The Real Effects of Modern Information Technologies: Evidence from the EDGAR Implementation

• Published date: 01 December 2023
• Author: ITAY GOLDSTEIN,SHIJIE YANG,LUO ZUO
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/1475-679X.12496

DOI: 10.1111/1475-679X.12496

Journal of Accounting Research

Vol. 61 No. 5 December 2023

Printed in U.S.A.

The Real Effects of Modern

Information Technologies:

Evidence from the EDGAR

Implementation

ITAY GOLDSTEIN,∗SHIJIE YANG,†AND LUO ZUO‡,§

Received 29 March 2021; accepted 29 April 2023

ABSTRACT

Using the implementation of the Electronic Data Gathering, Analysis, and Re-

trieval (EDGAR) system from 1993 to 1996 as a shock to information dissem-

ination technologies, we examine how a significant reduction in disclosure

processing costs affects the real economy. Wefind that the EDGAR implemen-

tation leads to an increase in corporate investment and that this effect is con-

centrated in value firms. We provide evidence that improved equity financing

∗Wharton School, University of Pennsylvania; †Business School, Southern University

of Science and Technology; ‡Business School, National University of Singapore; §Samuel

Curtis Johnson Graduate School of Management, Cornell University

Accepted by Regina Wittenberg Moerman. We gratefully acknowledge the helpful com-

ments of two anonymous associate editors, an anonymous reviewer, Musaib Ashraf, Lucian

Bebchuk, John Core, Henry Friedman, Enrique Gomez, Sudarshan Jayaraman, John Jiang,

Alon Kalay, Louis Kaplow, Bin Ke, Ranjani Krishnan, Charles Lee, Andrew Leone, Xitong

Li, Chen Lin, Yifei Lu, Jing Pan, Vivek Pandey, K. Ramesh, David Reeb, Sugata Roychowd-

hury, Yanting Shi, Eric So, Holger Spamann, Sri Sridhar, Rodrigo Verdi, Yanyan Wang,Joseph

Weber, Franco Wong, Joanna Wu, and Jason Xiao, as well as seminar participants at Cor-

nell University, Harvard University, HEC Paris, Massachusetts Institute of Technology, Michi-

gan State University, National University of Singapore, Northwestern University, Southern

Methodist University, the University of Rochester, the University of Toronto, Wuhan Uni-

versity, the 2020 Virtual Conference of Accounting Society of China, and the 2021 Hawai’i

Accounting Research Conference. An online appendix to this paper can be downloaded at

https://www.chicagobooth.edu/jar-online-supplements.

1699

© 2023 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

1700 i. goldstein, s. yang, and l. zuo

and enhanced managerial incentives are likely the underlying mechanisms.

Specifically, the EDGAR implementation leads to an increase in a firm’sstock

liquidity,a decrease in the cost of equity capital, and an increase in the level of

equity financing. Consistent with the monitoring effect of broad information

dissemination, the EDGAR implementation leads to an increase in a firm’s

operating performance. Our findings suggest that it is important to consider

information dissemination beyond information production when examining

the real effects of corporate disclosures.

JEL codes: G12, G14, G31, M41

Keywords: corporate investment; information technologies; EDGAR;

equity financing; managerial incentives

1. Introduction

One of the most important developments in financial markets over the

years is the greater availability of information to various market partici-

pants. Much of the information originates from firms themselves, as dis-

closures are enhanced and information technologies for their dissemina-

tion improve. Aside from understanding the financial-market implications,

a fundamental and perhaps more important question is about the effects

on the real economy (Goldstein and Yang [2017], Goldstein [2023]). After

all, the main function of financial markets is to assure the efficient alloca-

tion of capital. To understand this question, a large literature in account-

ing and finance has developed to examine the effects of financial reporting

and disclosure on corporate investment (Roychowdhury, Shroff, and Verdi

[2019], Kothari, Zhang, and Zuo [2023]). In this paper, we build on this

literature and examine how a significant reduction in disclosure process-

ing costs, brought by technological advances, affects corporate investment

decisions.

