Electronic copy available at: http://ssrn.com/abstract=1576327

The Impact of Internet Financial Reporting on Stock Prices Moderated by

Corporate Governance: Evidence from Indonesia Capital Market

Zulfa Devina Rahman

e-mail: zulfa.devina@gmail.com or zoe_lfa@yahoo.com

Abstract

This study focuses on examining the impact of Internet Financial

Reporting (IFR) on stock prices in Indonesia Stock Exchange. As stated by

efficient market hypothesis (EMH), security prices at any time “fully reflect” all

available information. If the market is true efficient, voluntarily financial

information disclosed on web site would generates stock prices that reflect this

kind of information. This study also investigates whether IFR companies have

better financial condition than non IFR companies as predicted by signaling

hypothesis. Previous study said that the use of internet as reporting tool indicates

high firm’s quality because IFR firms are seen more up to date and advance in

technology than traditional firms (non IFR firms). In addition, this study tries to

explore the moderating role of corporate governance in increasing the value of

IFR companies for the investors.

This study investigates all public companies incorporated in Kompas 100

index. Kompas-100 Index is an index of 100 shares of public companies stocks

traded on Indonesia Stock Exchange (IDX) that have high liquidity and high

market capitalization. The results show that the degree of information discloses in

website has significant positive impact on abnormal return. The t-test used to test

any significant difference between IFR companies and non IFR companies shows

insignificant result. Finally, the hierarchical regression test used to examine the

impact of moderating variable, corporate governance, on IFR companies’ stock

prices also shows insignificant result.

Keywords: Internet Financial Reporting (IFR), Abnormal Return, the degree of

voluntary information disclosure, and Corporate Governance.

Electronic copy available at: http://ssrn.com/abstract=1576327

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INTRODUCTION

The development of information technology is so rapidly increasing use of

the Internet as an important medium of communication. The Internet has become

a communication tool which use is increasingly widespread, both by the public

and the businesses as well. Surely, this condition has an impact on today's

business environment. Recently, more and more companies are developing their

own web site and disseminate information about their financial performance over

the web that they made. Internet enables the presentation of information very

quickly and in more effective and efficient way. In addition, information on the

Internet has many advantages that is easily deployed, without limitation, current,

has high interaction capabilities, and unlimited access to greater volume of data

(Asbaugh et al., 1999; Lymer, 1999; Wagenhofer, 2003; Pervan; 2006; Lai et al.,

2007). Though many benefits brought by the Internet but still many public

companies in Indonesia that do not have their own website and do not report their

financial performance over the Internet.

Through survey they did, Asbaugh et al. (1999) found the major reason

why companies use the Internet to disclose their financial performance voluntarily

was to communicate with the existing and potential shareholders. The Internet

enables the companies to make their financial information available for and reach

by all investors all over the world. However, the financial statement presented in

Internet is essentially voluntary and unregulated. It means that there is no

compulsion for companies to disclose their financial performance in the Internet

even though they already have a web site. Lai (2007) stated that there is no

international accounting standards that regulate this kind of reporting, hence the

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practice of financial reporting on internet is based on common practices

(Budisusetyo and Almilia, 2008). Therefore, the information presented in

companies’ website will differ one to another.

Although Internet reporting is voluntarily in nature, some previous

literatures indicate that investors prefer financial information distributed

electronically compared to financial information that is distributed traditionally

for making decisions because the electronically distributed information were

viewed more timely (Asbaugh et al., 1999; Deller et al., 1999; FASB,

2000). Financial information which is traditionally expressed through the annual

reports, news media, advertisements or brochures is considered less relevant

because they have timeliness quality problems. Information considered relevant

for decision making when the information was disclosed before that information

loses its capacity to influence decisions (SFAC No. 2, FASB, 1980). Hicks and

Bacque (2008) stated information is only valuable if the information is still up to

date when the user need it and the Internet is considered to be able to provide the

best information on time.

The hypotheses of this research are based on efficient market theory and

signaling theory. If the market is efficient as defined by Fama (1970), then in

equilibrium, at any time, any information published to the market will be reflected

in stock prices. That is, the market will react to the information available on the

market such as the disclosure of financial information on the Internet. Therefore,

even though the information disclosed on the Internet is voluntary and

unregulated, it predicts the market will continue to react to this information.

