Three Studies on eXtensible Business Reporting Language

Abstract

Abstract This thesis examines the governance and informational effects of the mandatory adoption of eXtensible Business Reporting Language (XBRL) in financial reporting, as required by the U.S. Securities and Exchange Commission (SEC). XBRL is a digital reporting standard that requires firms to tag financial filings using standardised taxonomies based on Generally Accepted Accounting Principles (GAAP), making financial information comparable and easily accessible through computer code. The thesis comprises three studies that explore whether and how XBRL adoption impacts corporate governance, stock price informativeness, and managerial discretion in using XBRL reporting. Study 1 examines whether reducing disclosure processing costs improves corporate governance effectiveness. Using XBRL adoption as an exogenous reduction in disclosure processing costs for small institutional investors relative to large institutional investors (Bhattacharya, Cho and Kim 2018), I find that following XBRL adoption, forced CEO turnover exhibits greater sensitivity to poor market performance in firms with higher ex ante ownership by small institutional investors compared to those with lower ex ante small institutional ownership. This enhancement in corporate governance is likely associated with increased shareholder proposals, greater proxy voting against management, as well as reduced effects of liquidity barriers on shareholder exit. The effect is stronger for firms with a poorer information environment prior to XBRL adoption. Ultimately, firm value improves as a result. These findings suggest that XBRL reduces disclosure processing costs for small institutional investors, thereby strengthening their role in corporate governance. Study 2 examines whether XBRL adoption impacts the feedback effect of stock prices on managers' investment decisions. I find that XBRL adoption enhances the market feedback for firms with higher ex ante small institutional shareholdings, relative to those with lower ex ante small institutional shareholdings. The effect is more pronounced in firms with greater growth opportunities, firms operating in more competitive industries, and firms with greater exposure to macroeconomic conditions, where the market holds a comparative informational advantage. Additional analysis reveals that the benefits of XBRL adoption are stronger in illiquid stocks, firms with a poorer ex ante information environment, firms with more privately informed trading, and firms with less use of customised XBRL reporting. Overall, the evidence suggests that XBRL adoption enhances the real efficiency of stock prices by improving the ability of stock market to convey feedback to managers. Study 3 examines the corporate governance determinants of the customised XBRL extensions in firms' 10-K filings and the relation between XBRL extensions and firms' future performance. Firms use XBRL extensions to report financial data outside standard GAAP taxonomies, potentially reducing transparency. I find that the ratio of XBRL extensions to total XBRL elements is negatively associated with measures of corporate governance strictness. The component of XBRL extension rate explained by corporate governance factors is negatively associated with firms' future operating performance and excess stock returns, while positively associated with firms' future information asymmetry. These findings suggest that managers opportunistically use XBRL extensions to report non-GAAP financial elements, but strict corporate governance can constrain such practices. Show more