Traditionally, corporate disclosures are often viewed as public informa-

tion that is costless for investors to process and is fully reflected in stock

prices (Fama [1970]). This notion is challenged by recent evidence show-

ing that investors face frictions in using corporate disclosures and that it

can be very costly, even for professional investors, to obtain, extract, and

understand a disclosure (Blankespoor, deHaan, and Marinovic [2020]).

The existence of disclosure processing costs implies that investors who

choose to process firms’ disclosures must expect a competitive return that

more than offsets the cost. It also means that stock prices cannot fully re-

veal the information in corporate disclosures; otherwise, no investors would

process these disclosures in the first place (Grossman and Stiglitz [1980]).

Thus, disclosure processing costs can have important implications for capi-

tal market outcomes and corporate actions. Modern information technolo-

gies have significantly reduced investors’ costs to monitor for, acquire, and

analyze firm disclosures. Although it is intuitive that these technological

advances often make at least some investors better off by reducing their

the real effects of modern information technologies1701

information processing costs (Gao and Huang [2020]), whether and how

these technologies affect the real economy is less clear.

In this paper, we exploit the implementation of the Electronic Data Gath-

ering, Analysis, and Retrieval (EDGAR) system from 1993 to 1996 as a shock

to information dissemination technologies that alter the costs of accessing

firm disclosures (Gao and Huang [2020], Chang, Ljungqvist, and Tseng

[2023]). Before the EDGAR implementation, in order to access firm disclo-

sures, investors had to subscribe to a commercial data vendor or physically

visit a public reference room of the Securities and Exchange Commission

(SEC). On February 23, 1993, the SEC specified a phase-in schedule for reg-

istered firms to start electronic filing on EDGAR in 10 discrete groups (SEC

Release No. 33–6977). Firms in the first and last groups became EDGAR fil-

ers in April 1993 and May 1996, respectively. This mandatory implementa-

tion of the EDGAR system reduces potential endogeneity concerns caused

by unobserved firm-, industry-, or market-level shocks or reverse causality

(Leuz and Wysocki [2016]). For an omitted variable to confound our find-

ings, it would need to affect different groups of firms at discrete points in

time as specified in the phase-in schedule.

The enhancement of information dissemination from firms to the

market through the EDGAR system reduces investors’ costs of accessing

corporate filings. Following prior theoretical literature, we argue that this

reduction in investors’ accessing costs can affect the level of corporate

investment through two nonmutually exclusive channels: the equity financ-

ing channel and the managerial incentive channel. First, making corporate

disclosures more easily available levels the playing field in the market and

mitigates information asymmetry among investors. Before EDGAR, most

retail investors and a large number of institutional investors likely chose

not to access the corporate filings given the high cost, only those located

close to an SEC reference room likely chose to access the filings physically,

and only the largest institutional investors likely subscribed to commercial

data vendors for online access (Chang, Ljungqvist, and Tseng [2023]). The

EDGAR system gives everyone timely and free access to corporate filings

and likely motivates more investors to become informed. Thus, it can

help firms broaden their investor base, attract liquidity to the secondary

market, and eventually achieve a lower cost of capital in the primary

market (Merton [1987], Diamond and Verrecchia [1991]).1According to

this argument, reduced costs of accessing firm disclosures should lead to

an increased level of equity financing and corporate investment.

Second, the EDGAR system can also affect managers’ incentives to

undertake investment projects through its effects on price efficiency and

1Theories also point out a countervailing force that makes the effect of EDGAR on liquidity

ambiguous. As a reduction in disclosure processing costs increases the number of informed

investors, price changes are more likely to be caused by information than by noise, which can

lead to heightened adverse selection for uninformed investors and reduced liquidity (Glosten

and Milgrom [1985], Fishman and Hagerty [1992], Vives [2010]).