Extensible Business Reporting Language for Financial Reporting (XBRL FR) and Financial Analysts' Activity: Early Evidence

ABSTRACT On January 30, 2009, the United States Securities and Exchange Commission (US SEC) adopted rules that require firms to provide to the Commission financial statements in XBRL format, as well as posting to its website should a firm maintain one. The use of XBRL for financial reporting brings several benefits to parties interested in financial information such as investors, financial analysts, and regulators alike in that it enhances information exchange, lowers accessing costs and times, reduces errors, and improves information analyses. XBRL can alleviate information overload and time pressure analysts face, and thus affect their forecasting activities. This paper empirically examines the effect of XBRL on analysts ' coverage and the quality of their forecasts. Using regression analysis, our results indicate that there are significant increases in analysts ' coverage and quality of their earnings forecasts after XBRL adoption. INTRODUCTION Developments in information technology over the past two decades have had an impact on financial markets and their users. These developments generally have improved market efficiency. Stice (1991) examines whether share prices react to the public filings of a Securities Exchange Commission (SEC) 10-K and 10-Q form or the publication of the same information in the Wall Street Journal (WSJ). Stice argues that firms sometimes file their 10-K or 10-Q with the SEC several days before the corresponding earnings announcements appear in WSJ. The result shows that share prices react to WSJ publication rather than the SEC filing even if the SEC filing is the first public earnings announcement. From this result, Stice suggests that the method of disclosing and cost of acquiring accounting earnings impacts whether the information embodied in those earnings will be reflected in share prices in a timely fashion. In short, this study provides evidence that any process that depends on the manual or even semi-automatic transformation of data has the potential to delay the release of potentially price sensitive information to the market and consequently to effect market efficiency. It may be unlikely that these results would persist today, given the electronic submission of filings. For example, Asthana and Balsam (2001) examine the effect of the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) adopted by the US SEC on the market reaction to 10-K filings. EDGAR is used to perform automated collection, validation, indexing, acceptance, and forwarding of submissions by firms. Its primary purpose is to increase the efficiency and fairness of the security market. They find both a price and volume reaction to the 10-K filings on EDGAR, but don't find those reactions in the pre-EDGAR filing. They conclude that the market reacts more significantly to 10-K' s filed on EDGAR and on average 10-K' s filed on EDGAR are filed earlier than 10-K' s filed under traditional methods. Even if the evolutionary exchanges of financial information shift from paper format to an electronic one, its usefulness is still limited. So far, electronic reporting of financial information involves the exchange of information in a variety of formats such as portable document (PDF), Hypertext Markup Language (HTML), and so on. Nevertheless, it is still in its infancy because it essentially replicates a paper format with all of its limitations in the electronic environment (Ramin, 2002). Its major limitation is that it is still costly, time-consuming, labor-intensive, and error-prone since further processing and analyzing of these financial information requires human intervention (Berkeley, Connors, &Willis, 2003). This issue is made worse by increased information overload and complexity because of rapid growth of the supply of Web-based businesses and financial information as well as more regulatory requirements. eXtensible Business Reporting Language (XBRL) has been presented as one of the solutions to these problems. …