XBRL adoption and cost of debt

• Pages: 199-216
• DOI: https://doi.org/10.1108/IJAIM-04-2014-0031
• Published date: 05 May 2015
• Date: 05 May 2015
• Author: Syou-Ching Lai,Yuh-Shin Lin,Yi-Hung Lin,Hua-Wei Huang
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

XBRL adoption and cost of debt

Syou-Ching Lai

Department of Accounting and Information Systems,

Chang Jung Christian University, Tainan City, Taiwan

Yuh-Shin Lin

Deloitte Touche Tohmatsu Limited, Tainan City, Taiwan, and

Yi-Hung Lin and Hua-Wei Huang

Department of Accountancy, National Cheng Kung University,

Tainan City, Taiwan

Abstract

Purpose – This paper aims to examine the relation between the cost of debt and the adoption of

eXtensible Business Reporting Language (XBRL).

Design/methodology/approach – The nancial data are obtained from the Compustat database.

Regression analysis is used to examine the research hypotheses.

Findings – The authors nd that both voluntary and mandatory adoption of XBRL lead to a lower cost

of debt for rms, with weak evidence that this reduction is greater for the former than the latter.

Research limitations/implications – The ndings support the policy of the USA Securities and

Exchange Commission (SEC), and thus this paper recommends that adoption of XBRL should be

mandatory for all public rms.

Practical implications – The ndings encourage top managers to develop their rms’ XBRL

systems.

Originality/value – The results support the SEC’s policy of mandatory XBRL adoption, as it can lead

to greater nancial reporting transparency and mitigate information asymmetry between management

and bondholders.

Keywords XBRL, Cost of debt, Information asymmetry, eXtensible business reporting language,

Financial reporting transparency, Voluntary/mandatory adoption

Paper type Research paper

1. Introduction

In recent years, there has been growing support for the wider adoption of XBRL

(eXtensible Business Reporting Language) by government authorities, enterprises and

public investors. To meet the related laws or accounting principles, the information that

is contained in electronic and paper versions of nancial statements is not materially

different. However, rms are free to choose among various formats (e.g. DOC, PDF,

HTML or TXT) when they disclose nancial information online, and this increases the

difculty of verifying and comparing information between years or among rms. This

clearly does not fully meet the needs of users, and thus further developments are needed

with the XBRL approach.

We had helpful discussions with the discussant, Dr David Y. Chen, and conference participants at

the 2013 American Accounting Association Annual Meeting - Information Systems Section.

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

XBRL

adoption and

cost of debt

199

Received 24 April 2014

Revised 28 June 2014

Accepted 28 June 2014

InternationalJournal of

Accounting& Information

Management

Vol.23 No. 2, 2015

pp.199-216

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-04-2014-0031

XBRL is used to tag and dene nancial-related data, and the information that is

contained in XBRL code can be transformed to a computer-readable and

computer-comparable format, making it easier to reuse and analyze. On February 5,

2005, the USA Securities and Exchange Commission (SEC) published the “XBRL

Voluntary Financial Reporting Program on the EDGAR System”, which called on rms

to voluntarily adopt this new reporting method, based on the rationale that “[…] tagged

nancial information may allow more efcient and effective retrieval, research and

analysis of nancial information through automated means”(SEC, 2005). XBRL has

been shown to improve the quality, consistency and accuracy of nancial reporting, as

well as reduce both the time-to-market and operating costs of rms over the long run[1].

Prior studies also indicate that XBRL enhances the transparency, timeliness and

disclosure level of nancial information, and can thus reduce information asymmetry in

capital markets (Hodge et al., 2004;Yoon et al., 2011).

To extend this important research stream, this study examines whether voluntary

and/or mandatory XBRL adoption lead to a lower cost of debt. The nancial health of

rms is evaluated by market bondholders, and the accounting information risk is

reected in the premiums these ask for. Unlike equity investors, bondholders have to

bear a rm’s bankruptcy risk, but they only receive xed interest instead of dividends,

and so do not benet from a stock’s growth potential (Plummer and Tse, 1999;Jiang,

2008). Bondholders thus focus on both the quality and usefulness of the information

disclosed by rms in their evaluations of default risk (Sengupta, 1998). Accordingly, we

expect that rms which adopt XBRL can collect and integrate nancial data more

efciently and effectively, and so help bondholders to obtain better information that can

aid in their decision making, and reduce both potential conicts of interest with

management and the related agency costs.

The results of this work show that rms which voluntarily adopt XBRL have a lower

cost of debt. In addition, the results also show a lower cost of debt for rms that adopted

XBRL after 2009, when it became mandatory. Finally, we nd weak evidence to support

the view that the reduction in the cost of debt related to the adoption of XBRL is greater

for the rms that voluntarily did so than those that were compelled to do so.

The remainder of the paper is organized as follows. Section 2 reviews the prior

literature and constructs our hypotheses. Section 3 describes the research design,

variable measurements, models and data. Section 4 provides our major empirical results

and presents a robust analysis of these. Finally, Section 5 reports the conclusions and

limitations of this work, along with some suggestions for future research.

2. Related literature and hypotheses development

2.1 Current practice of XBRL

The data that are presented in nancial reports released in PDF or HTML formats

cannot be automatically extracted and analyzed, and thus users have to collect, read and

examine the contents manually, a process that increases the cost, difculty and

likelihood of error. To overcome these problems, XBRL was developed to provide a

standardized means to prepare, publish and exchange nancial information (Boritz and

No, 2008).

XBRL is an international nancial reporting code and an application of XML

(eXtensible Markup Language), which is used to tag both nancial and non-nancial

data, making it easier to analyze. The concept of XBRL was rst proposed in 1998 by

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