Online Information Review

Online reporting by banks: a structural modelling approach

Carlos Serrano-Cinca Yolanda Fuertes-Callén Begoña Gutiérrez-Nieto
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Carlos Serrano-Cinca Yolanda Fuertes-Callén Begoña Gutiérrez-Nieto, (2007),"Online reporting by banks:
a structural modelling approach", Online Information Review, Vol. 31 Iss 3 pp. 310 - 332
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OIR
31,3 Online reporting by banks:
a structural modelling approach
Carlos Serrano-Cinca, Yolanda Fuertes-Callén and
310 Begoña Gutiérrez-Nieto
Department of Accounting and Finance, University of Zaragoza,
Refereed article received Zaragoza, Spain
26 September 2006
Approved for publication
20 October 2006
Abstract
Purpose – A structural equation model is proposed to explain internet reporting by banks. The
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model relates three constructs of financial institutions (size, financial performance, and internet
visibility) to their final influence on internet information disclosure (e-transparency).
Design/methodology/approach – This paper’s proposed model analyses a sample of Spanish
financial institutions using publicly available data. The model is tested using partial least squares.
Findings – A positive and statistically significant relationship has been found between size, financial
performance, internet visibility, and e-transparency, with direct and indirect effects. The study shows
that size accounts for most of the variance. Size has a positive effect on e-transparency, financial
performance, and internet visibility. However, the direct effect of financial performance and internet
visibility on e-transparency is small.
Research limitations/implications – The researchers have analysed only one year of data from
one country and one sector. The direction of cause and effect assumed in the model is a logical one, but
statistical methods cannot prove causality, only association. Even though any bank can disclose its
financial information online for a very low cost, building a robust, interactive web site requires major
resources. This gives larger banks a value added advantage.
Originality/value – The paper examines the relationship between size, financial performance,
internet visibility and e-transparency using a structural model. Although structural models are
commonly used in many scientific disciplines, they have not yet been applied in disclosure research.
Keywords Financial reporting, Online operations, Disclosure, Financial institutions,
Linear structure equation modelling
Paper type Research paper

Online Information Review
Vol. 31 No. 3, 2007
pp. 310-332
q Emerald Group Publishing Limited
1468-4527
DOI 10.1108/14684520710764096
Introduction
Today financial institutions are struggling to adapt themselves to constant changes in
their business model. One of their most critical challenges is to come to terms with the
internet, which offers both risk and opportunity. Recent research (Debreceny et al.,
2002; Serrano-Cinca et al., 2004; Xiao et al., 2004) has found a connection between firms’
technological strength and the amount of information they disclose on the internet.
Business information on the internet has become a very important part of business
information services (Liu, 2000). The internet is a technology with the power to
revolutionize external reporting (Jones and Xiao, 2004). Healy and Palepu (2001, p. 432)
are right when they predict that “the increasing use of the internet by investors is likely
The work reported in this paper was supported by grant Ref. S-14 (3) of the Department of
Science, Technology and University (Aragon Regional Government). Two anonymous referees
have suggested valuable comments that have improved the first version.
 to continue, reducing the costs of providing voluntary disclosures and presumably Online reporting
increasing their supply”. In recent years, supervisory bodies around the world have by banks
contributed to this growth by enacting measures that regulate the disclosure of
information on the internet. These include the Sarbanes-Oxley Act (Sarbanes and
Oxley, 2002) and the Directive 2004/109/EC (2004) on harmonisation of transparency
requirements from issuers.
The disclosure of information is a key issue in the financial sector. As a result, 311
numerous studies have been conducted on this topic. For example, Bryant (1980) and
Bernanke and Gertler (1990) find that information asymmetry between a bank and its
depositors can lead to a bank run or even to bankruptcy. Chen and Hasan (2006) study
the effect of banking system transparency on firms’ stability. Eijffinger and Geraats
(2006) analyse the transparency of central banks. Tadesse (2006) focuses on the
consequences of regulated disclosure. Akhigbe and Martin (2006) study the effects of
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the Sarbanes-Oxley Act on financial sector transparency. Spiegel and Yamori (2006)
analyse the causes of corporate information disclosure in the banking sector.
The purpose of this paper is to test the hypothesis that financial institutions with a
major internet presence disclose more and better online corporate information than do
their counterparts. It also tests two of the classical hypotheses of empirical research on
disclosure using the explanatory variables of corporate size and financial performance.
This paper also makes a methodological contribution. Numerous theories have been
proposed to explain companies’ behaviour in regard to the voluntary disclosure of
corporate information. These include the agency theory (Watts and Zimmerman, 1986),
the signalling theory (Morris, 1987), the political-costs theory (Holthausen and
Leftwich, 1983), the cultural relevance theory (Gray, 1988), the legal systems theory (La
Porta et al., 1998), and the legitimacy theory (Preston and Post, 1975). Such theories
generally use intangible concepts like “performance”, “legitimacy”, “culture”,
“visibility” and “transparency” that cannot be measured directly; therefore, they are
called latent variables or constructs. This paper proposes that these theories be tested
using Structural Equation Modelling (SEM), a multivariate technique that performs
multiple regressions between latent variables. Fornell (1987, p. 408) called SEM a
“second generation of multivariate analyses,” but it is still under-utilised in accounting
and finance (Blanthorne et al., 2006). Although SEM has not commonly been used to
analyse financial information, it has been used to process surveys (Hunton et al., 2000;
Sweeney et al., 2003; Baines and Langfield-Smith, 2003; Wang et al., 2006). This paper
uses SEM to test the proposed model, which allows the latent variables to be employed
properly; it also provides a better understanding of their relationships.
The remainder of this paper is organised as follows. The next section presents a
review of the recent literature on information disclosure, describes the proposed model,
and establishes the hypotheses based on the literature. The third section presents the
empirical study using data from 70 Spanish financial institutions. The fourth section
presents the results from the measurement and structural models. The final section
provides the authors’ conclusions.

Theoretical background and hypotheses

Under the umbrella of information disclosure theories, several hypotheses have been
established that relate the amount of corporate information issued by companies to
variables such as profitability (Wallace et al., 1994), size (Firth, 1984), listing status
 OIR (Cooke, 1993), audit firm (Singhvi and Desai, 1971), and leverage (Schipper, 1981).
31,3 Healy and Palepu (2001) provide a literature review. A special facet of this topic is
internet disclosure, which was studied early on by Lymer (1999). Larrán and Giner
(2002) provide a literature review of the use of the internet to disclose financial
information.

