XBRL Adoption and Expected Crash Risk

56 Pages Posted: 16 Jan 2018 Last revised: 27 Mar 2019

See all articles by Yanan Zhang

Yanan Zhang

Central University of Finance and Economics (CUFE) - School of Accountancy

Yuyan Guan

Nanyang Business School, Nanyang Technological University

Jeong-Bon Kim

City University of Hong Kong

Date Written: October 29, 2018

Abstract

The U.S. Securities and Exchange Commission (SEC) mandated the adoption of eXtensible Business Reporting Language (XBRL) in 2009, with the aim of facilitating data exchange and reducing information processing costs. To shed light on the economic consequences of this important disclosure regulation, this study investigates whether and how XBRL mandate impacts investor expectations of future crash risk. Using the steepness of the option implied volatility smirk as a proxy for ex ante expectation of crash risk, we find that expected crash risk decreases after adoption of XBRL. Moreover, we document that the effect is more pronounced for firms with higher financial opacity, more volatile earnings, and greater analyst forecast dispersion. Further, our analysis generates evidence that the use of customized extension XBRL elements attenuates the effect of XBRL reporting on reducing expected crash risk. Our empirical results are robust to a variety of sensitivity checks. Overall, the findings indicate that XBRL reduces information processing costs and strengthens information transparency of capital markets, which in turn, reduces investor expectations of future crash risk.

Keywords: Expected Crash Risk; Bad News Hoarding; eXtensible Business Reporting Language (XBRL)

JEL Classification: G12; M41

Suggested Citation

Zhang, Yanan and Guan, Yuyan and Kim, Jeong-Bon, XBRL Adoption and Expected Crash Risk (October 29, 2018). Journal of Accounting and Public Policy, Vol. 38, 2019, Available at SSRN: https://ssrn.com/abstract=3102949

Yanan Zhang (Contact Author)

Central University of Finance and Economics (CUFE) - School of Accountancy ( email )

39 South College Road, Haidian District
Beijing
China

Yuyan Guan

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

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