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The difference in reporting time between the financial reporting in terms

of annual reports to Bapepam (Indonesia Capital Market Supervisory Agency) and

financial reporting on the Internet makes the financial reporting on the Internet is

necessary to investigate. Lai et al. (2007) stated that this information time gap will

cause the investors to gain abnormal return from reevaluating their investment

decision. Thus, this research tries to examine whether the voluntary financial

information disclosed on the Internet influence investors’ decision. By using the

degree of information disclosed in Internet as the proxy of internet financial

reporting, this study tries to examine whether there is significant positive impact

between the degree of information disclosed on companies’ stock prices. In

addition, this study also tries to provide empirical evidence whether IFR

companies has better condition than non IFR companies, as predicted by signaling

theory. Craven and Marston (1999) states that the use of the Internet as a reporting

tool by the company indicates firms’ high quality. It also indicated a more modern

and up to date performance of the using a more advance technology compared to

traditional firms.

Furthermore, this study also tested the moderating role of corporate

governance to financial reporting on the Internet in increasing the company's

stock return. This is due to the financial reporting on the Internet is also believed

to be a form of corporate transparency (Deller et al., 1999; Silva and Alves, 2004;

Silva and Christensen, 2004). Transparency done by the company through greater

disclosure showed that the company seeks to do business with good management

or good corporate governance. Therefore, this study tries to examine whether

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firm’s corporate governance mechanism will influence the degree of information

disclosure to increase the company's stock return.

THEORETICAL FOUNDATION AND HYPOTHESES DEVELOPMENT

Internet Financial Reporting

Internet financial reporting refers to the use of the company's website in

disseminating information about the company's financial performance (Hunter and

Smith, 2007). Financial information provided by the company through web site

include a set of comprehensive financial statements, including footnotes, partial

financial statement and/or the subjects of financial information which may include

summary financial statements or anything resulting from such reports, the stock

price data, analyst reports, discussions related to management operations, a

database of companies’ related news and other company-specific information

(Asbaugh et al. 1999; Deller et al., 1999; Lai et al. 2007; Kelton and Yang , 2008).

From this definition, we can conclude that the Internet financial reporting provide

all information about a company whether it is in form of financial information or

non financial information and it can be used by the information users to make a

decision.

Asbaugh et al. (1999) examine whether the use of the Internet by a

company will improve the relevance of its financial reporting to the market. Their

(1999) research had defined IFR on the basis of 3 criteria:

(1) Reporting that provides a comprehensive set of financial statements (including notes to the financial statements and audit reports), (2) Links to other annual reports on the Internet, (3) A link to EDGAR, the electronic system of the SEC.

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The results found that 70% of their samples were conducting Internet

Financial Reporting (IFR) and they also found that the Internet financial reporting

practices are very difference in the quality in terms of timeliness and usefulness of

the information reported.

In 1999 more thorough studies which test the Internet financial reporting

in European countries (Lymer, 1999; Gowthorpe and Amat, 1999; Craven and

Marston 1999; Wagenhofer , 1999; Pirchegger and Wagenhofer, 1999;

Debrecency and Gray, 1999). Craven and Marston (1999) examined the

relationship between the level of financial disclosure on the Internet with

company size and type of industry. By using sample of 206 large companies in the

UK study found that large companies listed on the London Stock Exchange prefer

to report their financial information on the Internet. The results of this study also

showed that there is no significant relationship between the level of disclosure on

the Internet and the type of the industry.

Most of the previous literatures were focused on the investigation of

variables that affect the Internet financial reporting. However, little research found

focusing on tested the relationship between the financial reporting of the Internet

stock prices. Lai et al. (2007) stated that the diversity of financial information

makes it difficult to ensure the contribution of this Internet technology, especially

if it related to stock prices. One recent study that examined the relationship

between the financial reporting of the Internet stock prices is the research

conducted by Lai et al., (1999). This study tested the stock market in Taiwan and

found that the Internet Financial Reporting (IFR) companies’ stock price

fluctuates faster than non IFR companies’ stock price.