312 This paper’s proposed model

The model proposed in this paper (see Figure 1), relates three constructs of financial
institutions (size, financial performance, and internet visibility) to their ultimate
influence on internet information disclosure. The model also relates corporate size and
financial performance to internet visibility, as well as size to financial performance.
The construct “e-transparency” stands for the level of corporate information
disclosed on the internet. This paper follows Bushman et al. (2004, p. 210), who define
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corporate transparency as “the widespread availability of firm-specific information to

those outside the firm”, but it applies the definition specifically to internet availability.
The construct “corporate size” means the size of the bank. Although this could be
considered a measurable variable, it has no single definition. Many variables relate to
size, including the number of employees, total sales, total assets, the market value of
the firm, and the total number of shareholders.
It is also difficult to find a consensus definition for the construct “financial
performance”, although a number of indicators attempt to measure it. In fact, the bulk
of financial statement analysis is based on the assessment of financial performance.
This paper follows Kaplan and Norton (2004, p. 7), who maintain that “financial
performance provides the ultimate definition of an organisation’s success”.
The construct “internet visibility” attempts to capture the importance of an entity
on the Net. It is a non-financial construct because it does not appear in bank
statements, and its indicators have to be extracted from other information sources.
With the development of electronic banking, internet visibility has become an
important intangible asset for financial entities.

Underlying hypotheses
In this section, the researchers discuss in detail the hypotheses that underlie the model.

Figure 1.
Factors driving financial
institutions to disclose
financial information on
the internet
 Disclosure incentives: corporate size. The first hypothesis is that larger financial Online reporting
institutions are more likely to disclose corporate information on the internet than are by banks
smaller institutions. The agency theory supports this hypothesis because it says that
larger banks experience more information asymmetry between managers and
shareholders than smaller banks do; this implies high agency costs. Firth (1979)
suggests that the solution lies in more information disclosure from larger banks, not
less. The political cost or governmental regulation theory (Watts and Zimmerman, 313
1986) supports this hypothesis because it says that larger companies suffer from
political pressures that lead them to disclose more information. Gray (1984) points out
that corporate disclosure, both compulsory and voluntary, reduces political costs.
The positive relationship between corporate disclosure – whether voluntary or
compulsory - and corporate size has been tested empirically in many studies.
According to Ahmed and Courtis (1999), size is significant in most of these. Ashbaugh
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et al. (1999) and Larrán and Giner (2002) also find that size plays a significant role in
corporate disclosure on the internet.
In sum, many arguments and a great deal of empirical evidence find that the larger
the bank, the more and better corporate information it discloses. Therefore, the
following hypothesis is proposed:
H1. The corporate size of a bank has a positive effect on its e-transparency.
Disclosure incentives: financial performance. The relationship between performance
and disclosure has also been researched extensively. Singhvi and Desai (1971) argue
that higher profitability motivates managers to provide greater information because it
increases investors’ confidence. This, in turn, increases management compensation.
Cooke (1989) argues that a highly profitable firm is more likely to signal to the market
its superior performance by disclosing more information in its annual report. Lang and
Lundholm (1993) argue that disclosure is likely to be related to a firm’s profitability
only if perceived information asymmetry between managers and investors is high.
Giner-Inchausti (1997) finds that the political process theory provides a rationale for
this relationship because one could reasonably assume that a successful company will
disclose more information to justify its large profits.
The empirical research on this hypothesis is not conclusive. Some studies find a
positive correlation (Singhvi, 1968; Singhvi and Desai, 1971; Wallace et al., 1994). Other
studies either find no correlation at all (Raffournier, 1995; Ahmed and Courtis, 1999), or
they find a negative relationship (Belkaoui and Kahl, 1978).
Financial institutions with notable profitability, efficiency and client satisfaction are
expected to have an excellent web site in order to fulfil their reporting commitments to
their corporate information users. Therefore, the following hypothesis is proposed:
H2. Financial performance has a positive effect on e-transparency.
Disclosure incentives: the use of the internet. This hypothesis states that banks that
have made a strategic decision to maintain a strong internet presence will not only gain
greater visibility, but that they will also disclose more and better corporate
information. According to Xiao et al. (2004), Information Technology companies are
more likely to adopt internet-based corporate disclosures. This is due to their higher
levels of internet knowledge, their desire to lead in new technologies, and their
imitation of other innovative companies in their sector.
 OIR Serrano-Cinca et al. (2004) analyse a sample of savings banks and find that those
31,3 who use the internet as a strategic tool to reach customers tend to disclose more
corporate information through their web sites. They also find a positive and significant
correlation between a corporate information disclosure index and variables such as
level of electronic banking services. Debreceny et al. (2002) also find that technology is
a firm-specific determinant of internet corporate reporting.
314 The political cost theory espoused by Watts and Zimmerman (1986) also justifies
this hypothesis. The theory states that the more visible a company is, the more
information it discloses due to political pressures. Skinner (1994) finds that managers
of particularly visible companies are willing to reveal more information in order to
heighten their professional reputations.
In the age of the internet, it can be expected that online users, including bloggers,
will pressure banks with a high internet visibility to disclose more and better
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information. Therefore, the following hypothesis is proposed:

H3. Internet visibility has a positive effect on e-transparency.
Size, performance and internet visibility. Electronic activities frequently require a large
investment as well as organisational and cultural changes within a company. In 1998
the ICAEW published a report that identified certain trends among leading companies.
These included reporting on a continual basis, adapting information to different users,
integrating information from different sources, and communicating regularly with
users. In order to adopt such trends, however, a company needs to reach a particular
size so it is able to adapt its information system. Chan and Chung (2002) find that small
and medium size enterprises with limited resources and expertise are not capable of
developing the necessary technological capabilities solely by themselves.
Ellinger et al. (2003) confirm that the development and implementation of web sites
with interactive capabilities requires the devotion of resources that perhaps only the
largest firms are willing and/or able to commit. Empirical evidence for this viewpoint
is offered by Kowtha and Choon (2001), who examine the relationship between
strategic variables – such as competitiveness strength, company size, and strategic
commitment – and web site development and find a positive relationship. Therefore,
the following hypothesis is proposed:
H4a. Corporate size has a positive effect on internet visibility.
Similarly, it is proposed that those financial institutions which are the most successful
and best-managed, and which have the strongest reputation for outstanding financial
performance, will also place a strong emphasis on the internet and subsequently gain
excellent e-visibility.
With the development of e-business in recent years, many academics have studied
the relationship between financial variables, such as results, profitability and share
prices, and various internet indicators. The best-known indicators are web metrics
such as unique visitors, pages visited, and time spent at a site by internet users.
Trueman et al. (2003) find a significant relationship between income growth and web
metrics growth because companies need strong internet visibility to attract visitors
who will then turn into customers.
Drèze and Zufryden (2004) relate online visibility to web traffic and argue that
visibility precedes traffic. They further show that online visibility has a higher and
 more significant financial impact than either brand awareness or advertising. Other Online reporting
authors have studied these concepts separately (Rajgopal et al., 2003; Zhang and by banks
Dimitroff, 2005). A related issue is the effect of internet banking. Sullivan (2000)
analyses a sample of 427 banks and finds that return on equity tends to be higher, on
average, for internet banks. However, the statistical tests he conducts do not find the
difference significant.
It can be expected that financial institutions with better financial performance will 315
make a concerted effort to achieve a highly-visible position on the internet in order to
generate more traffic to their web sites. As a result, it would also be expected that they
would subsequently increase their number of customers and improve the services
offered to their existing customers. Therefore, the following hypothesis is proposed:
H4b. Financial performance has a positive effect on internet visibility.
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Size and financial performance. The study of corporate size and its relationship to
growth, financial performance and bankruptcy is a classical research subject (Gupta,
1969). Larger companies seem a priori to have advantages. However, large size does
not ensure benefits of scale. Size only provides an opportunity for scale economies and
may not be achieved without adequate strategies and actions (Abell and Hammond,
1979). Berger and Humphrey (1992), and Akhavein et al. (1997) reveal that challenges
such as coordination, motivation and conflicts of interest are bigger in large companies.
Capon et al. (1990) performs a meta-analysis of 69 papers and finds that size appears
unrelated to financial performance. They also find, however, some evidence supporting
a positive relationship when size is measured as industry-level sales.
The issue of bank size and performance is especially controversial (Boyd and
Runkle, 1992). One particularly fruitful area of study has been the relationship between
size and performance of financial institutions undergoing a merger. The last decade
has seen a particularly high number of mergers and acquisitions in this sector in both
the United States and Europe. Such a process results in a few very large and complex
financial institutions (Rhoades, 2000).
Many studies have found that mergers and acquisitions lead to a positive outcome.
For example, they create scale economies (Stiroh, 2000), scope economies (Wheelock
and Wilson, 2001), better management (Franks and Mayer, 1990), better competitive
position (Sapienza, 2002), and business diversification (Diamond, 1984), thus reducing
institutions’ risk (Amihud et al., 2002). Corbett and Mitchell (2000) maintain that certain
mergers and acquisitions aim to create larger companies in order to enjoy protection
from supervisory authorities.
Following this line of reasoning, the following hypothesis is proposed:
H5. Corporate size has a positive effect on financial performance.

Research methods
This section presents the sample and justifies the indicators chosen for each latent
variable.

Sample and data collection

The empirical study takes data from the Spanish financial sector. This is a powerful
sector consisting of remarkably efficient firms that rank highly among international
institutions. Several Spanish banks are leading multinational companies, and some of
 OIR them own strong industrial groups in very different sectors. Maudos et al. (2002)
31,3 provide an analysis of the structure and characteristics of the Spanish financial sector.
The sample in this study consists of 70 Spanish financial institutions. All are banks
and savings banks operating in Spain except for bank subsidiaries of foreign financial
institutions. The institutions analysed account for 85.7 per cent of credits and 87.5 per
cent of deposits in the Spanish financial system. It should be noted that savings banks
316 in Spain are non-profit organisations focused on making a social contribution.
However, in contrast to other countries, Spanish savings banks are full financial
institutions and act following pure market rules. In other words, they are totally free to
operate in the same way that banks do. Their share of the Spanish financial market, in
credits and deposits, is around 50 per cent.
The researchers collected data from the web sites of each institution in May, 2006.
Financial information from the year 2004 was extracted from the Statistical Yearbook
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of the Spanish Banking Association and the Spanish Confederation of Savings Banks.
All of the data used in the study are presented in Table I so that other researchers can
replicate the study. However, the institutions’ names are not provided for privacy
reasons.

Construct e-transparency variables

The first latent variable is “e-transparency”. This expresses the amount of information
in the annual accounts disclosed on each bank’s web site. To obtain transparency
indicators, the researchers revised recent literature on disclosure indexes, especially
that relating to financial entities (Marston and Shrives, 1991; Tadesse, 2006). The
literature takes two approaches to obtaining indicators; the first one analyses the stage
of development of corporate reporting, and the second one considers the amount of
information disclosed. By applying the latter approach, it is possible to collect
corporate information from financial statements as well as from other sources, such as
information on corporate government.
Thus, three indicators reflecting e-transparency are obtained. The first indicator
gives information about the stage of development of corporate reporting. The
classification is based on groupings suggested by Lymer et al. (1999), but it increases
the number of levels to seven and names them as follows: opaque, bare, paper lovers,
HTML accounts, internet portal, multimedia and Web 2.0. The last level is in line with
ICAEW:
The annual report of the twenty-first century will not be annual nor a report, but will create a
permanent dialogue between a company and its users, based on the information continuously
updated in the company’s web site (ICAEW, 1998, p. 17).
Table II describes each level. The first disclosure variable is labeled “eDIS1”.
The second indicator measures the information disclosed in the banks’ annual
accounts. To build this indicator, the researchers have taken into account Spanish
legislation, which follows international rules. Following Marston and Polei’s (2004)
lead, the indicator includes basic financial statements, as well as Directors’ Reports,
Auditors’ Reports, and historic accounting information. Due to the financial nature of
the companies analysed, one category has been set-aside for the Risk Management
Report (as in Nier, 2005). The maximum value of the indicator is 11 points: one for each
document displayed in Table II. The variable is named “eDIS2”.
 Downloaded by UNIVERSITY OF OTAGO At 23:00 06 May 2015 (PT)

