure. Moreover, they argue thatthe average quality of disclosure about CSR activities is so uneven as to be uselessfor meaningful analyses and comparisons.

Web-Based DisclosureMost prior disclosure research relies on traditional means of diffusion, that is,paper-based environmental and social responsibility reports (e.g., Neu et al., 1998) oron financial statement disclosure (e.g., Hope, 2003). However, the Web is nowperceived as the best platform for the disclosure of financial and non-financialinformation for stewardship purposes (Lymer, 1997; Robb et al., 2001; Patten, 2002;Marston and Polei, 2004). Because it facilitates direct contact between a firm and itsstakeholders, firms are able to better control their reporting strategies as they areless dependent on intermediaries such as journalists or financial analysts for thediffusion of their message (Lymer, 1999). Furthermore, information voluntarily dis-closed by a firm via its website is not currently subjected to any specific regulation,unlike financial statements, proxy statements or MD&A.

Prior research allows for the identification of key determinants that underlieweb-based disclosure. For instance, Ashbaugh et al. (1999) find that managers whoview communications with potential shareholders as important are more likely toconsider as important Internet financial reporting. Other key determinants includefirm size (e.g., Debreceny et al., 2002; Ettredge et al., 2002; Patten, 2002; Marston andPolei, 2004), information asymmetry between management and investors (Ettredgeet al., 2002; Cormier et al. 2009a), ownership status (Marston and Polei, 2004) and aforeign stock listing (Debreceny et al., 2002; Marston and Polei, 2004).

While the Internet is widely recognized as a flexible and versatile communicationsmedium, most prior research on web disclosure focuses solely on financial state-ments or on investor-related information drawn from investor relations links oncorporate websites (e.g.,Ashbaugh et al., 1999; Debreceny et al., 2002; Ettredge et al.,2002; Marston and Polei, 2004; Bollen et al., 2006). With respect to web-based social

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disclosure, Patten (2002) shows that web-based disclosure of social responsibilityinformation is quite low. Further, and importantly, from a social balance perspective,the web innovators in terms of product marketing are not industry leaders in termsof information disclosure. Furthermore, Cormier et al. (2009a) investigate the impactof social and human capital disclosure quality on information asymmetry. Overall,their results suggest that quantitative disclosure reduces share price volatility andincreases Tobin’s Q. However, despite the scope of information provided on manywebsites, our understanding of the strategies underlying firms’ overall Internetdisclosure is limited.

MODEL DEVELOPMENT

A Monitoring Perspective on DisclosureWe argue that three monitoring considerations underlie a firm’s web-based disclo-sure about its value-creating activities. First, external parties such as investors andfinancial analysts incur costs to monitor if the firm is taking appropriate actions tocreate long-term value. Such monitoring costs mostly relate to the investigation andgathering of relevant and reliable information. Hence, if a firm releases more infor-mation, it may reduce the monitoring costs incurred by investors and other capitalmarkets participants (Verrecchia, 1983). Most prior empirical evidence is consistentwith monitoring costs driving the extent of a firm’s voluntary disclosure (see areview of such literature in Healy and Palepu, 2001).

Second, concurrently to financial market monitoring, a firm’s governance struc-ture affects its disclosure, which is subject to managerial discretion. For instance,Markarian et al. (2007) show that there is convergence of disclosure and governancepractices among large international firms. Hence, through various internal gover-nance mechanisms, such as its audit committee, a firm influences the relevance andreliability of the information that it discloses (Vafeas, 2005). More specifically, firmswith effective boards use disclosure as a complementary and potentially powerfulgovernance mechanism (Zeckhauser and Pound, 1990; Craighead et al., 2004).

Finally, as primary institutional intermediaries, public media function as an addi-tional monitoring layer which may interact with and reinforce other monitoringmechanisms. Institutional intermediaries (both expert and more general institu-tional intermediaries like public media) are entities that specialize in disseminatinginformation about organizations or in evaluating their outputs (Fombrun, 1996; Rao,2001). Intermediaries play a pivotal monitoring role to the extent that they arebelieved to have superior ability to access and disseminate information by virtue oftheir institutional roles or structural positions (Rao, 1998, 2001). The actions andchoices of such intermediaries are closely followed and highly influential because oftheir perceived expertise in evaluating firms. In that vein, public media not onlyprovide channels for information pooling, but also shape normative pressuresthrough their evaluative activities. Hence, disclosure both affects and is affected bythe media (Deegan and Rankin, 1996; Neu et al., 1998; Aerts et al., 2008; Aerts andCormier, 2009).




Financial Market MonitoringBy reassuring a firm’s investors regarding various aspects of its operations or per-formance, expanded disclosure leads to a reduction in information asymmetrybetween managers and investors and, ultimately, to a reduction in monitoring coststo be incurred by investors (e.g., Kim and Verrecchia, 1994). Disclosure is alsobeneficial to a firm as it lowers its cost of capital, raises its valuation multiples,increases its stock liquidity and enhances its interest to institutional investors (Healyet al., 1999).

However, despite investors’ information needs, the decision by a firm’s manage-ment to disclose information about its underlying performance is likely influencedby a trade-off between the direct costs to be incurred for providing such disclosure,the benefits to be derived by the firm or its shareholders from such disclosure andthe costs of releasing private information (Scott, 1994). Hence, a firm may decide tovoluntarily disclose information if it is less costly than having market participantsgather the information (Milgrom, 1981; Atiase, 1985; Roberts, 1992; Lang andLundholm, 1993).

