XBRL: A Global Financial Reporting Standard

Does the adoption of XBRL by firms increase corporate investment?

The extensible Business Reporting Language also is known as XBRL was developed by the United States in 1999. After a short while, other countries like Australia, Asia, and Europe made a significant contribution to its development. After 2010, at least 31 states were part of XBRL implementation in some way. Countries like Japan, China, and the US among other countries found in Europe had made XBRL a requirement in financial reporting while countries such as New Zealand and Australia made it optional through the use of SBR (standard business reporting) (O’Kelly, 2010). In the United States, SEC put in place three years voluntary filing period prior to making the filing system a requirement in 2009 (Srivastava and Kogan, 2009).

The objectives of coming up with a voluntary filing plan by SEC were first to evaluate reasonable technical requirements of processing and tagging XBRL documents (Alles and Piechocki, 2012). The second reason was to appraise XBRL usefulness regarding financial reporting information for the commission, investors, and registrants. Earlier literature on XBRL shows some of its aspects like assurance issues through data quality, implementation matters, and taxonomy (Alles and Piechocki, 2012). Furthermore, XBRL can show the impact of using XBRL format in financial reporting. This literature review intends to demonstrate how XBRL adoption increases corporate investment through producing transparency, accurate and better information.

Tagging also applies to textual data like footnotes, principle statements and appendices thereby allowing data to become searched as well as extracted. These processes then enable easy comparison of the found information. Companies also use mapping criteria or taxonomies to disaggregate or aggregate data and produce reports or documents promptly without manual preparation (Johnston, 2017). Aggregate data is a combined form of data from various measurements which is done by replacing group observations with a summary statistics from the observations. Aggregation reduces time required to query a large data sets hugely.

Disaggregated data on the other hand involves non-numerical or numerical data which is collected from various sources or measures and summarized into aggregate data for statistical reporting or analysis (Hoffman, 2006). Hoffman (2006) believes that XBRL decreases costs, time and errors in the development of financial statements. Janvrin et al. (2011) and Martin (1971) argue that XBRL uses its computer readability which makes it easier and cheaper for the investors to process, retrieve, analyze and organize financial data for processes of decision making. The data is downloadable into software which is XBRL enabled or into Excel to develop graphs which allow doing trend and high-level examinations as well as conduct ratio computation.

A firm can quickly look for financial information and compare them with those from other topics, issues, industry sectors or companies. They can also get automatic updates in real time using XBRL (Stein, 2001). The ease and speed at which a firm can acquire important information puts it ahead of competition regarding investment decisions and corporate financing (Myers and Majluf, 1984; Morellec and Schürhoff, 2010). Additionally, XBRL reports which are computer readable data are readily available to the public for free (Srivastava and Kogan, 2009). Therefore, investors can get this information for free as well and use them to make investment decisions (Zhang, 2001).

XBRL allows standardization in financial reporting via systematic tagging that offers better comparability and consistency (Janvrin et al., 2011). This finding by Janvrin et al. (2011) is similar to that of Efendi, Park, and Subramaniam (2016) who found that XBRL may improve the effectiveness of information analysis. They say that accuracy gets achieved through allowing more efficient and accurate handling by eliminating expensive manual procedures. Furthermore, Efendi et al. (2016) posit that certainty comes from standardizing of financial disclosure through detailed tagging of elements of financial accounting.

Therefore, XBRL format can allow searches, calculations, and comparison of financial ratios thus enhancing disclosure (Lambert, Leuz, and Verrecchia, 2006). Efendi, Park, and Subramaniam (2016) argue that if investors lack the resources and ability to process all the available data, XBRL may help by providing these investors with more and better information than HTML formats. Another literature by Scannell (2006) and Bushman and Smith (2002) found that early financial information filers in XBRL design experienced stronger or superior operating performance or corporate governance.

After investigating structure-related, market and performance firm variables, results from their study suggested a positive and significant association of XBRL use and superior management. This positive association occurred mainly in firms that decided to file their financial information on XBRL earlier (Blankespoor, Miller, and White, 2012). Their findings are similar to those of Premuroso and Bhattacharya (2008) who linked performance factors like firm size and liquidity to voluntary and early XBRL choice of filing. Firms that are more liquid regarding their financial condition possesses a higher incentive to signal and disclose to the market its strength (Cooke, 1989; Campello et al., 2010).