Num eDIS1 eDIS2 eDIS3 ASSETS BRANCHES EMPLOYEES ROE1 ROE2 ROE3 LINKYAHOO LINKMSN LINKASK LINKWISE LINKATW

1 6 10 5 17.353 8.497 6.717 0.13032 0.16919 0.13589 10.003 8.629 6.263 4.025 6.4
2 5 9 4 16.605 7.862 5.799 0.08227 0.08714 0.08812 8.396 9.012 7.279 6.118 7.371
3 4 10 7 17.37 8.54 6.889 0.17287 0.16412 0.14565 7.955 7.633 5.945 1.946 4.828
4 4 8 5 17.121 8.144 6.561 0.1525 0.14389 0.13836 7.937 8.62 7.17 3.135 5.288
5 1 1 1 15.176 6.736 5.231 0.14701 0.16035 0.13576 5.743 6.54 3.829 0 2.565
6 5 8 4 15.351 6.839 5.451 0.15541 0.19398 0.09408 6.05 6.977 4.615 0 2.398
7 4 6 3 14.25 6.061 4.477 0.12674 0.12475 0.08725 7.479 7.265 3.664 0 2.197
8 5 10 3 14.987 6.54 4.97 0.16579 0.18247 0.14036 6.014 7.717 3.714 1.609 4.407
9 4 6 6 16.29 7.726 6.332 0.14052 0.19152 0.13804 6.349 8.03 4.317 1.609 4.812
10 5 8 5 15.661 7.171 5.557 0.15204 0.15553 0.10877 6.118 2.565 4.431 1.609 5.063
11 5 6 4 15.342 7.158 5.642 0.14336 0.14926 0.10124 7.056 6.807 6.163 0 4.357
12 4 2 5 15.489 7.088 5.412 0.10536 0.11017 0.0761 7.147 8.04 4.762 1.099 3.555
13 5 7 5 16.34 7.791 6.061 0.14018 0.14443 0.12051 7.539 8.049 5.784 2.833 4.868
14 5 8 4 15.817 7.233 5.398 0.13787 0.17769 0.14574 8.338 8.465 7.824 2.398 5.106
15 2 0 2 14.944 6.489 4.736 0.16636 0.16517 0.11124 5.855 6.269 5.7 0 2.398
16 5 8 5 14.855 6.719 5.257 0.09735 0.12338 0.09534 6.155 6.985 4.615 0 2.773
17 6 8 6 15.702 6.516 4.99 0.13932 0.16147 0.12146 7.115 7.713 7.969 0 3.989
18 5 7 3 15.331 6.914 5.03 0.11805 0.06944 0.06282 7.65 8.402 5.231 1.946 4.949
19 5 4 5 15.594 6.802 5.017 0.09692 0.14022 0.11513 4.277 5.204 2.639 0 3.258
20 6 5 4 16.259 7.779 6.118 0.17001 0.17523 0.14166 9.062 8.367 6.378 6.871 8.216
21 5 6 3 14.936 6.452 5.13 0.10879 0.10109 0.08872 6.349 7.137 4.394 0 2.197
22 5 5 3 16.386 7.789 6.337 0.08756 0.13237 0.10589 7.479 8.381 5.22 0 4.143
23 6 8 5 16.515 7.923 6.288 0.16411 0.08818 0.07934 8.355 8.734 5.9 1.946 5.124
24 5 6 3 15.338 7.001 5.472 0.12533 0.12961 0.10039 6.397 7.19 6.047 0 2.398
25 6 5 4 15.926 7.692 6.127 0.13357 0.17908 0.13013 5.613 6.935 4.477 4.796 7.208
26 5 8 3 13.707 5.533 4.159 0.12689 0.12209 0.11263 4.718 5.455 3.091 1.609 1.609
27 5 8 6 15.716 7.129 5.394 0.09689 0.11698 0.10885 8.299 8.688 8.093 7.29 10.322
28 5 6 3 13.21 5.136 3.611 0.07815 0.08791 0.0623 5.784 6.321 4.277 0 2.639
29 5 7 7 18.261 9.38 7.538 0.12451 0.13334 0.10698 10.747 9.706 8.802 3.989 6.242
30 6 7 5 17.24 8.617 6.765 0.21743 0.1793 0.13674 9.425 9.058 8.08 10.209 11.806
31 5 7 5 16.114 7.472 5.894 0.1949 0.20055 0.14928 7.272 8.134 5.425 2.485 4.852
32 5 8 5 16.04 7.212 5.481 0.11502 0.11317 0.10703 5.826 6.447 3.989 10.775 14.976
33 5 8 3 13.408 5.429 3.689 0.10308 0.11857 0.0819 5.892 6.31 6.409 0 2.485
34 5 7 3 14.617 6.094 4.727 0.13926 0.15024 0.11738 6.867 7.717 7.365 0 4.382
35 5 6 6 15.841 7.67 5.945 0.11377 0.12851 0.09757 7.507 8.418 6.975 0.693 3.584
36 4 7 3 14.969 6.258 4.595 0.11594 0.14292 0.12588 6.006 7.165 5.263 0 2.89
(continued)
Online reporting

Database employed
by banks

317

Table I.
 Downloaded by UNIVERSITY OF OTAGO At 23:00 06 May 2015 (PT)

