Information processing costs and firms’ investment efficiency: An examination of channels of the XBRL effect

Abstract

We examine the channels through which a reduction in information processing costs improves firm-level investment efficiency. We do so by exploiting the SEC’s eXtensible Business Reporting Language (XBRL) mandate, which serves as a natural experiment. We provide empirical evidence suggesting potential channels including (1) the use of standardized official elements versus customized extension elements in XBRL-filings and (2) the role of the external auditors. Specifically, we find that, while the use of standardized official elements facilitates investment efficiency, the use of customized extension elements hinders it. In addition, we show that firms with Big 4 auditors experience lesser improvement in investment efficiency. We also investigate ex post investment performance and find that firms’ return on assets and Tobin’s q increase following XBRL adoption, suggesting improvements in the effectiveness of investments in addition to improved investment efficiency. Furthermore, insofar as reduced information processing costs improve firms’ capital investment efficiency, we extend this line of research to investments in human capital. Notably, we show that labor investment efficiency is significantly improved in the post-XBRL era. This finding adds another dimension to the growing knowledge about the impact of accounting information on firm-level investment decisions.

Keywords: Information processing costs, Investment efficiency, XBRL

JEL Classification: G30, M40, M41, M48