The link between internet investor relations and information asymmetry

Abstract

BACKGROUND : Information asymmetry manifests when one party has more or better information than the other. Information asymmetry is said not only to increase transaction costs and decrease liquidity, but also to diminish the quality of the investment decisions taken by investors, thus weakening the overall functioning of markets. AIM AND SETTING : A well-developed Internet investor relations (IIR) strategy, coupled with increased disclosure levels, should theoretically decrease information asymmetry levels. The majority of related studies to date used either an indirect disclosure proxy or involved an examination of the annual report, and have used data from United States or European companies. Empirical studies to date have produced mixed results. The aim of this study was to ascertain whether a relationship exists between the quality of IIR (via corporate websites) and information asymmetry. METHOD : This study used data from Johannesburg Stock Exchange (JSE)-listed companies. Multiple regression analysis was applied with information asymmetry as dependent variable and IIR as one of a set of selected explanatory variables. A self-constructed measurement instrument was used to measure IIR for a sample of 85 companies. Given the inherent difficulty with direct observation of information asymmetry, three different proxies were used to estimate information asymmetry. RESULTS : A significant negative association was found between IIR and information asymmetry for all three information asymmetry proxies that were used: bid-ask spread, price impact, and analyst following. CONCLUSION : Empirical support is provided for the notion that companies may potentially benefit from a well-developed IIR strategy through reduced information asymmetry.