31,3
OIR

318

Table I.
Num eDIS1 eDIS2 eDIS3 ASSETS BRANCHES EMPLOYEES ROE1 ROE2 ROE3 LINKYAHOO LINKMSN LINKASK LINKWISE LINKATW

37 5 9 4 16.298 7.836 6.1 0.16315 0.15153 0.11106 6.621 7.309 5.403 1.792 4.804
38 2 0 1 12.336 4.19 2.773 0.12429 0.1392 0.10594 6.516 7.499 3.807 1.099 4.143
39 4 2 7 16.151 7.816 5.93 0.21437 0.17666 0.12587 7.611 8.03 7.39 1.792 4.143
40 5 7 6 16.865 8.368 6.845 0.10161 0.12346 0.10915 9.341 8.918 6.574 3.296 6.522
41 5 6 5 18.654 9.983 8.446 0.16201 0.09507 0.11407 10.158 9.766 7.244 3.761 7.17
42 5 5 4 15.718 7.026 5.22 0.1254 0.14068 0.13799 6.876 7.937 7.286 0 2.833
43 4 8 3 16.274 7.557 5.283 0.07056 0.09933 0.09277 7.048 8.23 4.522 3.045 5.838
44 5 6 3 15.654 7.16 5.342 0.14941 0.14302 0.10947 8.12 8.867 6.052 1.099 4.615
45 5 5 3 16.751 8.391 6.682 0.16977 0.17066 0.14422 9.787 9.146 5.861 3.401 6.947
46 5 7 4 15.504 6.558 4.745 0.11693 0.12912 0.10651 7.484 7.524 4.836 0 2.773
47 5 7 5 15.448 7.209 5.438 0.09146 0.11922 0.0939 8 7.215 5.513 1.386 4.654
48 4 6 4 13.078 5.242 4.29 0.12272 0.13483 0.0821 4.828 4.963 4.317 0 1.099
49 1 0 1 11.732 2.398 0 0.0521 0.05219 0.05219 3.135 4.263 1.946 0 1.946
50 5 9 7 19.248 10.32 8.108 0.13697 0.14072 0.1303 9.661 9.54 8.02 5.056 8.993
51 4 6 2 13.299 5.268 2.079 2 0.011 0.00868 0.01247 6.24 7.178 4.71 1.099 5.05
52 1 0 2 12.092 3.97 2.079 0.00638 20.002 0.00064 5.198 5.591 4.762 0 2.303
53 5 10 4 16.021 7.436 5.872 0.16255 0.19957 0.13177 5.858 6.389 4.554 1.099 4.796
54 5 8 5 18.106 9.127 7.354 0.20517 0.20445 0.1423 9.717 9.733 7.467 4.22 7.669
55 1 0 1 12.512 4.605 3.135 0.10898 0.12001 0.07849 6.671 5.849 3.401 0 3.045
56 4 5 2 14.573 6.488 5.094 0.12715 0.11401 0.08628 5.407 6.475 5.094 0 2.639
57 3 4 5 15.701 7.029 5.489 0.17472 0.15098 0.13821 6.617 6.964 5.447 1.386 3.664
58 1 0 1 11.807 4.754 1.386 2 0.316 20.3141 2 0.31411 6.545 6.742 4.804 2.773 5.775
59 4 6 3 16.423 8.104 6.303 0.10173 0.10465 0.06206 6.736 6.897 6.059 1.386 4.304
60 7 9 6 17.534 9.165 6.994 0.11696 0.13516 0.09483 6.497 7.217 5.204 2.485 5.333
61 5 11 7 19.129 9.949 7.89 0.06227 0.05938 0.05938 8.65 9.189 6.118 2.708 5.684
62 4 5 2 14.698 6.759 5.112 2 0.0636 20.0653 2 0.06605 1.099 1.609 1.946 0 1.946
63 1 0 2 15.239 6.725 4.094 0.04491 0.0592 0.05556 5.889 6.494 5.403 0.693 3.434
64 1 1 2 13.323 4.369 3.135 0.0813 0.10612 0.06724 3.951 4.317 2.833 0 3.738
65 3 4 2 14.393 4.97 0.693 0.08553 0.08994 0.05945 4.984 5.257 4.511 0 4.533
66 6 7 5 17.194 7.997 5.733 0.23222 0.24444 0.16599 7.969 7.43 6.217 3.045 6.196
67 4 4 3 13.92 5.602 3.784 0.04553 0.05945 0.04464 6.116 6.071 4.078 0 4.905
68 5 5 4 16.515 8.124 6.209 0.06843 0.05147 0.04745 7.03 7.115 5.384 6.019 7.787
69 6 6 4 12.44 5.318 2.398 0.0165 0.02965 0.08713 4.078 5.05 2.079 3.045 4.963
70 5 7 5 16.288 7.904 5.541 0.05183 0.10763 0.0931 6.736 7.082 5.342 6.908 8.952
 Online reporting
Total (%)
by banks
eDIS1. Stage of development of financial reporting:
1. Opaque. Mere legal and contact information.
Financial information does not exist or if
existing, it consists of isolated data. 7 (10)
2. Bare. A summary of accounting information with 319
highlights 2 (2.9)
3. Paper lovers. Allows downloading accounts in
PDF or similar. 2 (2.9)
4. HTML accounts. Annual accounts in PDF, and a
specialized financial information section. 14 (20)
5. Internet financial portal. Continuous reporting.
Updated news and dynamic web page. 36 (51.4)
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6. Multimedia. Advanced technological

development and different ways of displaying
and downloading financial information,
including videos and PPT presentations. 8 (11.4)
7. Web 2.0. Top level. Dialogue and interaction with
accounting information users. Webcast. 2.0
characteristics like XML (RSS, XBRL, Blog) 1 (1.4)

eDIS2. Financial information in financial statements:

1. Directors’ Report 40 (57.1)
2. Balance Sheet 59 (84.3)
3. Income Statement 59 (84.3)
4. Notes to the Financial Statements 59 (84.3)
5. Auditors’ Report 59 (84.3)
6. Intermediate information 38 (54.3)
7. Cash Flow Statement 9 (12.9)
8. Statement of Changes in Equity 7 (10.0)
9. Annual accounts analysis. Financial ratios and
graphs. 33 (47.1)
10. Historical series (three years or more) 24 (34.3)
11. Risk Management Report 28 (40.0)

eDIS3. Other information outside the financial statements

1. Information on main business activities 70 (100.0)
2. Roll and short background of the main
company’s managers 61 (87.1)
3. Information on Good Governance practices 57 (81.4)
4. Information on the quality standards
implementation to different process or products 13 (18.6)
5. Clear and quantitative information on human
resources policy 35 (50.0)
6. Separate report on Intellectual Capital 3 (4.3) Table II.
7. Report on Corporate Social Responsibility 23 (32.9) Highlight on disclosure
8. Clear and quantitative information on items of Spanish financial
environmental impact policy 15 (21.4) institutions
 OIR Banks disclose other kinds of information in addition to that found in their annual
31,3 accounts. This disclosure, which may be required by law or may be voluntary, includes
information such as a description of a bank’s plans, its social or environmental impact,
intellectual capital, information on good governance practices, and so on. These are
displayed in Table II. The third indicator, eDIS3, takes a maximum value of eight
points.
320 At the time the data was collected, many differences existed among the institutions.
However, most of them disclosed complete corporate financial data with high quality
presentations. In regard to the stage of development of financial reporting, Table II
shows that more than half of the entities (51.4 per cent) placed in level 5 (internet
portal). This illustrates the maturity of the sector. Overall, nine entities (12.9 per cent)
placed in levels 1 or 2, while the other 9 reached the two top levels (6 and 7).
In regard to the availability of financial statements, most of the entities disclosed
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their Balance Sheet, Income Statement, Notes to the Financial Statements and
Auditors’ Report (84.3 per cent). Smaller percentages (40 per cent) disclosed additional
documents such as the Risk Management Report. In regard to information derived
from sources outside financial statements, the disclosure of Good Governance practices
is remarkable: 81.4 per cent did so. In contrast, only three entities revealed documents
on Intellectual Capital.

