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.
Highlights
In view of both the costs and the skills required to gather information, not all investors are necessarily informed, resulting in there being both informed and uninformed investors. Brown and Hillegeist (2007) and Chang et al (2008:376) described information asymmetry as the situation where some investors have access to private information (‘informed investors’) while others only possess publicly available information (‘uninformed investors’)
The purpose of this study was to test for the association between the quality of Internet investor relations (IIR) and information asymmetry by examining the corporate websites of a sample of Johannesburg Stock Exchange (JSE)listed companies
Of the three proxies used for information asymmetry in this study, the bid-ask spread is the most popular and theoretically appealing proxy, but it provides the strongest empirical support for a negative association between IIR and information asymmetry
Summary
In view of both the costs and the skills required to gather information, not all investors are necessarily informed, resulting in there being both informed and uninformed investors. Brown and Hillegeist (2007) and Chang et al (2008:376) described information asymmetry as the situation where some investors have access to private information (‘informed investors’) while others only possess publicly available information (‘uninformed investors’). Information asymmetry may exist, either between the management of a company and its investors, and/or between investors themselves. Akerlof (1970) first pointed out the negative effects of information asymmetry on the effective functioning of markets. Information asymmetry hinders the ability of investors to distinguish between good and bad investment opportunities (Healy & Palepu 2001), creates additional costs through promoting adverse selection (Leuz & Verrechia 2000:92; Welker 1995:802) and decreases liquidity levels (Gajewski & Li 2015:117; Lev 1988). Information asymmetry is said to increase transaction costs and decrease liquidity, and to diminish the quality of the investment decisions taken by investors, weakening the overall functioning of markets
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