Monitoring costs to be incurred by capital markets participants can be inferredfrom a firm’s financial condition, systematic risk, reliance on capital markets andregulatory oversight (e.g., Scott, 1994). In turn, hypotheses are developed for eachfactor.

Systematic risk is a finance-derived measure of how a firm’s stock price behavescompared to the stock market as a whole (otherwise called Beta). More specifically,it is the variability of a firm’s stock market value relative to market-wide variability.The higher a firm’s systematic risk, the more difficult it is for investors to assessprecisely a firm’s value. A firm’s systematic risk can be a proxy for informationasymmetry between the firm and investors (Leuz and Verrecchia, 2000; Botosan andPlumlee, 2005). In such a context, to reduce information asymmetry and associatedmonitoring costs incurred by investors and analysts, firms need to provide moredisclosure. Hence, a positive relationship is expected between systematic risk andweb-based disclosure:

H1a: A firm’s systematic risk is positively related to its web-based disclosure.

Firms in which expansion is dependent upon continuous access to capital marketshave incentives to reduce information asymmetry between managers and investors,as information asymmetry translates into higher monitoring costs for investors. Areduction in information asymmetry, through enhanced disclosure, leads to lowerfinancing costs (Clarkson et al., 1994; Frankel et al., 1995). Lang and Lundholm(1993) document a positive relationship between capital markets reliance and vol-untary disclosure. In contrast, firms with extensive free cash flows face less externalmonitoring (Jensen, 1986). Hence, the following hypothesis:

H1b: A firm’s (lack of) reliance on capital markets is (negatively) positively related to itsweb-based disclosure.

Many Canadian firms have a listing on a U.S. stock market (New York StockExchange, Amex or NASDAQ). U.S.-based investors who follow these firms have to

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engage in more extensive monitoring activities as (a) information channels aboutthese firms are foreign and more distant, and (b) the regulated levels of disclosureare lower in Canada (Leuz et al., 2003). Hence, U.S. listing is meant to capturepressures for quality disclosure (Leuz and Verrecchia, 2000). Debreceny et al. (2002)find that listing on a US exchange influences Internet financial reporting. Hence, thefollowing hypothesis:

H1c: A firm’s U.S. listing is positively related to its web-based disclosure.

By providing voluntary disclosure, firms may meet capital markets participants’information needs, and reduce their associated monitoring costs. However, firms inpoor financial condition face intense monitoring by debt rating agencies and banksas well as numerous contractual constraints that limit managerial discretion (e.g.,bond covenants). In such a context, firms need to ramp up their internal monitoringcosts through, for example, more intensive internal audits or controls (Carcello et al.,2005). Hence, there is likely to be less external demand for information for moni-toring purposes. Thus, consistent with prior findings (McGuire et al., 1988; Cormierand Magnan, 2003), it is expected that there is a negative relationship between afirm’s financial condition, as proxies by its leverage, and performance disclosure.

H1d: A firm’s leverage is negatively related to its web-based performance disclosure.

Governance MonitoringThe quality of a firm’s governance and the extent of its voluntary corporate disclo-sure are closely intertwined (Bushman and Smith, 2001). Governance encompassesmonitoring and incentive practices that ensure managerial actions are consistentwith shareholder interests. Within a governance framework, three major monitoringmechanisms influence corporate disclosure decisions: owners, directors and auditors.In addition, the overall quality of a firm’s governance can also be assessed byobserving executive compensation, one of the few visible outcomes of board gover-nance. For instance, Bebchuk (2004) labels executive compensation the ‘smokinggun’ of corporate governance.

Ownership structure can determine the level of monitoring and, thereby, the levelof disclosure (Zeckhauser and Pound, 1990; Eng and Mak, 2003). Usually, the needfor external monitoring is reduced in firms with concentrated ownership. Morespecifically, since the dominant shareholders have access to the information theyneed, closely held firms are expected to be unresponsive to public investors’ moni-toring costs (Hope, 2003) or other stakeholders’ needs (Roe, 2003). Hence, thefollowing hypothesis:

H2a: Concentrated ownership is negatively related to web-based disclosure.

Non-executive directors on a board enhance the monitoring of corporate insiders(Fama and Jensen, 1983). For instance, Chen and Jaggy (2000) document a positiverelationship between board composition (proportion of independent directors) andthe comprehensiveness of information in mandatory financial disclosures by HongKong firms. Karamanou and Vafeas (2005) provide evidence that firms with higherquality governance characteristics are likelier to issue voluntary earnings forecasts.




In addition to board composition, Chtourou et al. (2004) find that board size isassociated with less earnings management, that is, higher quality disclosure. Finally,boards are more likely to be effective in overseeing management if they meetregularly (Vafeas, 2005). Hence, board monitoring effectiveness relies on boardcomposition (i.e., outside vs inside directors), board size and level of activity.

H2b: Board effectiveness is positively related to web-based disclosure.

In Canada, audit committees are mandatory and take over a significant portion ofthe board’s responsibility with respect to disclosure. By regulation, audit committeesmust comprise at least three members who are independent from management. Weargue that three is a small number for the audit committee to play effectively itsmonitoring role and that adding a few more members could be beneficial in thatregard. Effective monitoring also implies a minimum number of meetings by theaudit committee (Abbott et al., 2003). With respect to disclosure, Bronson et al.(2006) find that voluntary management reports on internal controls are more likelyfor firms that have an audit committee that meets more often. Hence, the followinghypothesis:

H2c: Audit committee effectiveness is positively related to web-based disclosure.