Variables for the rest of constructs

The variables used to test the hypotheses and their definitions are shown in Table III.
There are many ways to measure the first construct, which is corporate size. The
researchers chose three indicators: total assets (ASSETS), number of employees
(EMPLOYEES), and number of branches (BRANCHES). These variables were
transformed to logarithms in order to minimise normality problems and to avoid
heteroscedasticity.

Variable Definition

e-Transparency: eDIS1 Result from adding the seven points on stage of

development of financial reporting
eDIS2 Result from adding the 11 points on financial
information in financial statements
eDIS3 Result from adding the 11 points on other
information outside the financial statements
Size: ASSETS ln (Total Assets)
BRANCHES ln (Number of Branches)
EMPLOYEES ln (Number of Employees)
Financial performance: ROE1 Operating margin/equity
ROE2 Profit before tax/equity
ROE3 Net profit/equity
Internet visibility: LINKYAHOO ln (Number of incoming links according to Yahoo)
LINKMSN ln (Number of incoming links according to MSN)
LINKASK ln (Number of incoming links according to Ask)
Table III. LINKWISE ln (Number of incoming links according to Wisenut)
Variables and their LINKATW ln (Number of incoming links according to
definitions Alltheweb)
 To measure the construct “financial performance”, several financial ratios were chosen. Online reporting
Financial performance is a complex concept, so it was decided to include ratios related by banks
to a single aspect of financial performance: profitability. These indicators, which are
associated with Return on Equity (ROE), are: Operating Margin/Equity (ROE1), Profit
before Tax/Equity (ROE2), and Net Profit/Equity (ROE3).
To measure the construct “internet visibility”, the number of incoming links to the
institution’s web site was calculated. Most search engine algorithms use this data as 321
one of the criteria with which to rank search results (Brin and Page, 1998). It is
impossible to know the exact number of links, but an approximation can be obtained
using a special query. This consists of typing “link” followed by the web page address
one wishes to analyse. This action was performed in five search engines: Yahoo, MSN,
Ask, Wisenut, and Alltheweb.
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Data analysis and findings

The technique chosen to test the model is SEM, which allows properly latent variables
to be employed and provides a better understanding of their relationships. The
technique has two stages. The first is the measurement model, which specifies how
well the constructs are measured in terms of the observed variables. The second is the
structural model, which focuses on the relationships among constructs. It has been
estimated through Partial Least Square (PLS) using the software PLS-Graph, 3.0
version (Chin, 2001). It must be noted, however, that these models make it difficult to
establish causal relations (Freedman, 1997) and that correlation does not imply
causation.

The measurement model: testing the internal consistency

The first stage in PLS analysis is the measurement model, which is based on Principal
Components Analysis (PCA) calculations. Although PCA is an exploratory technique
commonly used in accounting research, the way it operates in SEM is different. This is
because SEM takes a deductive approach. The researchers begin by proposing the
indicators in the construct; those not fulfilling certain attributes, such as
unidimensionality, reliability, convergent validity and discriminant validity, are later
rejected.
To test unidimensionality, PCA analyses were performed on all indicators for all
constructs in the study. In total, four PCA analyses were performed: one for each
construct. Kaiser’s (1960) criterion was then applied: to obtain an eigenvalue greater
than 1 only in the first principal component.
All of the constructs resulted in unidimensionality except for “internet visibility”. If
the five indicators are included, the second principal component eigenvalue in this
construct turns out to be 1.169. After studying the components’ matrix, the researchers
rejected the indicators “Number of incoming links according to Alltheweb” and
“Number of incoming links according to Wisenut”. This means that Alltheweb and
Wisenut are very different search engines from Yahoo, MSN and Ask. When the PCA
were recalculated without these indicators, the second principal component eigenvalue
was 0.271, which fulfills the unidimensionality requirement.
Table IV (Column A) displays the eigenvalues of the first two principal components
after the two indicators mentioned above have been rejected. One would expect that the
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31,3
OIR

322

Table IV.
Results for the

Internal consistency
measurement model.
Unidimensionality Reliability Convergent validity
(A) Eigenvalue (B) Variance
for the 1st and explained. 1st and 2nd (C) Cronbach’s (D) Composite (E) Average
Constructs and indicators 2nd component component alpha reliability variance extracted (F) Loading

