Academic journal article Journal of International Business Research

Impact of Internet Financial Reporting on Emerging Markets

Academic journal article Journal of International Business Research

Impact of Internet Financial Reporting on Emerging Markets

Article excerpt

INTRODUCTION

The use of information technology for competitive advantage is well known and often applied by business firms. Using stock data for firms listed on the emerging market stock exchanges in Brazil, India, Indonesia, Russia, and South Africa, this study provides empirical evidence as to the positive dispersions in price and volume regarding the economic event of investments in the Internet. We show that in spite of operating in highly volatile capital markets, some emerging market firms attempt to distinguish themselves in the 1990s by investing in Internet technology. Our study contributes to prior disclosure literature by providing evidence regarding the integrity and speed of adjustment (efficiency) of emerging markets to the new (value relevant) qualitative information that is released electronically by public firms.

Internet financial reporting refers to the use of a company's website to distribute information about the financial performance of the corporations. Use of Internet financial reporting is effectually a method of marketing a company to shareholders and investors (Poon et al. 2003). According to Wagenhofer (2003), Internet financial reporting has at least two major economic effects. First, the Internet alters information processing costs and with it the demand and supply of financial information in capital markets. Second, Internet financial reporting creates a demand for standardization; this led to development of XBRL (Wagenhofer 2003).

Brown and Warner (1980) state that event studies provide a direct test of market efficiency; their assumptions are that the event will be either reflected in traded asset prices or in trading volume, if the corporate news announcement is deemed value-relevant to their investors. The authors that a major concern in event studies is that they tend to assess the extent to which security prices perform around the time of the economic event as abnormal. They also state that nonzero abnormal security returns that persist after a particular type of event are inconsistent with the efficient market hypothesis that security prices adjust quickly in order to fully reflect new information (Brown and Warner 1980).

In this study, we analyze two economic events to assess the impact of information technology in Brazil, India, Indonesia, Russia, and South Africa. The first event regards the effect of the Internet at the macro-economic level. The purpose of the first event analysis is to measure the total market response to the introduction of a new communications medium that resulted from reforms made to the telecommunications sector. The second event regards use of the Internet at the micro-economic level. The purpose of the second event analysis is to measure the market performance of those firms that have invested in the new technology. The firms with websites send a strong signal to the government of their endorsement of the privatization initiative.

This study uses valuation methodologies from prior literature to measure security price performances relative to the two event dates, i.e. the Mean Returns, the Market, and the Market Adjusted Returns models (Megginson 1997; Brown and Warner 1980). Each methodology was applied to publicly listed firms in Brazil, India, Indonesia, Russia, and South Africa that commercialized the Internet and announced the existence of their websites during the sampling period of 1991 to 2001. These five securities markets are, arguably, the most important and volatile emerging markets in the world and are often clustered into the same market indices by virtue of their systematic risks (Posner 1998; International Finance Corporation Annuals 1992-1999; Standard & Poor's Emerging Market Factbook (S&P EMF) 2000).

This study proceeds as follows. The next section briefly describes the research environment. Following this section, the research questions are formulated based on the conceptual model of the Internet as a reporting medium. …

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