Just like Premuroso and Bhattacharya (2008) and Camfferman and Cooke (2002) discovered definite link between liquidity and XBRL application by Dutch firms which favors the conclusion that users of XBRL designs can signal that they can meet current obligations to suppliers and short-term lenders as well as demonstrate their strong or better financial position. Therefore, XBRL format creates a level ground for investors as well as decreases potential disparities or differences between firms regarding content and disclosure level (Biddle and Hilary, 2006). The marketplace thus rewards early filers with larger capital markets and better corporate governance (Brown and Caylor, 2006).

Literature by Efendi, Park, and Subramaniam (2016) demonstrate that XBRL reporting design offers higher information value. They acquired this outcome after looking at the application of XBRL disclosures under voluntary filing plans. They saw that HTML formats possess less value concerning information than XBRL designs whose information value is two and a half folds more. XBRL format mainly is very appealing to small investors as they are accessible, free and significantly easy to apply (Efendi, Park, and Subramaniam, 2016). Another advantage of XBRL which leads to a higher corporate investment got demonstrated by Hao, Zhang, and Fang (2014) and O'Hara and Easley (2002).

In their study, they looked into how XBRL adoption decreases equity capital costs. They argue that there are three underlying reasons why approval of this design voluntarily may decline CofE (value of equity). First, they say that XBRL may decrease capital cost by establishing better information transparency and acquisition. Hao, Zhang, and Fang (2014) and O'Hara and Easley, (2002) posit that XBRL is an interactive information format that can increase consistency and comparability of data, enhance usability and accessibility to non-financial and financial information. It may also improve financial disclosure.

Second, they argue that XBRL can decrease the costs of a transaction. Implementing XBRL can incur extra costs when presently adopting the design. However, in the long-run, it lowers information production costs by offering free resources and automation (Hao, Zhang, and Fang, 2014). Third, XBRL adoption can raise liquidity and reduce company risk. Hao, Zhang, and Fang (2014) argue that because XBRL-tagged information becomes transparent, they reduce uncertainty and investor risks. Besides, XBRL interactive information filing can result in broader analyst coverage, higher investor interest, better market exposure and registrant’s security confidence (Hao, Zhang, and Fang, 2014).

Therefore, adoption of XBRL can decrease firms' risks as well as improve market liquidity and eventually show investors and creditors that the firm can pay its debts. According to Campello et al. (2010) because of higher liquidity, the firm may receive more investors or credit whose effect is raising its corporate investment. The use of XBRL decreases the cost of information processing and mitigates or curbs delays seen in data incorporation into prices of stock (Weill and Olson, 1989). A low capacity of information processing impacts the required equity by investors majorly because these investors under-diversify risks.

Furthermore, investors often experience adverse selection challenges (Lemmon and Lins, 2001). Li, Ni, and Lin, (2012) argue that a decrease in the cost of information processing may impact analysts’ behavior. Furthermore, when XBRL decreases costs of information processing, organizations having complex data may gain more or better analysis coverage (Li, Ni, and Lin, 2012). Therefore, more data gets provided to the public. Under such a circumstance, information asymmetry is curbed or mitigated, as investors demand smaller equity coverage (Li, Ni, and Lin, 2012).

Third, the adoption of XBRL decreases information barriers that separate large investors with more significant financial resources from small investors. Competition increases among all investors when adoption of XBRL affects investor base size and consequently impacts the market depth. Investors often need less premium when markets turn more liquid especially the premium required to bear fewer risks related to liquidity (Li, Ni, and Lin, 2012). Literature by Blankspoor, Miller, and White (2014) demonstrate that XBRL results in low abnormal liquidity as well as a decline in the volume of irregular trading, especially in small trades.

