Impact of XBRL on Adopters’ Financial Reporting Quality and Cost of Capital

Abstract

This study investigates whether corporate governance quality affects differences in financial reporting quality and cost of capital of public companies associated with adoption of XBRL in the Voluntary Filing Program (VFP) launched by the Securities and Exchange Commission (SEC) in March 2005. Using the degree of earnings management to measure financial reporting quality and using the cost of equity capital measure proposed by Easton (2004) to estimate cost of equity capital, we hypothesize and find that voluntary adopters with superior corporate governance quality are more likely to have better financial reporting quality after their XBRL adoption, relative to those with weak corporate governance quality. We also find a significant interaction effect of corporate governance quality and XBRL adoption on companies’ cost of equity capital. These findings suggest that the impact of XBRL on its adopters’ financial reporting quality and cost of equity capital is contingent on adopters’ corporate governance quality.

Keywords: XBRL, Corporate governance, Financial reporting quality, Cost of capital

JEL Classification: M41, G30