Finally, there is evidence that compensation such as stock options can alignmanager interests with shareholder interests (Hanlon et al., 2003). However, con-tracting costs may lead to incomplete contracts and agency conflicts. Aboody andKarnak (2000) show that managers may mislead shareholders by accelerating badnews and by delaying good news to reduce the exercise price of stock option grants.Hence, CEOs with extensive stock option values are likely to be opportunistic intheir disclosure strategies. Therefore, no directional prediction is made.

H2d: A CEO’s stock option holdings relate to a firm’s web-based disclosure.

Media MonitoringThe impact of public media on corporate disclosure derives primarily from theirability to focus public attention on specific firms or issues (Deephouse, 2000; Pollockand Rindova, 2003;Aerts et al., 2008). By setting the public agenda, the media do notnecessarily mirror public concerns (Ader, 1995). However, through the transfer ofsalience, the media agenda may transpose into the public agenda (Caroll andMcCombs, 2003). Therefore, the media are actively involved in the construction ofsocial impression processes and related monitoring (Gamson et al., 1992).We expectboth a direct and an indirect effect of media coverage on disclosure.The direct effectresults from media coverage voicing social concerns driving the corporate transpar-ency agenda, while the indirect effect stems from its interaction with governancemonitoring. Thus, the following hypothesis:

H3a: The extent of media coverage is positively related to web-based disclosure.

However, we expect that in the absence of media coverage, the impact of externalboard members on disclosure transparency will be restricted to financial disclosure

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while they will influence non-financial disclosure when the firm is facing extensivemedia coverage. Public rhetoric surrounding the role and functioning of indepen-dent directors may have created an ‘expectations gap’ (Reay, 1994; Hooghiemstraand Van Menem, 2004), that is, the existence of a gap between what independentdirectors can reasonably be expected to accomplish and what is expected by theexternal business environment.1 This expectations gap puts pressure on independentdirectors if these expectations are effectively ‘voiced’. One could refer to thesepressures as external accountability pressures. External (independent) membershave their reputation as professional referees at stake, and will be more sensitive toreputational risk threats than inside directors (Aguilera, 2005).

We expect that media monitoring, as measured by media exposure, hasa positive impact on the role played by independent directors concerning a firm’sdisclosure.

H3b: The extent of media coverage enhances the effect of an independent board of directorson a firm’s web-based performance disclosure.

METHOD

SampleThe sample comprises 155 Canadian publicly traded firms. All non-financial firmsrepresented on the Toronto Stock Exchange S&P/TSX 300 Index were initiallyidentified in 2002.2 For the current research, web-based disclosure was collectedfrom websites (web page and HTML) in summer 2003 and 2005. Multivariateanalyses were performed on 2005 web disclosure. Financial data for 2004 was col-lected from the Stock Guide and governance data was collected from 2004 proxystatements. The final sample is 139 firms since, out of the initial sample of 155 firms,there are missing data for board size and independence (9 firms), stock options (5firms), and debt and stock issues (2 firms).3 Sample firms operate in the theseindustries: metals and mines; gold and precious metals; oil and gas; paper and forestproducts; consumer products; industrial products; real estate; utilities; communica-tion and media; merchandising.

1 Factors contributing to the expectations gap include: ambiguous and often conflicting (e.g., strategysetting versus somewhat detached monitoring) roles of independent directors; the extent to which thenon-executive directors are really independent (some non-executive directors are in some way affili-ated, e.g., former management, business or family ties); recent claims that the monitoring ability of theboard is hampered by ‘cosy’ and possibly difficult to observe relationships (Larcker and Richardson,2004); shareholder concerns are not the only aspect of interest to directors; information asymmetrybetween inside and outside directors; limited practical ability to monitor and control.

2 We initially collected web disclosure in summer 2002 (Cormier et al., 2009b). The 2002 sample com-prised 189 observations for web-based performance disclosure. Mergers and acquisitions and delistedfirms reduced our sample to 167 firms in 2003 and 155 in 2005.

3 With the addition of board meetings and audit committee meetings to our model (sensitivity analysis),we lose twenty-three additional observations for a total sample of 116 firms.




Empirical ApproachWe explore the determinants of web-based disclosure by using the following model:

Web-based disclosureFinancial market monitoring, Gover

it =f nnance monitoring,Media monitoring, Control variables it

() −11

New disclosure and governance requirements came in force in March 2004 (Cana-dian Securities Administrators, 2004). Since some information related to corporategovernance was not available before 2004, we restrict our regression analyses to thedeterminants of web-based disclosure in 2005.

Measurement of Web-Based DisclosureWe focus on voluntary disclosure available from a firm’s website in HTML formatsince it is comprehensive and accessible to all shareholders at a low cost. In aCanadian context, however, mandated disclosure is filed on SEDAR (a system ofelectronic data archiving and retrieval that is maintained by securities regulators).The SEDAR website (www.sedar.com) comprises all documents in which disclosureis mandated by securities regulators: financial statements, annual reports, proxystatements, MD&A and press releases. However, all these documents are also avail-able on paper and most investors still receive them in paper form. The content ofthese documents is regulated. Therefore, our disclosure measure reflects only infor-mation that the firm has voluntarily decided to post on the web.