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Hunter and Smith (2007) tested the use of Internet for financial reporting

in emerging capital markets, including Indonesia, and found that the

dissemination of information through internet are more timely and are affecting

the emerging markets. Overall, this study provides empirical evidence of the

longitudinal effects of Internet technologies such as the spread of financial

information more timely for developing markets. The results of this study

revealed that there is a positive spread in the market price and trading volume

around the event date.

Efficient Market Hypothesis (EMH) and Internet Financial Reporting

Efficient market hypothesis was first proposed by Fama (Fama, 1969;

1970). This theory predicts that if the developed capital markets such as the

Indonesian capital market, is efficient, then in equilibrium, any information that

enters the market as information disclosed on a voluntary basis through the

company website will be reacted by the market. This is proceed from the

condition of "fair game" a condition where every investor has the expected return

from the investment they made and by using the information available on the

market investors make investment decisions for which they expect the return. The

existence of voluntary disclosure on internet will make investors reevaluate their

investment decisions and they can choose whether to sell or to hold the stocks

(Lai et al., 2007).

Ettredge et al. (1999) stated that companies continue to disseminate their

financial information over the web site due to efficient market condition, web site

provide earlier information than those provide by traditional information media

and initial use of this information make sophisticated users quickly generates

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stock prices that reflect the new information. Voluntary disclosure by companies

aimed to reduce information asymmetry between the company and

shareholders. Therefore, although the information disclosed on the Internet this is

voluntary and unregulated, this study expected that the market will continue to

react to this kind of information.

H1: The degree of voluntary information disclosure on the website will

have a positive impact on company's stock price.

Signaling Theory and Internet Financial Reporting

Signaling theory explains that the use of the Internet to disclose

information about the company is a signal of good quality companies. Financial

reporting on the Internet is a form of management efforts to reduce the

information asymmetry, so that investors will appreciate the manager’s

effort. Craven and Marston (1999) states that the use of Internet as a reporting

medium by the company indicates companies’ high quality if it compared with

conservative companies.

Beaver (1968) claimed that good companies will disclose as much as

information in order to make investors to be able to differentiate between the good

company and the bad ones. Similarly, Dutta and Bose (2007) in their study stated

that the use of the Internet to disseminate company information will minimize

investor shocks due to negative news and it will be reflected in stock prices. If a

company providing less information it will increase the information asymmetry

between management and investors. Therefore, this study posits this following

hypothesis:

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H2: There is a difference between the abnormal stock price returns of

internet financial reporting by the abnormal stock price returns are not

doing financial reporting on the internet

Corporate Governance and Internet Financial Reporting

Corporate governance is an important element in improving economic

system and corporate governance framework also provides the definition of clear

organizational goals and how to achieve that goal. Many previous studies showed

that companies with good corporate governance will be valued higher by investors

(Black et al., 2003; Gompers, 2003). Good corporate governance will lead to the

increase in stock returns (Gompers, 2003; Drobetz, 2004; Bauer et al.,

2004). Specifically, Kelton and Yang (2008) stated that the company's corporate

governance mechanisms affect the behavior of corporate disclosure on the

Internet. Thus, this study hypothesized as below:

H3: firm’s corporate governance mechanism strenghtened the relationship

between the degree of voluntary information disclosure and the company's

stock price

RESEARCH DESIGN

Sample and Data Collection

Population of this research is all companies listed on the Indonesia Stock

Exchange (IDX) that have their own company web site. The samples used in this

study are those companies that meet the criteria established in this study. The

sampling method used in this study is purposive sampling, with the following

criteria:

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a. Company has been listed on the Stock Exchange from 2007-2008.

b. Companies already have a web site prior to the study.

c. Company has implemented corporate governance practice

d. To control bias, this study exclude all announcements coincide with other

announcements such as dividend announcements, and the acquisition/merger

announcements.

e. Companies have similar market capitalization (company size)

f. Companies that have incomplete data are excluded from the sample.

Data collected through the website of the companies and Indonesia capital

markets website, www.idx.co.id. The collection of data through the company

website is using observation techniques.