E-transparency: 2.349 0.443 78.310% 14.757% 0.780 0.914 0.781

eDIS1 0.915
eDIS2 0.908
eDIS3 0.829
Size: 2.895 0.082 96.505% 2.747 0.980 0.988 0.965
ASSETS 0.981
BRANCHES 0.974
EMPLOYEES 0.992
Financial performance: 2.884 0.076 96.136% 2.522% 0.977 0.987 0.961
ROE1 0.976
ROE2 0.986
ROE3 0.979
Internet visibility: 2.623 0.271 87.445% 9.042 0.928 0.954 0.874
LINKYAHOO 0.959
LINKMSN 0.942
LINKASK 0.904
 first principal component would account for most of the variance, and this is, indeed, Online reporting
true. It ranks between 78 per cent and 96 per cent. by banks
Reliability assesses the consistency of the indicators in the construct (all of the
indicators should measure the same). The researchers calculated Cronbach’s alpha
(Cronbach, 1970) and composite reliability (Werts et al., 1974), ranking the indicators
from 0 (absence of homogeneity) to 1 (maximum homogeneity). The difference between
the two calculations is that Cronbach’s alpha presupposes that each indicator in a 323
construct has the same weight, while composite reliability uses item weights from the
causal model. The usual reliability criterion is for both indexes to reach values higher
than 0.7. Column C in Table IV shows Cronbach’s alpha values, while Column D shows
composite reliability values. All constructs surpass the recommended 0.7 value.
Convergent validity is the degree to which the indicators reflect the construct. (In
other words, whether or not the construct measures what it purports to measure.) The
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researchers calculated the Average Variance Extracted (AVE), which assesses if the
construct’s variance can be explained from the chosen indicators (Fornell and Larcker,
1981). The minimum recommended values are 0.5 (Bagozzi and Yi, 1988), meaning that
the indicators account for more than 50 per cent of the variance. Column E in Table IV
shows these values, which satisfy the requirements for all of the constructs.
The second criterion used to analyse convergent validity is to verify that all of the
factorial loadings in the principal components matrix are . 0.5 for each variable
(Jöreskog and Sörbom, 1993). According to Chin (1998), most of the loadings should be
at least 0.60; ideally, they should be 0.70 or above, indicating that each measure
accounts for 50 per cent or more of the variance of the underlying construct. Column F
in Table IV shows these values. All of the chosen indicators comfortably fulfill the
criterion.
“Discriminant validity” means that every construct is significantly different from
the others. To analyse this, a loadings and cross-loadings matrix was obtained.
Loadings are Pearson’s correlation coefficients of indicators to their own construct.
Cross-loadings are Pearson’s correlation coefficients of indicators to other constructs.
Loadings should be higher than cross-loadings. That is, indicators should load higher
for their own construct than for any other construct. Table V shows loadings (in italics)
and cross-loadings for the measurement model. The discriminant validity requirement
is fulfilled.
Another criterion verifying discriminant validity is that the AVE square root be
higher than the correlation between this construct and the other constructs (Chin,
1998). Notice in Table VI, which shows the correlation coefficients between constructs,
that the diagonal displays the AVE square root values instead of “1” usual values.
According to Bagozzi (1994), the correlations between the different constructs in the
model must be smaller than 0.8, and so they are.
To properly speak of “size”, “financial performance”, “internet visibility”, and
“e-transparency” and to establish relationships among these latent variables, it is
important to test all the requirements of a construct’s internal consistency. Such tests
outperform the generalised results of studies that use observable variables because
they are limited by the need to set up hypotheses between variables such as Total
Assets and Return on Investment.
Notice that in Table VI, a positive and significant correlation exists between
e-transparency and the latent predictive variables’ corporate size, financial
 OIR
e-Transparency Size Performance Internet visibility
31,3
eDISLEVEL 0.915 * * 0.595 * * 0.417 * * 0.417 * *
eDISFINAN 0.908 * * 0.592 * * 0.367 * * 0.393 * *
eDISOTHER 0.829 * * 0.744 * * 0.416 * * 0.559 * *
ASSETS 0.705 * * 0.981 * * 0.485 * * 0.704 * *
324 BRANCHES 0.718 * * 0.992 * * 0.403 * * 0.702 * *
EMPLOYEES 0.707 * * 0.974 * * 0.518 * * 0.658 * *
ROE1 0.427 * * 0.489 * * 0.976 * * 0.391 * *
ROE2 0.433 * * 0.444 * * 0.986 * * 0.325 * *
ROE3 0.467 * * 0.469 * * 0.979 * * 0.353 * *
LINKYAHOO 0.493 * * 0.697 * * 0.352 * * 0.959 * *
Table V. LINKMSN 0.462 * * 0.644 * * 0.345 * * 0.942 * *
Loadings (in italics) and LINKASK 0.481 * * 0.623 * * 0.322 * * 0.904 * *
cross-loadings for the
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measurement model Notes: * * significant at the 0.01 level; * significant at the 0.05 level

e-Transparency Size Internet visibility Performance

e-Transparency 0.884
Table VI. Size 0.738 * * 0.982
Correlations of latent Internet visibility 0.526 * * 0.701 * * 0.935
variables. The AVE Performance 0.452 * * 0.476 * * 0. 364 * * 0.980
square root values are
displayed in the diagonal Notes: * * significant at the 0.01 level; * significant at the 0.05 level

performance and internet visibility. Even though the relationship is statistically

significant at first glance, the structural model specifies the direct and indirect relations
among the constructs. This sheds light on the indirect effects, another characteristic of
the use of SEM (presented in the next subsection).

Results of the structural model

The researchers tested the significance of all of the paths of the structural model using
a bootstrap re-sampling procedure with 200 iterations. Table VII shows the b
standardised regression coefficients named “path coefficients” in SEM jargon. It also

Relationships between constructs b t-statistic

H1: Size ! e-transparency 0.6653 5.8363 * *

H2: Performance ! e-transparency 0.1070 1.2215
H3: Internet visibility ! e-transparency 0.0355 0.0877
H4a: Size ! internet visibility 0.7033 5.3244 * *
Table VII. H4b: Performance ! internet visibility 0.0459 0.2124
Results for the structural H5: Size ! performance 0.5008 5.2087 * *
model. Relationships
between constructs Notes: * * significant at the 0.01 level; * significant at the 0.05 level. R-square for e-Transparency
(n ¼ 70) = 0.558; R-square for internet visibility = 0.493; R-square for performance = 0.226
 shows Student’s t and R-square values, which are interpreted in the same way as Online reporting
conventional regressions. by banks
R-square values measure the construct variance explained by the model. The
R-square for “e-transparency”, the latent variable to be explained, is 0.558. The
R-square values for the rest of the latent variables are 0.493 for “internet visibility” and
0.226 for “financial performance”.
Standardised path coefficients allow us to analyse the degree of accomplishment of 325
the hypotheses. Chin (1998) suggests that they should be greater than 0.3 to be
considered significant. Falk and Miller (1992) recommend multiplying the “path
coefficient” (b) by the correlation coefficient between latent variables on the grounds
that this data is a reasonable measure of the variance of the construct explained by the
latent predictive variable.
H1 states that size has a positive effect on e-transparency. Table VII shows a
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b-value of 0.6653 and a t-value of 5.84, which is statistically significant. When

