The Impact of Information Processing Costs on Firm Disclosure Choice: Evidence from the XBRL Mandate

• DOI: http://doi.org/10.1111/1475-679X.12268
• Date: 01 September 2019
• Author: ELIZABETH BLANKESPOOR
• Published date: 01 September 2019

DOI: 10.1111/1475-679X.12268

Journal of Accounting Research

Vol. 57 No. 4 September 2019

Printed in U.S.A.

The Impact of Information

Processing Costs on Firm

Disclosure Choice: Evidence from

the XBRL Mandate

ELIZABETH BLANKESPOOR

∗

Received 10 February 2013; accepted 11 January 2019

ABSTRACT

This paper examines the effect of market participants’ information process-

ing costs on firms’ disclosure choice. Using the recent eXtensible Business

Reporting Language (XBRL) regulation, I find that firms increase their quan-

titative footnote disclosures upon implementation of XBRL detailed tagging

requirements designed to reduce information users’ processing costs. These

results hold in a difference-in-difference design using matched nonadopting

∗Foster School of Business, University of Washington.

Accepted by Philip Berger. This paper is based on my doctoral thesis completed at the

University of Michigan, and I am grateful to my dissertation committee for their insightful

comments and guidance: Gregory Miller (Chair), Raffi Indjejikian, Nejat Seyhun, Cather-

ine Shakespeare, Jeffrey Smith, and Hal White. I thank Craig Chapman, Emmanuel De

George, Merle Ederhof, Jeff Hoopes, Reuven Lehavy, Edward Li, Feng Li, Ken Merkley,

Michael Minnis, Venky Nagar, Darren Roulstone, Richard Sansing, Nemit Shroff, Joe We-

ber, Chris Williams, Gwen Yu, Jerry Zimmerman, and workshop participants at Columbia

University, Dartmouth College, Massachusetts Institute of Technology (MIT), New York Uni-

versity, Northwestern University, Stanford University, The Ohio State University, University

of Michigan, University of Oregon, University of Rochester, and University of Utah for

helpful feedback. I thank Feng Li for programming advice, Shauna Bligh, Ken Li, and

Edward Watts for research assistance. Finally, I gratefully acknowledge financial support

from the Paton Accounting Fellowship and the Deloitte Doctoral Fellowship. An online ap-

pendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal-of-

accounting-research/online-supplements.

919

CUniversity of Chicago on behalf of the Accounting Research Center,2019

920 E.BLANKESPOOR

firms as controls, as well as two additional identification strategies. Examina-

tion of the disclosure increase by footnote type suggests that both regulatory

and nonregulatory market participants play a role in monitoring firm dis-

closures. Overall, these findings suggest that the processing costs of market

participants can be significant enough to impact firms’ disclosure decisions.

JEL codes: D83; M41; M48; O33

Keywords: information processing costs; disclosure; XBRL

1. Introduction

In this paper, I examine whether firms adjust their disclosure in response to

changes in market participants’ information processing costs. Firm disclo-

sures play a critical role in a well-functioning capital market, and an impor-

tant consideration in the market’s use of firm disclosure is the cost of pro-

cessing the disclosure. Numerous studies find that information processing

costs can reduce or impair participants’ processing of information (see sec-

tion 2.1). Building on these findings, I hypothesize that these information

processing costs can in turn affect firms’ disclosure choice through their

impact on disclosure outcomes. In particular, I predict that firms increase

their disclosure when they expect a reduction in participants’ information

processing costs.

Models of firm disclosure portray disclosure choice as a cost–benefit

tradeoff, with benefits that include reduction of information asymmetry

and improved market liquidity (Diamond and Verrecchia [1991]), as well

as avoidance of penalties for underdisclosure of information. These penal-

ties can be imposed by investors in the form of price protection and market

value adjustments (Grossman and Hart [1980]) and/or by regulators in

the form of fines, regulatory burdens, and related repercussions (Becker

[1968], Bushee and Leuz [2005]). For firms to receive these disclosure

benefits or face penalties for underdisclosure, however, market participants

must process the information disclosed. Thus, when processing costs pre-

vent participants from fully responding to disclosure or the lack of disclo-

sure, the extent of disclosure benefits could be muted and firm disclosure

choices affected.

Although many studies examine the determinants of firm disclosure, the

impact of participants’ processing costs on firms’ disclosure has not re-

ceived much attention. This lack of attention is likely due to the difficulty

of isolating the impact of participants’ processing costs on firm disclosure

choice from disclosure’s effect on processing costs. To overcome this dif-

ficulty, I exploit a recent regulation that reduces information processing

costs for market participants without changing firms’ disclosure require-

ments. Specifically, the eXtensible Business Reporting Language (XBRL)

mandate requires a subset of firms to “tag,” or label, all quantitative dis-

closures in the financial statements and footnotes so the amounts are ma-

chine readable, but the mandate does not require additional disclosure.

IMPACT OF INFORMATION PROCESSING COSTS ON FIRM DISCLOSURE 921

The Securities and Exchange Commission (SEC) argues that XBRL re-

duces processing costs by eliminating the need for manual search and com-

pilation of financial amounts, enabling easier comparison across time and

firms, and highlighting contextual information about data items, calling it

a “quantum leap over existing disclosure technology” (SEC [2006]). There-

fore, I use a firm’s mandatory adoption of XBRL as an exogenous reduction

in expected market participant processing costs for that firm.

To measure firm disclosure, I focus on quantitative disclosures in the fi-

nancial statement footnotes (i.e., disclosures subject to XBRL’s “detailed

tagging” requirements) because these details are valuable but costly to pro-

cess. Footnotes provide a rich context for understanding the firm beyond

that provided by summary statistics (De Franco, Wong, and Zhou [2011],

Li, Ramesh, and Shen [2011]). For example, calculating a firm’s lever-

age ratio gives a sense of the financial structure of the firm, but examin-

ing the detailed listing of notes payable, interest rates, and maturity dates

paints a more nuanced picture of the firm’s current and future health. Al-

though footnotes are valuable, they also impose high processing costs on

investors, regulators, and other market participants because they include

many pieces of information in a wide variety of formats, often with text and

numbers interspersed (Casey [1980], Hodge, Kennedy, and Maines [2004],

Li, Ramesh, and Shen [2011]).

To the extent market participants do not fully process footnote informa-

tion, firms have lower disclosure benefits (and lower costs of nondisclosure)

and thus less incentive to provide the detailed information. As participants’

information costs decrease, though, they can process more of the footnotes

and increase their attention to detailed information. Anticipating increased

processing and therefore more benefits to disclosure (and more costs of

nondisclosure), firms have a stronger incentive to provide this detailed in-

formation.

As highlighted by the SEC, lower processing costs can increase atten-

tion from any market participant: investors, analysts, media, regulators, etc.

(SEC [2009]). Each of these groups influences firms’ disclosure choice in

different ways. For example, investors can affect the bid–ask spread of a

firm, increasing it when information is scarce and information asymmetry

large, and decreasing the spread when firms provide more disclosure and

thus reduce information asymmetry. Regulators, on the other hand, can

impose fines or other regulatory burdens if firms do not provide enough

disclosure. Analysts and media can influence firms by altering trading be-

havior through recommendations and articles. For any of these market par-

ticipants, the amount of disclosure they process can have a significant im-

pact on the firms that provide the information.

Accordingly, I predict that when firms comply with the detailed footnote

tagging requirements of XBRL, they also increase the number of quanti-

tative footnote disclosures in anticipation of increased market participant

attention to these disclosures. For example, increased details of the de-

ferred tax asset valuation allowance and various impacts on tax rates and