Variables Definition and Measurement

Dependent Variable

Dependent variable in this study was abnormal return that is used to test

the information content of H1, H2 and H3. Abnormal return is calculated by using

market-adjusted model that assumes that the best measurement of expected return

is the composite index return. Here is the formula for calculating the abnormal

return:

ARit = Rit - Rmt

where, ARi,t is abnormal return of security i during period t, and Ri,t is the return

on security during period t, measured as the change of current stock price to the

previous closing price divided by the previous closing price. Rm,t is the market

index return on day t. Rm,t is computed by the change of current composite stock

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t=5

t=1

price index divided by the previous composite stock price index. Cumulative

abnormal return is defined as:

CARi (t1,t5) = ∑ ARi,t

ARi,t definition is the same with equation (1), t1, t5 is the same interval of stock

return observation on accumulation period from t1 to t5.

To test the relationship between the financial reporting on Internet with an

abnormal return proxies by Cumulative Abnormal Return (CAR), this study uses

an "event" test method with a 5-day before and 5 days after the event date of the

reporting, so that there are 11 days observation period. Cumulative abnormal

return of each company is accumulation of the abnormal return of each company

during those 11 period days.

event window

In addition, based on researcher early observation, the difference in the

financial reporting period by the company to the Bapepam with the financial

reporting period on the Internet necessitate this study to distinguish the financial

reporting on the Internet that reported earlier and Internet reporting which are

reported later compared to the company's financial reporting period to the

Bapepam.

Independent Variable

Independent variable in this study is the degree of voluntary information

disclosure. The degree of voluntary information disclosure is measured by using

t=-5 t=-4 t=-3 t=-1 t=-2 t= 0 t= 1 t= 2 t= 3 t= 4 t= 5

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the model developed by Spanos (2006) that is the Internet Disclosure Index (IDI)

with 50 items construct, which combines content and presentation criteria. There

are 6 main themes in the IDI that include: 1) Accounting and financial

information; 2) Corporate Governance information; 3) CSR and human resources

information; 4) Contact details to investor relations; 5) Material processable

formats; 6 ) Technological advantages and user support. Value 1 is given for each

construct that exists and the value 0 for non existence. Thus, the possibility of a

total value of the information disclosure level of each sample companies ranged

from 0 to 50.

Moderating Variable

Moderating variable in this research is corporate governance. Corporate

governance in this study was measured by using modified model of Governance

Board model by Kakabadse, Kakabadse, Kouzman (2001) in Syahkhroza

(2003). The main criteria in the assessment of the Board Governance in this study

are divided into (1) Board of Commissioner and (2) Board of Director. Each

existing construct is going to get value 1 and 0 to non existing construct.

Hypotheses Tests Model

The relationship between the level of Internet Financial Reporting by

Abnormal Return

Hypothesis 1 tested by using regression analysis with the following

equation:

CAR= α0+β1TPI+ε

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where, CAR is cumulative abnormal return and TPI is the degree of voluntary

information disclosure and ε is error.

1. Experimental group is group of companies that have web site and disclose

financial information through their web site at the test period.

Abnormal Return Differences between companies that make financial

reporting on the Internet with a company that does not make financial

reporting on the Internet

Hypothesis 2 tested using t-test. Based on Lai et al. (2007) which refers to

Rice's (1978), to test this hypothesis 3 the companies to be tested are divided into

two groups:

2. Control group is group of companies that do not have a web site or do not

report their financial information over their web site.

As explained at the beginning, this research requires the sample companies

to have similar market capitalization to avoid bias. Therefore, the population of

this research is companies incorporated in the Kompas-100 index from the year

The relationship between Corporate Governance and Cumulative Abnormal

Return

Hypothesis 3 tested by using hierarchical regression analysis as explained

as follows:

CAR= α0+β1TPI+β2CG+ε…..................................................(1)

CAR= α0+β1TPI+β2TPI*CG+ε...............................................(2)

where, CG is corporate governance and TPI*CG is the interaction between the

degree of voluntary information disclosure and corporate governance.

Data Collection Results

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2007-2008. Kompas-100 Index is an index of 100 shares of public companies

stocks traded on Indonesia Stock Exchange (IDX) that have high liquidity and

high market capitalization. The samples in this study are described in the

following table:

Insert table 1 here

As seen on the table, averaging 75% of 100 companies listed in the

Kompas-100 index already have website, but many of them can not be used as

sample in this study because: (1) The announcements date of financial information

that is required in the event study are not available on the web site (upload date);

(2) Financial information that the company provided in the web site are not

updated. Therefore, only about 25% of the population can be tested in this study.