Disclosure indicators, financial or non-financial, are based on balance scorecardliterature and emerging performance measurement practices (e.g., Standard &Poors, 2002, for financial and governance disclosure; Pirchegger and Wagenhofer,1999; Patten, 2002; and Marston and Polei, 2004, for investors, governance and socialresponsibility disclosures; Kaplan and Norton, 1996; Ittner and Larcker, 1998; andRobb et al., 2001, for indicators about operations’ efficiency, value for client, inno-vation, development and growth). We analyse web-based disclosure by codingthe content of corporate websites using a grid developed by Cormier et al. (2009b)(see Appendix).4 The grid comprises 111 items, which are grouped in eight catego-ries: website quality, financial performance, corporate governance, customer value,human and intellectual capital, production efficiency, innovation, development andgrowth, and social responsibility. Website quality is captured by features such asinteractive components, video-audio access, hyperlinks, etc. These features mayenhance firms’ ability to convey their message to outside users. Our measure ofwebsite quality is consistent with Marston and Polei (2004) who, in their assessmentof web disclosure strategy, consider the timeliness of the information, technologicalfeatures (e.g., loading time) and navigation support (e.g., convenience and usability).The rating is based on a score of 1 to 3 per element, with each item possiblycomprising many elements. A score of 3 is given for an element that is describedin quantitative terms (‘hard’ information), a score of 2 when an element is described

4 Websites were analysed and coded online in the summers of 2003 and 2005, with the structure of thewebsite being kept on a CD-Rom for future reference and validation.

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specifically and a score of 1 for an element discussed in general (‘soft’ information).For instance, within the customer profile item, we may find many elements ofinformation on market segments, market shares, number of customers, etc. Each ofthese elements could be coded, which would imply a total score for this item greaterthan 3. We decided not to cap individual scores since our grid aims to capture allrelevant information excluding any overlap or repetitions. Such a coding scheme,with higher weights for hard disclosure items than for soft disclosure, is consistentwith prior research (Cho and Patten, 2007; Clarkson et al., 2008).The use of a codingscale to qualify a firm’s disclosure is consistent with prior work in financial/non-financial disclosure (e.g., Gibbins et al., 1990; Lang and Lundholm, 1993; Botosan,1997; Healy et al., 1999; AIMR, 2002; Robins and Stylianou, 2003).

The coding was performed concurrently by two graduate students. Coding instruc-tions, as well as standardized coding worksheets, were prepared beforehand. Eachcoder then applied the following coding sequence: (a) independent identification ofthe occurrence of items relative to the different coding categories; (b) independentcoding of the items according to quality level of content; and (c) timed reconciliationon a subset of company reports. The coders were trained by one of theco-researchers in applying coding instructions and in using the coding worksheets.The training went over a few weeks as the coders and the researcher mutuallyverified their coding on a subsample of test cases, typically two firms by industry.Coders were unaware of the research hypotheses. Initial differences in identifyinggrid items accounted for an average of 7% of the maximum number of itemsidentified. Of the information quality level coding, less than 10% had to be discussedfor reconciliation. Disagreement between coders mostly happened at the beginningof the coding process (essentially the first forty sample firms). The researcher rec-onciled coding disagreements exceeding 5% of the highest total score between thetwo coders. Smaller disagreements were resolved by the two coders themselves.Internal consistency estimates (Cronbach’s alpha on score components) show thatthe variance is quite systematic (alpha= 0.713 in 2005, see Table 2). This is slightlyhigher than Botosan (1997), who finds an alpha of 0.64 for an index including fivecategories of disclosure in annual reports.5

For analysis purposes, a firm’s disclosure score is scaled by its industry mediandisclosure score. Two reasons motivate that empirical choice. First, there areindustry-specific disclosure patterns (e.g., Aerts et al., 2006). Second, addingindustry-specific dummy variables would use up many degrees of freedom andseriously compromise our analyses’ statistical power. Hence, it is deemed appropri-ate to control for industry patterns by scaling the dependent variable by industrymean.

Measurement of Web-Based Disclosure DeterminantsFinancial market monitoring Five variables are used to capture capital markets’information considerations that affect disclosure: Systematic risk; New financing;

5 Cronbach’s alpha estimates the proportion of variance in the test scores that can be attributed to truescore variance. It can range from 0 (if no variance is consistent) to 1.00 (if all variance is consistent).According to Nunnaly (1978), a score of 0.70 is acceptable.




Free cash flow; U.S. listing; and Leverage. Systematic risk is measured by Beta(extracted from Stock Guide). A positive relationship is expected betweensystematic risk and the extent of disclosure. New financing is a measure ofexternal financing or reliance on capital markets. It can be proxied by issues oflong-term debt and equity (Dechow et al., 1996). The variable measures the actualamount of long-term financing raised through stock or debt offerings scaled bytotal assets. Free cash flow is a second measure of external financing (Jensen, 1986;Dechow et al., 1996). It proxies for the demand for external financing (in negativesense) by measuring a firm’s ability to cover its capital expenditures. The higherthe free cash flow, the lower the need for external financing. We measure thatvariable as cash flow from operations in 2004 minus the average of capital expen-ditures from 2002 to 2004 scaled by total assets. U.S. listed firms are meant to facedisclosure pressures internationally (Leuz and Verrecchia, 2000). Debreceny et al.(2002) find that in addition to a firm’s size, listing on U.S. exchange is a specificdeterminant of Internet financial reporting. Hence, U.S. listing is introducedas a binary variable (1; 0 if not) and a positive relation is expected betweenSEC and disclosure. Leverage is measured by long-term financial debt on stock-holders’ equity.

