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Top1. Introduction
The advancement of digital content and the internet era have vastly increased the flow of information between corporations and investors (Rubin & Rubin, 2010). In particular, in the wake of corporate failures, investors’ need for transparency and semantic interoperability of corporate financial statements has increased significantly. eXtensible Business Reporting Language (XBRL) leverages internet technologies to facilitate this flow of information to meet this need (Zhu & Wu, 2011). XBRL is an open source information standard which allows for the standardized conversion of business information into computer-readable format. Granular information contained in the financial reports of companies— the primary financial statements and footnotes—are encoded such that software applications can automatically download this detailed information and update valuation models for immediate analyses as soon as the financial statements are posted with the securities regulator, stock exchange or on company websites. Currently, in the United States, the Securities and Exchange Commission (SEC) has mandated that all SEC filers submit their 10-Ks and 10-Qs using XBRL, in addition to the traditional HTML filing with EDGAR. According to the SEC, XBRL has the potential to “increase the speed, accuracy and usability of financial disclosure and eventually reduce costs for investors” (SEC, 2008).
Stock exchanges around the world in China, Japan, India, and Singapore have already mandated that companies submit their filings in XBRL. In addition, government regulators in Australia and around the world are also implementing XBRL as a means of electronically exchanging information between government agencies. Although proponents claim that XBRL promises to increase transparency, information accessibility, and thus efficiency in the capital markets (SEC, 2007), to date there is very little empirical evidence to support these claims. Indeed, cynics of XBRL suggest that a plausible alternative hypothesis is that XBRL has no material effect on the speed, accuracy and usability of financial statements, and merely increases preparation costs for firms. In this study, we argue that there is significant cross-sectional variation in the potential informational benefits to XBRL filings.
In this study, we examine whether XBRL adoption increases the efficiency with which the market reacts to financial statements filed with the Shanghai (SSE) and Shenzhen (SSZE) stock exchanges. There are two ways in which XBRL filings may have a potential effect on market reactions. First, XBRL-formatted financial statement, as well as footnote, information can be instantly available for market participants to perform analyses, and therefore XBRL is able to increase the timeliness and efficiency with which market participants can use financial information.1 The second way in which XBRL may affect market reactions is in the relatively higher precision of information provided via an XBRL implementation, by associating each individual financial statement item with a tag in the XBRL taxonomy.