Statistical Test Results

Table 2 shows descriptive statistics from the regression model using event

windows (t=11). Mean of cumulative abnormal return (CAR), the degree of

voluntary information disclosure (TPI) and corporate governance (CG) are -

0.00138; 1.5491 and 0.7041 respectively. Minimum value of the CAR, LGTPI

and LGCG are -0.18714; 1.41 and 0.70 respectively. The maximum value of

CAR, LGTPI and LGCG is 0.20762; 1.67 and 0.78 respectively.

Insert table 2 here

Hypothesis Testing and Discussion

The relationship between the Cumulative Abnormal Returns and the degree

of voluntary information disclosure

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Hypotheses 1 is tested by using regression analysis of linear regression

model and hypothesis 3 is tested by using hierarchical regression model. This test

aims to determine the level of statistical significance of each independent variable

and the moderating variable. Summary of test results of both regression model are

summarized in table 3 below:

Based on the above hypothesis testing, it showed that the first hypothesis

is statistically supported. The first hypothesis test results showed that the higher

the degree of voluntary financial information disclosure conducted on the web site

the higher the abnormal return to be gained by investors from the investment

Insert table 3 here

Hypothesis 1 tested the influence of the degree of voluntary information

disclosure (TPI) on the Internet measured by the Internet Disclosure Index (IDI)

to stock prices proxies with cumulative abnormal return (CAR). Adjusted R2

values are used to test the goodness-fit of the regression model and shows that the

amount adjusted R2 value of 0.030 means that the variability of dependent

variables that can be explained by the independent variable is 3.0%. Adjusted R2

values are relatively small and it suggests that the ability of independent variables

in explaining the dependent variable is very limited.

The effect of the degree of voluntary information disclosure on cumulative

abnormal returns are statistical significant at 5% alpha. This is indicated by t

values of 2.289 with a significance of 0.024. The coefficient of relationship

between CAR and the degree of voluntary information disclosure is positive of

0.206. It means that each increase in the 5% the degree of voluntary information

disclosure will increase abnormal return of 0.206%.

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decisions they made. The results of this study is consistent with Lai et al. (2007)

which states that the abnormal returns of a company's stock will rise when the

degree of voluntary disclosure by the company on the web site also increases. The

study tested 101 companies that have a web site and listed on the Taiwan Stock

Exchange. They (2007) divided those samples into two subgroups that is groups

of companies that make a complete disclosure of financial information web sites

as well as both non-financial information and corporate groups which are not

serve full disclosure. The result from test of difference or t-test (one-tailed t-test)

is significant at t =-2.3017 and the probability value of 0.0117. Lai et al (2007)

concluded that the higher the level of financial disclosure on the website will

caused company's stock price to change more quickly.

The difference between CAR of companies that make financial reporting on

the Internet with CAR of companies that do not have a website/do not

practice internet financial reporting

Hypothesis 2 in this study was tested by using t-test. Test different t-test

used to determine whether two unrelated samples have different mean values. Test

of difference or t-test was done by comparing the difference between the two

mean values with standard error of the mean difference in the two samples.

Initial output of statistical test result shows the mean cumulative abnormal

return for the company that practicing financial reporting on the web site

(experimental group) is -0.00138, while the mean for the group of companies that

do not have a web site/do not practices financial reporting on the web site (control

group) were 0.02001. It is absolutely clear that the mean cumulative abnormal

Insert table 4 here

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returns is different between groups of companies that make financial reporting on

the website with group of companies that do not have a website. However, to see

whether this difference is real the second output must be analyzed (independent

sample test).

As seen from the output of Levene test of 16.967 with a probability of

0.000 for the probability of <0.05. It can be concluded that the data have the same

variance. Furthermore, if it viewed from the value of t for -1.643 and the

significance value for 0.102 means that the mean cumulative abnormal return of

internet financial reporting companies did not differ significantly with the

cumulative abnormal return of companies that do not have a web site/do not

practice financial disclosures on web site due to the significance value is >

0.05. Thus, the results of statistical tests indicate that hypothesis 2 is not

supported. Thus, based on statistical test results of this study can be concluded

that the announcement of financial statements on the web site is not signals

companies’ future prospect.