Governance monitoring comprises five variables: Concentrated ownership; Boardindependence; Board size; Audit committee size; and CEO stock options. Concen-trated ownership is measured as a dichotomous variable taking a value of one (1)when an investor, or a related group of investors, owns more than 10% of a firm’soutstanding voting shares, and zero (0) otherwise. Ten per cent is the ownershiplevel that must be disclosed in Canada. A negative relationship is expectedbetween concentrated ownership and disclosure. Board effectiveness is assumed tobe captured by two distinct variables, Board independence and Board size. Boardindependence is a summary variable that reflects two facets of a board’s compo-sition. A board is deemed to be independent (dependent) if the proportion ofoutside directors, that is, directors who are not executives and/or their relativesand controlling stockholders, exceeds 50% (is less than 50%). Another aspect ofboard independence is the separation of the roles of chair and chief executiveofficer. The variable takes the value of zero (0) when the majority of directors arenot independent, a value of one (1) when the majority of directors are indepen-dent, and a value of two (2) when the majority of directors are independent andthe functions of CEO and chair of the board are separate. We expect a positiverelationship between this variable and disclosure. Board size is measured by thenumber of its members. We expect a positive relationship between this variableand disclosure. In modern governance, monitoring is increasingly performed byboard committees. With respect to disclosure, the audit committee is the pivotalgovernance mechanism. Hence, to complement board effectiveness, we consideralso audit committee effectiveness, which is measured by Audit committee size,that is, its number of members. Finally, CEO stock options reflect the intrinsicvalue of unexercised stock options held the CEO as per the proxy statement date,divided by his/her CEO cash compensation.

A BAC U S


Media monitoring Media monitoring upon a firm is proxied by Media exposure. Itis computed by taking the average number of articles for the period 2000 through2004, as contained in the ABI Disclosure database. The reason for this choice is thatdisclosure in 2005 may be affected by the amount and types of articles publishedabout a firm in the recent past. We expect that as media exposure increases, the firmwill increase its disclosure.

Control variables Three control variables are added to the empirical model: Firmsize; High skill employees; and Repeat customer relations. Prior evidence is consis-tent in highlighting a positive relation between the extent of corporate disclosureand Firm size, which is measured as the Ln (Total Assets) (e.g., Scott, 1994)). Anindicator variable captures employees’ skill level (High skill employees = 1, 0 oth-erwise dependent upon the type of labour required by the industry in which the firmoperates). Employees’ perceived skill levels enhance their potential visibility andthe firm’s dependence upon them, thus providing the firm with an incentive to bemore transparent in its disclosure. For instance, several media recognize and publishrankings of ‘Employers of choice’. Typically, many of these firms will be high value-added firms with large professional or scientific labour forces.6

We also consider that a firm’s relations with clients may affect their disclosure,with firms that engage in long-term relationships with their customers being morelikely to provide more web-based disclosure than firms where such long-term com-mitments do not exist (e.g., Bowen et al., 1995). Sample firms are classified into twogroups, with the first group comprising firms with short-term repeated transactionswith clients (e.g., grocery stores) while the second group of firms maintain long-termrelationships with its clients (e.g., cable and entertainment) or engage in long-termcontracts with them (e.g., durable goods with warranties). The variable Repeatcustomer relations is coded (1) for short-term or repeat relations with customers, or(0) otherwise.

RESULTS

Descriptive StatisticsTable 1 provides some descriptive statistics about explanatory variables as well ascross-correlations. Overall, sample firms are relatively large (average assets of $4.3billion) and exposed to media (average of 4.7 articles per year over the last 5 years).Fifty-nine per cent of sample firms have a concentrated ownership, while 45% arelisted in the United States. CEO stock option value in-the-money represents 1.79times their salary and bonus.All correlations are below the 0.50 threshold, except forthree variables. The highest correlations are between Systematic risk and firms withHigh skill employees (0.55), Board size and Audit committee size (0.55), and Boardsize and Firm size (0.53). This suggests that collinearity is not a concern.

6 For instance, each year, Hewitt & Associates, a large consulting firm, publishes rankings of employersof choice, in both Canada and the United States. These rankings are widely publicized in regional andnational media.




Tab

le1

DE

SCR

IPT

IVE

STA

TIS

TIC

SA

ND

CO

RR

EL

AT

ION

MA

TR

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DE

PE

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EN

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LE

S

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nST

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23

45

67

89

1011

1213

14

1L

ever

age

0.21

0.16

1*-

0.12

*0.1

70.

09-0

.02

0.07

*-0.

14*0

.21

*0.1

5-0

.11

-0.0

6*0

.21

*-0.

27-0

.02

2Sy

stem

atic

risk

0.68

0.49

1-0

.01

-0.0

10.

08-0

.05

0.06

*-0.

12*-

0.13

*0.2

1*0

.29

*-0.

12*0

.55

*0.1

13

New

finan

cing

0.09

0.12

1-0

.09

*0.2

3-0

.06

*-0.

130.

010.

09-0

.04

0.02

-0.0

6-0

.01

0.02

4Fr

eeca

shflo

w0.

020.

151

0.01

-0.0

2*-

0.12

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0.05

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0.07

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491

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00.

07-0

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27

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rdin

depe

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ce0.

910.

511

0.11

0.09

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168

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rdsi

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992.

761

*0.5

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*-0.

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com

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size

3.98

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10.

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0.19

0.06

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tion

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100.

110.

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40.

0112

Size

($m

illio

n)4,

268

7,01

61

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24*-

0.16

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igh

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empl

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s0.

180.

381

*0.2

014

Rep

eat

cust

omer

rela

tion

s8

873

1607

11

*Si

gnifi

cant

at0.

10tw

o-ta

iled

A BAC U S


As illustrated in Table 2, total web-based disclosure does not vary significantlyfrom 2003 (mean score of 91.84) to 2005 (mean score of 92.17). Among the eightdisclosure components, we observe increases in web quality and in social responsi-bility disclosure and the opposite concerning customer value, production efficiencyand innovation, development and growth.

