Internet investor relations, information asymmetry and the cost of capital: evidence from JSE listed companies

In South Africa, King III compliance is a JSE listing requirement. Chapter 8 of the King III code states that transparent and effective communication with stakeholders is essential for building and maintaining their trust and confidence. Investors and creditors, as important sources of finance, are two important stakeholders to companies. Investor relations is the field that is concerned with the management of relationships between companies and investors. Financial communication is an important component of investor relations, and entails much more than mere financial statements. While South Africa has recently been ranked number one by the World Economic Forum 2015–2016 Global Competitiveness Index for the strength of its auditing and reporting standards for the sixth consecutive year, the quality of investor relations, as a wider concept, is largely un-researched in South Africa. As opposed to financial statements which content is regulated by various standards, acts and codes, the investor relations activity is not regulated and companies have a wide variety of investor relations communication channels from which to choose. This dissertation is concerned with one of these channels, namely the corporate website. The purpose of this study was to investigate the quality of the corporate website for investor relations purposes in South Africa, to establish the determinants thereof, and to establish whether the use thereof has any effect on the level of information asymmetry and the cost of capital. Theoretically, a well-developed Internet investor relations strategy will increase company visibility, according to the investor recognition hypothesis of Merton (1987). An increased visibility may increase liquidity and, according to economic theory, an increased liquidity is linked to the cost of capital through information asymmetry. Considerable research has been done on the relationship between disclosure and both information asymmetry and the cost of capital. The vast majority of empirical research to date has relied on either the use of an indirect proxy for disclosure (e.g. analyst ratings) or a measurement of annual report voluntary disclosures. Prior research on Internet investor relations is limited. Although the weight of empirical evidence points to a negative association between disclosure/investor relations and both information asymmetry and the cost of capital, literature is far from reaching a consensus; and numerous studies have found no or even positive associations. Empirical research in these areas has further favoured the use of developed country data and this is the first study that endeavours to examine the determinants of Internet investor relations, as well as the effect thereof on information asymmetry and the cost of capital in the South African context. In the absence of a readily available and comprehensive measurement instrument, the first objective of this study was to develop a measurement instrument that could be used to measure the extent of Internet investor relations. The measurement instrument was developed using: (1) the best practice corporate website guidelines as published by the Investor Relations Society, (2) an extensive Stellenbosch University https://scholar.sun.ac.za