multiplying the b value by the correlation coefficient between both latent variables
(0.738), 0.4909 is obtained. This is a reasonable measure of the variance of the construct
“e-transparency” explained by the latent predictive variable “size”. From b, t and
R-square values, it can be concluded that the data support H1.
H2 relates financial performance to e-transparency. The correlation coefficient
between them is 0.452 (Table VI), which is positive and statistically significant. But the
b (0.1070) and t-values (1.22) are very low. As a result, H2 is rejected.
What is happening here? Notice that the b-value between “size” and “financial
performance” (H5) is 0.5008 and that the t-value is 5.21, which is statistically
significant. Financial entities with better performance disclose more information, but
this is because they are large. So the data do support H5 (corporate size has a positive
effect on financial performance), but they do not support H2.
Remember that when H2 was presented, it was pointed out that even though several
theories could justify the observation that highly profitable companies tend to disclose
more information, the empirical results were not conclusive. Therefore it must be
concluded that the results obtained here show the maturity of the Spanish banking
system (Maudos et al., 2002; Lozano-Vivas et al., 2002). In contrast, an immature
banking system would disclose profits only when they are high and fail to disclose
them when they are low.
Something similar happens in H3, which relates internet visibility to
e-transparency. The correlation coefficient between both variables is 0.526 (see
Table VI), which is positive and statistically significant. But the b (0.0355) and t-values
(0.09) are very low. As a result, H3 is rejected.
A possible explanation for these results is that the pressure internet users put on
banks to disclose information electronically is still low. This is partly due to the small
number of internet and electronic banking users. According to the most recent data
from the Spanish Observatory for Telecommunications and Information Society (year
2005), 48 per cent of every 100 inhabitants in Spain use the internet. Among these, only
13 per cent use electronic banking services. In addition, Barrutia and Echebarria (2006)
reveal that the internet banking channel in Spain is expanding at a slower rate than
that predicted by the most optimistic forecasts.
The data do support H4a: Corporate size has a positive effect on internet visibility.
Table VII shows a b-value of 0.7033 and a t-value of 5.32, which is statistically
 OIR significant. In contrast, H4b, which relates financial performance to internet visibility,
31,3 must be rejected because the path coefficient (b) is 0.0459.
This contradicts what the researchers expected to find; it also contradicts Kotha
et al. (2001), who find that media visibility is associated with performance. However,
they conducted their empirical research using a sample of the top 50 pure internet
firms. The sample used here does include some pure internet banks, but most are
326 conventional banks that also offer electronic banking services. Similar to dot com
companies in all sectors and countries, pure internet Spanish banks do not stand out
for their profitability. In fact, none of them achieved profitability until 2004. This
confirms a study conducted by Benbunan-Fich and Fich (2004), who find that most
internet companies are still not profitable. In comparison, conventional financial
institutions are very profitable – even though some of them have only a small internet
presence.
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The Spanish financial sector, both banks and savings banks, has always been
obsessed with size. In contrast, many other sectors in Spain and banks in other
countries experience no relationship between corporate size and performance. Since
profitability is not necessarily dependent on size, both small and large companies
can coexist and prosper. But in Spain, larger banking entities also achieve superior
financial performance. This leads to one outcome: mergers. In 1985 Spain had
almost 80 savings banks; by 2006, only 46 remained, and more mergers were in
sight.
Remarkably, during those same 20 years, savings banks multiplied their assets by
ten. Banks have followed a similar process: Six of the historical “big seven” leaders in
the sector have now merged. This has created two international players: BBVA and
Santander. (Both of these entities have also bought several small and medium-sized
banks.) Size and profitability have enabled the sector to expand internationally, not
only to Latin America, where Spanish banks are now leading institutions, but also to
other European countries.
The results of this study confirm that size does matter in the Spanish banking
sector. They also confirm the research teams’ expectations that a correlation exists
among size, performance, internet visiblity and e-transparency. Larger entities are
smarter (i.e. they have greater internet visibility) and more diligent (i.e. they experience
better financial performance). They stand out for their disclosure of more corporate
information on the internet and for displaying true financial portals that offer
numerous services to clients and internet surfers. However, some deviations have also
emerged. When studying the direct and indirect effects in depth, size clearly accounts
for most of the transparency, while performance and internet visibility have little
effect.
Clearly, larger banks now boast great internet visibility. This flies in the face of one
of the pillars of the so-called new economy, which is that the size and quality of a
company’s web site is not dependent on its overall size. Even small companies, it is
maintained, can build an effective web site on a low budget. For proof of this, one need
only consider the example of teenagers who have, in their spare time, created amazing
web sites that receive thousands of hits.
However, building an outstanding, interactive and effective corporate web site
requires that a bank have the requisite financial, human and technological resources to
do so. Larger banks, with greater resources, have already achieved this step and will
 easily accommodate the inexorable growth of electronic banking as they move into the Online reporting
future. by banks

Conclusions
This paper proposes a model that explains internet reporting by financial institutions. 327
The model relates three constructs (size, financial performance and internet visibility)
to their final influence on internet corporate information disclosure (e-transparency).
A series of hypotheses have been put forward and various latent variables, which
are not directly observable, have been analysed. It has also been assumed that the
relationships between the variables will be complex. The model has been estimated
using structural equations modeling (SEM), and it has been tested using a sample of
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Spanish financial institutions.

The researchers have found a positive and statistically significant relationship
between size, financial performance, internet visibility, and e-transparency, with direct
and indirect effects. The study shows that, at least in Spain, size accounts for most of
the variance. Size has a positive effect on e-transparency, financial performance, and
internet visibility. However, the direct effect of financial performance and internet
visibility on e-transparency is small.
The study supports the Spanish banking sector’s obsession with increasing
corporate size through mergers and acquisitions since larger entities have higher
profitability. (In an indirect way, this creates entities that are more visible on internet
and more e-transparent.) Even though any bank can disclose its corporate financial
information online at very low cost using PDF files, building a robust, interactive
corporate web site requires major resources. This gives larger banks a value added
advantage.
In addition to such findings, this paper makes a methodological contribution. The
research team finds that SEM, the analytical technique used, is especially good at
gathering data reduction techniques, such as principal component analysis, and
techniques that relate variables, such as multivariate regression. SEM has allowed the
team to identify latent variables that meet unidimensionality, reliability, convergent
validity and discriminant validity requirements.
The structural model also allows the researchers to study complex relationships
between latent variables with direct and indirect effects, such as those found among
size, performance and e-transparency. Although SEM is commonly used in many
scientific disciplines, it is not yet being applied routinely in accounting and financial
research. The researchers believe that its ability to analyse relationships between
latent variables makes it a powerful tool with which to model complex relationships
where financial and non-financial information intersect.
Finally, although the direction of cause and effect assumed in the model is a logical
one, it must be recognized that the relationship can work in both ways. For example,
the most profitable banks lead merging processes. Therefore, they grow rapidly
because an increased web visibility attracts more online customers and improves their
financial results. In the end, however, statistical methods cannot prove causality, only a
correlation.
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Corresponding author
Carlos Serrano-Cinca can be contacted at: serrano@unizar.es

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