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Who Benefits when Companies Provide XBRL Financial Statements?

Faculty Research - March 2016

Dr. Rod Smith’s (Accountancy) research could have implications on the way public companies provide financial statements and financial statement schedules. He is investigating whether eXtensible Business Reporting Language (XBRL) reporting is providing the benefits that the Securities and Exchange Commission (SEC) expected when it began requiring most U.S. corporations to provide financial statements in this interactive format.

XBRL is an XML-based computer language for the electronic transmission of business and financial data. The SEC began requiring companies to use XRBL in 2009 to make it easier for financial users to retrieve and analyze financial information, while assisting in automating regulatory filings and business information processing.

XBRL reporting should reduce investors’ information processing cost and correspondingly reduce information asymmetry. Ease of information processing should attract new investors and market makers. The improved financial visibility should reduce information asymmetry, which should in turn impact XBRL filers’ stock liquidity and thereby lower the XBRL filers’ cost of capital.

From the onset, however, there have been questions about XBRL’s benefits. Corporate finance departments have complained that the use of XBRL is neither useful internally nor to the analysts and investors that XBRL is supposed to aid. In 2013 research on the costs and benefits of XBRL commissioned by the Financial Executives Institute, showed that companies reported that the top concern about XBRL compliance remains costs relative to benefits. Users of XBRL statements have also complained that XBRL filings contain numerous egregious errors, making some filings costlier to process.

Using the period before and after firms’ first mandated XBRL 10-K filing as a natural experiment, Dr. Smith and his coauthors are examining the shift in stock liquidity over three years covering the three SEC XBRL phase-in periods to determine its effectiveness.

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