Multivariate ResultsDeterminants of web-based disclosure Table 3 provides evidence regarding thedetermination of web-based disclosure.7 The Total score column shows results froma cross-sectional OLS regression between overall disclosure (dependent variable)and variables proxying external for monitoring costs, governance and media moni-toring, as well control variables. The following eight columns provide results fordifferent facets of disclosure. Focusing on the regression for total disclosure, itsexplanatory power is 45.3% (p < 0.000). Diagnostic procedures (VIF and normalitytests) do not reveal multicollinearity or normality problems (variance of inflationfactors do not exceed three in any regression). The use of the Belsh-Kuhley proce-dure allows for the identification of three outliers (absolute value of standardizedDFITS > 1.0).8 Hierarchical regressions indicate that both control and experimen-tal variables contribute in explaining disclosure. Adding experimental variablesto control variables generates a significant F change for total disclosure model

7 We first perform analyses without some governance variables, as their use would imply losing too manyobservations because of missing data for board and audit committee meetings.

8 DFITS is the scaled difference between the predicted responses from the model estimated from all thedata and the predicted responses from the model estimated without the i-th observation. Outlyingobservations are excluded for all regressions’ results reported in this paper.

Table 2

DESCRIPTIVE STATISTICS WEB-BASED DISCLOSURE BY COMPONENT

2003 2005

Meanscore

Cronbach’salpha

Meanscore

Cronbach’salpha

Web-quality 14.80 0.649 17.47 0.661

Financial performance 8.03 0.865 6.18 0.869

Corporate governance 17.14 0.709 17.93 0.830

Customer value 17.35 0.794 14.86 0.703

Human / intellectual capital 9.27 0.823 9.88 0.761

Production efficiency 9.44 0.623 7.32 0.648

Innovation / development and growth 3.15 0.819 2.41 0.735

Social responsibility 12.59 0.765 16.05 0.704

Total score 91.84 0.644 92.17 0.713

N 167 155




Tab

le3

OL

SR

EG

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SSIO

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OF

TH

ED

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OF

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348

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003

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00.

230

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Free

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0.03

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11.

204

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117

0.20

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209

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size

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A BAC U S


(3.120; p < 0.001). F change tests are significant for seven out eight disclosurecomponents.

Among variables proxying for external monitoring costs, results show that, toreduce information asymmetry and associated monitoring costs incurred by inves-tors, firms provide more disclosure when facing high environmental uncertainty asexpressed by Systematic risk (H1a) (0.117; p < 0.050). In contrast, firms with exten-sive free cash flows face less external monitoring and hence disclose less informationthan others (H1b) (-0.031; p < 0.100). As expected, it appears that high leveragereduces external demand of information for monitoring purposes with (H1d)(-0.534; p < 0.010). Furthermore, results show that governance and monitoring issuesare associated with disclosure. More specifically, Concentrated ownership translatesinto less disclosure (H2a) (-0.055; p < 0.100). In addition, board effectiveness,as measured by Board independence (0.100; p < 0.050) and Board size (0.036;p < 0.010), is positively related to disclosure (H2b). Finally, the magnitude of theCEO’s stock option holdings is negatively associated with disclosure (H2d) (-0.003;p < 0.010).These results suggest that efficient governance leads to more transparencywhile the extent of CEO stock options leads to less transparency. Despite ourexpectations (H3), there is no significant relationship between media exposureand web-based disclosure. Among control variables, we find a positive relationshipbetween Firm size (0.119; p < 0.010) and disclosure. Moreover, firms listed on U.S.stock exchange (SEC) (0.294; p < 0.010) provide more extensive disclosure thanothers do.9 Overall, there is support for the impact of governance and monitoringvariables on voluntary disclosure. To get better insights into the web-based disclo-sure process, we now break down total disclosure into its eight components.Table 3’sother columns provide evidence regarding the determination of different disclosurecomponents, with the best explanatory powers being for disclosure about human andintellectual capital (adjusted R2 = 36.6%), social responsibility (29.5%), innovation,development and growth disclosure (27.8%), and corporate governance (19.5%).

Some patterns that underlie disclosure relationships can be highlighted. First,financial market monitoring seems relevant to explain disclosure about human andintellectual capital (H1a, H1b, H1c, H1d), innovation, development and growth (H1a,H1c, H1d) and customer value (H1a, H1b, H1c). All these disclosures relate tointangible assets, which are often not well reflected in traditional or regulateddisclosures such as audited financial statements (e.g.,Lev and Zarowin,1999).Second,governance variables appear to have particular relevance in explaining disclosureabout financial performance (H2a, H2b, H2c), corporate governance (H2a, H2b) andinnovation, development and growth (H2a, H2b, H2c, H2d). Third, the relationshipsbetween web-based disclosure components and information costs and benefits andgovernance variables are consistent with those reported for total disclosure.However, for media monitoring, two patterns emerge. On the one hand, consistentwith H3a, media exposure translates into more human and intellectual capital and

9 Many studies document a positive association between a firm’s level of disclosure and its financialperformance (McGuire et al., 1988; Cormier and Magnan, 1999, 2003; Murray et al., 2006). As a firstsensitivity analysis, we add profitability (net income/assets) to the regression model. The coefficient isnot significant.




social responsibility disclosures. On the other hand, media exposure seems to trans-late into less web quality and disclosure on governance, customer value, and innova-tion, development and growth. This would explain the lack of a significant relationbetween media exposure and total disclosure, which we now explore.