This result is different from the results of the study Lai et al. (2007) who

found that the abnormal return on the companies the experimental group was

significantly different from the abnormal return on the companies control

group. These results obtained by testing the abnormal return on the second day

after the day of the announcement. The opposite results of this study with

previous studies is probably attributed to earnings announcement through

quarterly financial reports are believed to be one of few sources of new

information and is not a solely source of substantial new information, then

causing the market not reacted to this information (Ball and Shivakumar, 2008).

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Ball and Shivakumar (2008) found that earnings announcement do not

bring additional new information to the market. Information consisted in earnings

announcement are historically rather than real time to the market. They concluded

information carried in the quarterly announcements averaging only 1% to 2% of

total annual information. They found that there is a reducing value of information

generated through earnings announcement due to low frequency of

announcements, less discretionary and using historical approach. They also stated

that management forecast that is announcing earlier than earnings announcement

provide more substantial new information to the market. This condition made the

earnings announcement less relevant to the decision makers and not reacted by the

market.

The influence of corporate governance against the cumulative abnormal

return is statistically significant at 5% alpha. This is indicated by t-values of -

2.494 with a significance value of 0.014. The coefficient of corporate governance

relationship with the CAR is negative of -0.76. It means every increase in

The relationships between CAR and the degree of voluntary information

disclosure which is moderated by the Corporate Governance

Hypothesis 3 tested with hierarchical regression analysis. Adjusted R2

values are used to test the goodness-fit of the regression model and shows that the

amount adjusted R2 value of 0.066 means corresponding variability dependent

variables can be explained by the variability of the independent variable is

6.6%. The regression test of model 1 has adjusted R2 of 3.0%, while model 2 has

better adjusted R2 for 6.6%. This shows that the inclusion of moderating variables

will improve the explainability of independent variable to the dependent variable.

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corporate governance level for 1% will reduce the abnormal return for

0.764%. This shows that the higher the corporate governance the smaller

abnormal return that can be gained by investors.

The interaction between the level of information disclosure and corporate

governance (TPI * CG) with CAR as the dependent variable has t-value of - 2.461

with the significance value of 0.015 and significant at 5% alpha. The coefficient

of interaction between TPI and corporate governance (TPI * CG) with a

cumulative abnormal return is negative of -0.478. Hence the result indicated that

the increase in the level companies’ corporate governance will reduce the

abnormal return, or vice versa. This regression test results are not in accordance

with the prediction posited by this study. Thus, hypothesis 3 in this study is not

supported.

This research shows the opposite result to the theory that is the negative

relationship between corporate governance and abnormal return. The explanation

of the opposite result might be explained by research conducted by Mannan

(2009). According to Mannan (2009) Indonesian capital market experienced

bearish conditions in 2008. This condition characterized by variations in stock

prices in Indonesia Stock Exchange (IDX), overall stock prices are decline in

extreme conditions, as well as the level of trading volume for individual shares or

even the composite index and the LQ45 index were also decline during the year

2008. This condition is attributed to investors’ Bearish (pessimistic) behavior on

globally expected capital market conditions. Bearish period is a term used by

investors to describe a period in which the market experienced a global

decline. Fabozzi and Francis (1977) stated market risk (Beta) in the period Bearish

19

tend to be unstable and therefore contributes to stock return. This condition

eventually caused the investors to act Bearish by reducing investment transactions

to avoid the relatively higher risk.

Gompers et al (2003) provide several explanations to the condition when

corporate governance valued but the value were not incorporated immediately into

stock price are due to (1) market factor (beta); (2) a firm’s market capitalization

(size); (3) book-to-market ratio and (4) immediate past return. In addition,

Cremers and Ferrel (2009) provide other explanation for this condition that is

what they called as the market "learning" the market is learning the importance of

corporate governance for companies.

