Releasing Information in Xbrl: Does It Improve Information Asymmetry for Early U. S. Adopters?

Abstract

INTRODUCTION XBRL (eXtensible Business Reporting Language) is a machine-readable language that offers enhanced search and data analysis capabilities that surpass previous reporting languages used for filing financial information in the U.S. (SEC, 2005). The intended purpose of XBRL is to improve the quality of publicly released financial and non-financial corporate information to regulators, stockholders, and the investing public (Plumlee and Plumlee, 2008). In fact, the intent behind the development of XBRL formatting was to improve the accuracy, reliability, and efficiency of analysis of corporate information released to the public (Debreceny et al. 2005; XBRL US, 2008a), thereby reducing information asymmetry between parties in the capital markets (Healy et al. 1995; Bartov and Bodnar, 1996; Brown and Fernando, 2011). Information asymmetry represents a fundamental imbalance in the capital markets in that one party's information has more quality, quantity, or timeliness than the other party's information in the transaction, (Kulkarni, 2000; Grewala et al. 2003; Biswas, 2004; Brown and Fernando, 2011) therefore enabling the more informed party to attain above average levels of return in the market (Bartov and Bodnar, 1996). XBRL, however, has its proponents as well as its detractors. Anecdotal evidence suggests that XBRL use may level the information playing field and reduce information asymmetry in the equity market (Harrington, 2005). In contrast, XBRL may increase information asymmetry if only sophisticated investors can process XBRL filings, especially in the initial years of its use (Debreceny et al. 2005, 2011). These opposing expectations regarding the actual effect of XBRL use in the U.S. raise the empirical question of whether XBRL reduce information asymmetry as claimed by the SEC (2005, 2009), or whether it compounds the problem. Accordingly, we contribute to the sparse, but growing literature on actual market effects associated with the use of XBRL by examining early U. S. adopters of XBRL (i.e., firms adopting XBRL prior to the SEC's mandate) for evidence of changes to their information asymmetry. We observe 366 firm-quarters of early XBRL adopters with XBRL and HTML EDGAR filings on the same date. We also observe an equivalent number of firm-quarters of the same early adopters prior to their XBRL adoption. Specifically, we investigate the effect of firm size while analyzing bid-ask spreads and trading volume of early XBRL adopters in the U.S. before and after their XBRL adoptions. In one of the few targeted studies in this area, Yoon et al. (2011) assessed bid-ask spreads as their sole measure of information asymmetry in their investigation of the one-time mandatory switch to XBRL reporting in Korea. Their results suggest that XBRL reduced information asymmetry immediately in Korea. Unlike the U.S. equity market, the equity market in Korea does not have designated market makers (Yoon et al. 2011: 158). So, in Korea, most equity transactions are executed directly between sellers and buyers. Whereas in the U.S., most equity transactions involve an intermediary where sellers sell their equities to the intermediary, the intermediary then sells the equities to a buyer. Another contrast between the U.S. and Korean stock markets is that the switch to XBRL in the U.S. was phased-in over multiple periods as opposed to a one-time switch to XBRL like in Korea. Consequently, the results of XBRL reporting in Korea may not be identical to the results observed in the U.S. To date, the effects of XBRL on information asymmetry in the U.S. are mixed. Kim et al. (2012) results suggest reduced information asymmetry as a result of XBRL while Blankespoor et al. (2012) results suggest that XBRL increase information asymmetry. Our study contributes to this emerging body of research in two ways. First, we present an empirical examination of XBRL formatted information in the U.S. equity market to determine whether XBRL has actually reduced information asymmetry in the U. …

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