Additional Governance-Focused AnalysesReputational risk rests highly on media coverage. To assess the impact of mediamonitoring on the role played by external members of the board, we add an inter-action term Board independence*Media exposure to the regression. Consistent withH3b, results (not tabulated) show that the coefficient for the interaction term ispositive and significant (0.016; p < 0.052), while the coefficient for Board indepen-dence is not significant (-0.021; p < 0.705). The coefficient for Media exposure isnegative and significant (-0.013; p < 0.024). This result suggests that media monitor-ing, as measured by media exposure, has a positive impact on the role played byexternal directors regarding disclosure transparency.

Furthermore, we split the variable Board independence in two different variables:independent members (1/0) and CEO not chair of the board (1/0). Our results(untabulated) suggest that an external board has a positive impact on disclosure onlywhen the CEO is not the chair of the board and only in the presence of public mediacoverage. Hence, the coefficient for the variable CEO not Chair*Media exposure ispositive and significant (0.022; p < 0.010). Coefficient for CEO not chair (0.054; p <0.493), Independent members (-0.036; p < 0.749), and Independent members*Mediaexposure (0.018; p < 0.749) are not significant. This finding suggests board memberindependence is effective when the chair is distinct from the CEO, thus supportingHermalin and Weisbach’s (1998) argument.

One way to measure the effectiveness of a board committee is to look at thefrequency of its meetings. As an additional sensitivity analysis, we add board ofdirector meetings as well as audit committee meetings to our model. Concerning theaudit committee, best practices suggest three or four meetings per year (KPMG,1999). We expect that the disclosure of the frequency of board meetings and auditcommittee meetings will be positively related to disclosure. We observe that twenty-three out of our sample firms did not disclose this information. Results for thereduced sample (not tabulated) show a positive association between board meetingsand financial performance disclosure (0.096; p < 0.010) and a negative associationwith disclosure about operations efficiency (-0.041; p < 0.050). In addition, moreaudit committee meetings translate into more total disclosure (0.018; p < 0.100), aswell as disclosure on innovation, development and growth (0.213; p < 0.050) andgovernance (0.040; p < 0.100).

Analyses Controlling for EndogeneityPrior research documents that the proportion of independent directors can beendogenously determined. Peasnell et al. (2005) find that the proportion of indepen-dent board members is associated with block ownership, firm size and leverage.Since a firm’s communication strategy may affect disclosure, media exposure andboard independence simultaneously, we first assess whether or not interrelations

A BAC U S


exist between these variables using the Hausman test. Using this procedure, wereject the null hypothesis of no endogeneity with respect to disclosure and boardindependence (t = -2.630; p < 0.010), and between media exposure and boardindependence (t = 5.119; p < 0.000). To assess whether our results could be biased bythe presence of endogeneity, we adopt the following simultaneous equations modelusing a three-stage least square approach:

Web-based disclosureSystematic risk, U.S. Listing, Fre

it =f ee cash flow, Leverage, Board independence,Board size, Au

(ddit committee size, Concentrated ownership, CEO stock optiions,

Media exposure, Firm size, High skill employees, Repeeat customer relations it 1) −

Board independenceConcentrated ownership, Leverage,

it 1− =f SSystematic risk, Free cash flow,Media exposure, Lag disc

(llosure, Firm size it 1) −

Media exposureNumber of employees, U.S. Listing, Rep

it 1− =f eeat customer relations,High skill employees it 1

() −

The board independence regression model presented in Table 4 has an explana-tory power of 17.8% (F statistic p value < 0.000). The coefficients are statisticallysignificant, that is, Free cash flow (-0.524; p < 0.100 two-tailed) and Lag disclosure(0.655; p < 0.100 two-tailed).10 The media exposure regression model has an explana-tory power of 16.7% (F statistic p value < 0.000). Three out of four coefficients aresignificant, that is, Number of employees (0.001; p < 0.010), SEC (4.335; p < 0.010)and High skill employees (4.784; p < 0.010). Concerning the disclosure regressionmodel, the explanatory power is 32.1% (F statistic p value < 0.000). Results remainsimilar to those estimated with an OLS regression (Table 3) except for two variables.The coefficients for Systematic risk and Concentrated ownership become insignifi-cant. These findings do not suggest endogeneity problems.

CONCLUDING REMARKS

Our paper focuses on the web disclosure being provided by Canada’s leading pub-licly listed firms about their value creation processes. We adopt a conceptual frame-work that weaves together three complementary monitoring perspectives, withvariables proxying for financial market monitoring, governance monitoring andmedia monitoring being found to underlie web-based disclosure. Results are con-sistent with monitoring costs faced by investors, the effectiveness of board monitor-ing and media monitoring driving web-based disclosure about value creation. Our

10 We use the web-based disclosure in year 2003 as a determinant of board independence in 2004.




results also suggest that disclosure complements media and board governance as amonitoring mechanism.

Our results are subject to some limitations. First, the paper focuses on web-basedperformance disclosure only, which represents but one facet of a firm’s disclosurestrategy. However, most prior research emphasizes specific dimensions (e.g., annualreport, press releases, etc.) as it is difficult to construct a comprehensive measure ofcorporate disclosure. A second potential limitation is the paper’s focus on HTMLdisclosure, which excludes hyperlinked documents in PDF. However, these docu-ments (e.g., quarterly or annual financial statements, press releases, annual reports,sustainability reports or proxy statements) are typically also published in paper form(e.g., Aerts et al., 2007). Moreover, our experience and further investigations ofspecific firms suggest that most PDF disclosures are mandated disclosures. Anotherpotential limitation is the use of a coding grid to quantify corporate disclosure, ameasure that may be perceived as subjective. However, our coding approach isconsistent with recent studies. Finally, the paper adopts a monitoring perspective toexplain corporate disclosure. Alternative explanations may be provided to explainthe same relations (e.g., for free cash flow). However, monitoring considerationsoffer a comprehensive view.