CONCLUSIONS AND LIMITATIONS

The focus of this research is to examine whether financial reporting on the

website practicing by companies - related to timeliness - will affect the company's

stock price. Specifically, this study tested whether the degree of voluntary

information disclosed by companies on their web site has a significant influence

on stock prices. Some conclusions can be drawn from the results of the tests in

this study. The first results of statistical tests in this study supported the prediction

of efficient market theory and consistent with previous study conducted by Lai

(2007). This study provides empirical evidence that the degree of voluntary

information disclosed on the website has significantly positive effect on stock

prices. In other words, the higher the degree of information disclosure on the web

site the higher the abnormal return will be. Therefore, it can be concluded that the

greater the degree voluntary information provided by a company (more

transparent) the better a company's stock performance.

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The second results of statistical tests of this study found no difference

between the abnormal stock return of IFR companies with abnormal return of that

companies do not report their financial report through internet. This opposite

result can be explained by research conducted by Ball and Shivakumar (2008).

They found that there is a reducing value of information generated through

earnings announcement due to low frequency of announcements, less

discretionary and using historical approach. This condition made the earnings

announcement less relevant to the decision makers and not reacted by the market.

Finally, test results showed that the interaction between corporate

governance and the degree of voluntary information disclosures has significant

effect on abnormal return but their relationship is negative. It means that an

increase in corporate governance will decrease the abnormal return or vice

versa. Test results can not support the third hypothesis in this study because it

contrast to the prediction that posited by this study. The explanation of the

opposite result might be explained by research conducted by Mannan (2009).

Mannan (2009) stated that Indonesia capital market suffers bearish condition in

2008- a global market decline due to unstable market condition which

characterized by an extreme decline in overall stock prices and trading volume. In

addition, Gompers (2003) and Cremers and Ferrel (2009) provide other

explanations that contributed to negative relationship between corporate

governance and stock prices that is market factor, market capitalization, book-to-

market ratio, immediate past return (Gompers, 2003) and market learning

(Cremers and Ferrel, 2009).

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Several limitations found throughout this study are: (1) This study does

not distinguish between the nature of the announcements such as good news and

bad news; (2) The corporate governance proxy in this study are based only on the

board 6 construct of board governance and the determination of score from the

proxy is also only based on the sum of these constructs. The next study should

have built a proxy that can be relied upon in the assessment of corporate

governance based on the determination of score and weighing each of construct so

that it will resulting in a better corporate governance index measurement; (3) The

degree of disclosure of information scores is assumed to be similar every year.

This condition attribute to the lack of information about the changes in content

and presentation in the companies’ web site.

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APPENDIXES

Table 1 Sampling Procedure

Data Description Years of observation

2007 2008

Companies incorporated in Kompas 100 index 100 100

Less: Companies that their financial information are

not available in IDX 1 1

Companies with incomplete data 50 51

Total experimental group samples 25 24

Control group samples 24 24

Table 2 Descriptive Statistics

Variables N Mean Minimum Maximum Standar Deviation

CAR 136 -0,00138 -0,18714 0,20762 0,07227

LGTPI 136 1,5491 1,41 1,67 0,6811

LGCG 136 0,7042 0,70 0,78 0,01976

Table 3 Statistical Results of Hypothesis 1 and Hypothesis 3

Variable Model 1 Model 2

Dependent variable CAR

(t-value)

CAR

(t-value)

Independent variable

LGTPI 2,289** 3,308*

LGCG -2,494**

Moderat -2,461**

R2 0,038 0,080

26

Adjusted R2 0,030 0,066

F 5,240** 5,746**

Table 4 t-test Result

Group Statistics

FIRM_CAT N Mean Std. Deviation Std. Error Mean

CAR Web 136 -0,00138 0,07227 0,00619 non web 136 0,02001 0,13364 0,01146

Independent Samples Statistics

Levene's Test for Equality of Variances t-test for Equality of Means

F Sig. T df Sig. (2-tailed)

CAR Equal variances assumed

16,967 0,000 -1,643 270 0,102

Equal variances not assumed

-1,643 207,740 0,102

where, firm_cat : firm category divided into web and non web.

web : group of companies that practicing internet financial

reporting non web : group of companies that do not have website/do

not practices internet financial reporting

27

28

Source: Spanos (2006)

29

Board Governance

Board Characteristic

Board of Commissioners Directors’ Background

Insideness

External Expertise/Independent Board

Board of Directors Directors’ Background

Insideness

External Expertise/Independent Board