Does voluntary adoption of XBRL reduce cost of equity capital?

• Date: 29 April 2014
• Pages: 86-102
• DOI: https://doi.org/10.1108/IJAIM-11-2012-0071
• Published date: 29 April 2014
• Author: Lizhong Hao,Joseph H. Zhang,Jing (Bob) Fang
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Does voluntary adoption of XBRL

reduce cost of equity capital?

Lizhong Hao

California State University, Fresno, California, USA

Joseph H. Zhang

School of Accountancy, The University of Memphis,

Memphis, Tennessee, USA, and

Jing (Bob) Fang

The Beacom School of Business, University of South Dakota,

Vermillion, South Dakota, USA

Abstract

Purpose – The paper aims to examine whether or not f‌irms voluntarily f‌iling in XBRL (eXtensible

Business Reporting Language) format enjoy a lower cost of capital. XBRL, or “interactive data” as the

US Securities and Exchange Commission refers to it, is an information format that enables electronic

exchange of standardized business and f‌inancial information.

Design/methodology/approach – The authors investigate whether voluntary adoption of XBRL

impacts cost of equity capital using a sample of US f‌irms participated in the SEC Voluntary Filer

Program, each matched with a pair of non-XBRL f‌ilers (matched by two-digit SIC code, same f‌iscal

yearend, and close total assets in the same year). The authors measure f‌irm-specif‌ic cost of equity

capital at the f‌iscal year of last voluntary XBRL f‌iling, using the PEG ratio model proposed by Easton,

Gode and Mohanram, and Hou et al.

Findings – The results show that cost of equity capital is signif‌icantly and negatively associated

with XBRL adoption. The magnitude of the coeff‌icient on XBRL suggests that f‌irms voluntarily

adopting XBRL are associated with an average reduction in cost of equity capital by 17-20 basis points

(conditional on different cost of capital measures).

Research limitations/implications – There is a research limitation due to the sample of voluntary

XBRL adopters as of self-selection bias. The authors address this issue by using the Heckman

two-stage regression procedure.

Practical implications – The study provides evidence on the economic consequence of XBRL

adoption in that it benef‌its shareholders by reducing the cost of equity capital. The evidence should

provide regulatorslike the SEC more incentivesto mandate the XBRL standardand motivate companies

to adopt the standard as well.

Originality/value – By showing that voluntary XBRL adopters are associated with lower cost of

equity capital,the study provides timely and relevantempirical evidence to the economicconsequences

of voluntary adoption of XBRL. It also contributes to the limited empirical research on the economic

consequencesof new information technology andhighlights the importance of institutionalregulation in

shaping the outcomes of new f‌inancial reporting format.

Keywords Information systems,Cost of equity capital, US evidence, XBRL

Paper type Research paper

1. Introduction

The paper examines whether f‌irms voluntarily f‌iling in eXtensible Business Reporting

Language (XBRL) format enjoy a lower cost of equity capital (CofE). XBRL, or

“interactive data” as the Securities and Exchange Commission (SEC) refers to it, is an

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1834-7649.htm

Received 24 November 2012

Revised 5 February 2013

11 March 2013

29 March 2013

Accepted 29 March 2013

International Journal of Accounting

and Information Management

Vol. 22 No. 2, 2014

pp. 86-102

qEmerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-11-2012-0071

IJAIM

22,2

86

information format that enables electronic exchange of standardized business and

f‌inancial information. XBRL specif‌ications were developed by XBRL International,

a non-prof‌it consortium of approximately 550 companies, governments, stock

exchanges, and accounting organizations around the world working together to build

XBRL language and promote its global adoption[1].

In USA, the primarydriver for XBRL f‌iling comes from the SEC.Since early 2004, the

SEC has proposedthe rule (No. 33-8496) to establisha voluntary program and encourage

registrants to use XBRL. In the rule No. 33-8529 regarding the Voluntary Filer Program

(VFP), the SEC assertsthat XBRL benef‌its all users of f‌inancialinformation by means of

improving information transparency and lower CofE (SEC, 2005). While prior research

f‌inds some evidence that XBRL improves transparency of f‌inancial reporting

(Hodge et al., 2004; Tan and Shon, 2009), there is little empirical research to date

supporting the SEC’s assertion that XBRL interactive data reduces CofE and the

economic consequence of such adoption stillremain unclear. Thus, we aim to explore the

impact of XBRL adoption on the CofE for US companies who participate in the VFP.

There are at least three reasons why voluntary adopting XBRL may reduce CofE.

First, XBRL may reduce capital cost through “improved information transparency”. As

an interactive data format, XBRL has the potential to improve comparability and

consistency of information, enhances accessibility and usability to f‌inancial and

nonf‌inancial information, and increase f‌inancial disclosure. Second, XBRL may “reduce

transaction cost”. Implementing XBRL may incur additional costs at the beginning of

such adoption. In the long run, however, XBRL will lower the cost of producing

information through automation and free resources from manual work (SEC, 2005).

Third, adopting XBRL may “increase liquidity” and “decrease f‌irm risk”. Proponents of

XBRL argue that since XBRL-tagged data are more transparent, they should reduce the

uncertainty and risk of investors. Moreover, f‌iling in XBRL interactive data may lead to

“broader analyst coverage”, more market exposure and greater investor interest and

conf‌idence in a registrant’s securities(SEC, 2005). Therefore, XBRL couldlower f‌irm risk

and increase market liquidity, and eventually lower the CofE.

We investigate whether voluntary adoption of XBRL impacts CofE using a sample

of f‌irms participated in the SEC VFP, each matched with a pair of non-XBRL f‌ilers

(matched by two-digit SIC code, same f‌iscal yearend, and close total assets in the same

year). We measure f‌irm-specif‌ic CofE at the f‌iscal year of last voluntary XBRL f‌iling,

using the PEG ratio (Easton, 2004). We then regress f‌irm-specif‌ic CofE on a dummy

variable indicating the type of f‌irms (one for XBRL f‌ilers and zero otherwis e) and a set

of control variables that include f‌irm size and risk. We predict that a f‌irm’s CofE is

negatively associated with XBRL adoption.

Multivariate regression results indicate that CofE is negatively and signif‌icantly

associated with XBRL f‌ilings after controlling for f‌irm size and risk. The magnitude of

the effect is such that, on average, XBRL adoption is associated with a reduction in the

CofE of 1.7 percent points for the sample f‌irms. The primary results persist when we

use alternative CofE measures and apply with different model specif‌ications.

This study contributes to the literature in the following ways. First, it provides

timely and relevant empirical evidence to the economic consequences of “voluntary

adoption of XBRL”. XBRL is a new revolution in f‌inancial reporting and it will

dramatically change the reporting process. However, there is little empirical research

on the capital market effects of XBRL adoption. This study provides evidence that

Voluntary

adoption of

XBRL

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