Dong et al. (2016) on the other hand found that adoption of XBRL by firms results to a decrease in the synchronicity of stock return. This decline in synchronicity hugely affects filing done under mandatory programs than voluntary plans. Dong et al. (2016) eventually concluded that adoption of XBRL decreases price delay. When they contrasted non-adopters to adopters’ synchronicity changes, they discovered difference especially in the synchronicity of stock returns. These researchers argue that adoption of XBRL has the potential to decrease costs of information processing. Therefore, the method of filing improves the incorporation of information that is firm-specific into prices of stock.

Moreover, the XBRL design facilitates production of firm-specific details thereby decreasing synchronicity of stock return. Dong et al. (2016) further argue that quality information or data is provided by XBRL design of filing. Additionally, reliable and timely info hastens capitalization of data and decreases comovement of the share price. On the other hand, unreliable and stale XBRL information lacks such an effect (Dong et al., 2016). Dong et al. (2016) state that creditors and investors react weakly to data disclosed through footnotes as compared to information found on financial statements.

The reason behind this comparison is partly because of limitations in cognitive processing. The literature suggests that the techniques enhance transparency particularly of financial statement data and thus might decrease firm incentives to select footnotes to reduce the impacts of contrary data. Dong et al. (2016) suggest that XBRL is the best choice as it allows for easy analysis and comparison of information of one company and that of another. XBRL also makes financial statements’ derived numbers more accurate. The design enables firms to communicate effectively with investors and thereby enhance transparency and quality of information for both individual and institutional investors.

Alless and Piechocki (2012) affirm the benefits of adopting XBRL filing formats by arguing that it tremendously changes and enhances governance within the firm that employs this design. They say that firms should ensure that this design adds or improves value rather than just facilitating an exchange of information. Concerning decision-making procedures related to governance, Bushman and Smith (2002) confirm that better methods of manipulating and viewing information produces better data that in combination with other powerful tools of analysis results to better knowledge which allows outside and inside investors to make relevant decisions.

Therefore, XBRL’s value addition springs from employing it as a technique of reformatting and disaggregating information. Lastly, the use of XBRL reduces the cost of while increasing the flow or supply of information. According to Grossman and Stiglitz (2018), costly information means that the prize of shares only partly reflects data of well-informed investors and thus data acquisition gets compensated. Sims (2003) says that because data-processing capacity is low, freely available information to investors who are uninformed cannot be adequately utilized. Therefore, it is apparent that the costs of data processing might delay information incorporated into the prices of assets.

Peng (2005) also argue that constraints in information processing can lead to under-diversified risk. Veldkamp (2006) further explains that higher fixed prices for information production make rational investors to only purchase a subset of data. A small part of costly firm-specific data thus gets incorporated into the prices of stock. When firm-specific data is available at lower costs, investors increase firm-specific data demand allowing its incorporation into prices of stock. Thus, low costs of information processing speed up data amount and its integration into prices of assets. These studies have shown that adoption of XBRL allows incorporation of new information into prices of stock in a sufficient and timely manner by reducing the costs of information processing. This availability of low-cost information allows investors to acquire information needed for crucial decision-making processes about investment.

The Link Between adoption of XBRL and Accounting Standards Harmonization

XBRL adoption reduces the cost of while increases flow or supply of information. According to Efendi, Park, and Subramaniam (2016), costly information means that the prize of shares partly reflects data on well-informed investors thus data acquisition gets compensated. The costs of data processing might delay information incorporated into prices of assets (Li, Ni, and Lin, 2012). Additionally, constraints in information processing can lead to under-diversified risks while higher fixed prices for information production make rational investors purchase a subset of data. Consequently, only a small part of costly firm-specific data thus gets incorporated into the prices of stock. When firm-specific information is available at lower costs, investors increase firm-specific data demand allowing its incorporation into prices of stock. Thus, low costs of information processing speeds up data amount and its incorporation into prices of assets.

These studies have shown that adoption of XBRL allows integration of new information into prices of stock in a sufficient and timely manner by reducing costs of information processing (Hao, Zhang, and Fang, 2014). Reliable and timely data prompts its capitalization as well as decreases co-movement of share prize. Investors who are well informed can easily make investment decisions. This paper intends to review various literature that discusses how the adoption of XBRL results to accounting standards harmonization which eventually increases corporate investment.