Table 4

3SLS REGRESSIONS ON THE DETERMINANTS OF WEB-BASED DISCLOSURE ABOUTVALUE CREATION, BOARD INDEPENDENCE AND MEDIA EXPOSURE

Disclosure Boardindependence

Mediaexposure

Systematic risk 0.076 0.055

Free cash flow 0.397 *-0.524

U.S. listing ***0.309 ***4.335

Leverage *-0.400 -0.248

Concentrated ownership -0.014 -0.006

Board independence *0.889

Board size *0.025

Audit committee size -0.018

CEO stock options *-0.002

Media exposure -0.024

Firm size ***0.140 -0.035

High skill employees 0.046 ***4.784

Lag disclosure score scaled by the industry median *0.655

Repeat customer relations *0.155 -0.202

Number of employees ***0.001

R2 32.1% 16.7% 17.8%

c2 (p value)N = 139

75.1(0.000) 26.6(0.000) 12.3(0.000)

* p < 0.10, ** p < 0.05, *** p < 0.01. Two-tailed significance.

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Our study has the following implications. From a theoretical perspective, weconclude that a firm’s disclosure about various aspects of value creation is not solelydriven by external monitoring considerations but is also influenced by the effective-ness of its internal governance mechanisms. One can infer that governance may needto be reinforced by external monitoring through more open disclosure. This findingis consistent with Craighead et al. (2004), who show that disclosure can be viewed asa governance mechanism that complements boards and owners. In addition, direc-tors’ monitoring role seems to be influenced by media exposure. This suggests thatdirectors perceive themselves to be accountable to a wider audience than justinvestors. From a practical perspective, our results suggest that regulators may needto intervene in corporate disclosure practices, especially in contexts where gover-nance is weak or less effective.

An objective for further research should be to implement a strategic watch tofurther investigate the importance of temporal trends and industry membership inweb disclosure, as media monitoring can evolve over time and cause shifts in firms’disclosure strategies. In addition, the use and impact of web-based disclosure as amonitoring mechanism could be further investigated. For instance, what is the reli-ance of financial analysts on information conveyed through the Web? More in-depthanalyses of patterns and determinants underlying disclosure components could alsobe performed. Finally, the relative adoption and use of the Web as a reportingplatform could be compared across various countries, with different socio-politicalenvironments.

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Appendix

PERFORMANCE DISCLOSURE GRID

Up-to-date (less than 1 month: 3; 1 to2 months: 2; 3 months: 1)

Increase in sales / market shares

Internal links (levels of internal links) Increase in investments

External links (number) Total growthRefers to documents for additionalinformation (0 or 1)

Total innovation, development et growth

Information usually on the web versuspaper (0 or 1)

Product description

User friendly (high: 3; average: 2; low: 1) Quality / up-to-date technology

Interactive components (0 or 3) Reliability: errors / returns

Video-audio access (0 or 3) Price

Total web-quality Delivery time

Liquidity Awards

Indebtedness Total productInterest coverage Customer profile / market segment / market share

/ number of customers

Total solvency Pre-sales support: information / counsel / ordersfollow-up

Net operating income After-sales service / insurance

Gross margin Customer satisfaction / complaints management

REA or REO Customer loyalty

EPS (diluted) 1 Awards

Stock price or stock return Total customersEVA Service Internet (1 of order, 2 if service, 3 if both)

Total profitability E-business salesTotal financial performance E-business productivity [Cost efficiency / speed]

Leadership Impact (award, number of users or visitors)

Mission Total e-businessStrategic planning Total customer valueRisk management Hiring / new employeesGlobalization Qualification / expertiseTotal strategic management TrainingCompetence of managers Description of job requirements 1, 2, 3Managers’ compensation Total competenceTotal managers Employee empowerment / involvementCompetence Board Capacity to suggest and to implement changesIndependence Board TeamworkCompensation (stocks/options) Performance assessmentOther committees Performance based compensationTotal directors Earnings-based compensation

Competence Audit committee Carrier opportunities

Independence Audit committee Award

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Appendix

CONTINUED

Relations with external auditors Fringe benefits

Relations with internal auditors Total motivation/work climateTotal Audit committees Employees satisfaction, survey

Ownership structure Employee turnover

Other Other

Total ownership Total satisfactionTotal corporate governance Total human/intellectual capitalInvestment ($) Purchases of goods and services

Reengineering / downsizing Employment opportunities

Process improvement methods (ex.Kaisen)

Job creation

ISO 9000, total qualitymanagement—TQM

Equity programs

Others (benchmarking, JIT, etc.) Human capital development

Total operations rationalization Regional developmentProduction cost Gifts and sponsorshipsProduction capacity Accidents at workWaste Health and safety programsInventory / run out rate Product-related-incidentsQuality of equipment and technology Products in development and environmentFlexibility Product safetyProcess description (1,2,3) Business ethicsOthers Strategic alliancesTotal productivity-cost Community involvement

Production time Social activities

Unplanned downtime Total social responsibilityTotal productivity-speed / cycle time Total performance disclosurePartnershipsAcquisitionsTotal strategic alliancesTotal production efficiencySales—new productsMarket share—new productsAwardsTotal new productsInvestments in R&DDescription of products in developmentProduct testingAwardsOthers—R&DTotal R&D




Web-Based Disclosure About Value Creation Processes: A Monitoring Perspective

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