When investors are experiencing ambiguous accounting figures or numbers, they find it challenging to understand the performance of particular firms. To help solve this problem, Blankespoor et al. (2012) says that the adoption of XBRL can allows these investors to process data using XBRL filing at lower costs and quickly. Furthermore, Blankespoor (2012) asserts that XBRL results to a higher disclosure like through quantitative footnotes. Cohen and Lou (2011) argue that when firms use XBRL, the analysis of sophisticated financial statements becomes facilitated which enhances production of more firm-specific data.

This case is particularly typical in organizations possessing business segments with number earnings from multiple sources. In such firms, investors find it challenging to identify value factors, mostly the underlying factors. Complex firms experience higher costs in information processing which results in more inefficiencies and frictions especially in processes of stock-pricing. Furthermore, for firms to adopt XBRL format, their financial statements require taxonomies or same names for the items with same economic consequences or implications (Johnston, 2017).

Therefore, adoption of XBRL decreases challenges in examining or analyzing sophisticated financial statements by enabling investors to readily compare accounting values across various industries and firms at smaller costs. XBRL adoption improves data analysis efficiency as it allows more efficient and accurate handling by eliminating costly manual procedures and through financial disclosure standardization (Alles and Piechocki, 2012). This standardization is made possible through detailed tagging of elements of financial accounting.

Srivastava and Kogan (2009) further posit that XBRL facilitates comparisons, calculations, and searchers of needed financial ratios. Investors who have fewer resources or ability to process information which is publicly available, XBRL allows them to so through its format which offers them larger information value beyond those provided by traditional forms such as HTML. The significance of XBRL to investors is mainly seen in how it makes it possible to process, analyze and study information in a timely fashion. XBRL disclosures reduce information asymmetry and risk.

Blankespoor et al. (2012) also add that the format becomes more important when substantial quantity information is reported. Kim et al. (2012) further contribute to this literature by saying that XBRL streamlines financial reporting in the firm by availability and tagging of various taxonomies. It is possible to tag every XBRL data piece based on an accounting term’s standardization list. Through tagging, data pieces get accorded relational meaning. Tagging applies to financial figures and textual information like principles, statements, appendices and footnotes by enabling easy data search, comparison, and extraction.

By eliminating or decreasing manual processes, financial reporting procedures are more controlled as per the Sarbanes-Oxy Act, section 404. Kim et al. (2012) posit that XBRL decreases errors, costs and time used in the preparation of financial reports. Another way in which XBRL results in better information supply is through its computer readability formats (Plumlee and Plumlee, 2008). This readability makes it easier and cheaper for investors to quickly retrieve, analyze, organize and process financial information which is essential in decision-making processes.

Data on XBRL is downloadable into XBRL-enabled software or Excel to develop graphs and compute ratios as well as conduct trend analysis. Besides, this computer readability nature of XBRL data allows for easy organization, processing, and alteration into usable information. Therefore, XBRL formats are dynamic as compared to the static conventional HTML designs. Furthermore, the computer readable data forms are freely available to the public. Unlike the freely available data, privately acquired information is often expensive and is not easily acquired by all investors.

Another huge advantage is how XBRL allows financial reporting standardization thus offering better comparability and consistency. For instance, Plumlee and Plumlee (2008) report that after the 2008 VFP period, XBRL US had published what they regarded as an entire US GAAP taxonomy for at least 12,400 definitions and tags for standard accounting rules or terms. Besides, the XBRL US also reported an increased information value to the investors who used this format. Therefore, adoption of XBRL increases corporate investments made by firms (Dong et al., 2013). As can be seen in the works of Lambert et al. (2006), the quality of data in accounting influences capital cost in a firm both directly and indirectly.

The direct impact is through affecting perceptions of market participants about future flow of cash while indirect influence comes from affecting real decisions which change future cash circulation or flow. Besides, Lambert et al. (2006) argue that the direct effect happens due to impact of disclosure quality on covariance between cash flow in one firm and that of another. The information quality can either lower or increase a firm’s capital cost. Because XBRL results in efficient financial report preparation, it is expected that corporate investment will increase for firms that have adopted this reporting as investors can get information about specific firm’s financial position as well as their ability among other factors (Premuroso and Bhattacharya, 2008).

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