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THE IMPACT OF THE XBRL MANDATE ON MARKET EFFICIENCY

THE IMPACT OF THE XBRL MANDATE ON MARKET EFFICIENCY. Yu Cong Morgan State University Jia Hao Wayne State University Lin Zou Texas Woman’s University. The Evolution. EDGAR, 1994- Replaces paper based SEC filing system

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THE IMPACT OF THE XBRL MANDATE ON MARKET EFFICIENCY

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  1. THE IMPACT OF THE XBRL MANDATE ON MARKET EFFICIENCY Yu Cong Morgan State University JiaHao Wayne State University Lin Zou Texas Woman’s University

  2. The Evolution • EDGAR, 1994- • Replaces paper based SEC filing system • Attempts to structure the electronic filings, requiring SGML tags and structured key data elements, for instance, FDS. • HTML and richer electronic contents, 1998- • XBRL, 2009-2012

  3. SEC On Technology • “The vital role of the Internet and electronic communications in modernizing the disclosure system under the federal securities laws and in promoting transparency, liquidity and efficiency in our trading markets.” (SEC 2008, p.6) • “create new ways for investors, analysts, and others to retrieve and use financial information in documents filed with [SEC]. For example, users of financial information will be able to download it directly into spreadsheets, analyze it using commercial off-the-shelf software, or use it within investment models in other software formats. Through [XBRL], that is currently static, text-based information can be dynamically searched and analyzed, facilitating the comparison of financial and business performance across companies, reporting periods, and industries.” (SEC 2009)

  4. So, Our Question Is … • Can XBRL improve liquidity and efficiency? • Extant findings • Kim at al. 2012 • Information asymmetry 30 days after filing date is reduced by the SEC XBRL mandate • Blankespoor at al. Working Paper. • Information asymmetry around filing date is increased. • XBRL discriminates small investors.

  5. What Remains Not Answered: • Liquidity: • Reconcile Kim et al. 2012 and Blankespoor 2013. • Efficiency? • XBRL facilitates price formation?

  6. Theoretical Background • Conventional wisdom • Common disclosure suppresses private information • Verrecchia (2001): agents in market • interpret a common disclosure heterogeneously (Kim and Verrecchia,1994) • possess private information of heterogeneous quality (Kim and Verrecchia, 1997) • Combine the interpretation with private information

  7. Theoretical Background • A common disclosure stimulates the generation of new information (private + common contents). • The information is infused into the market when the possessor uses it to trade (becomes public). • Two observable indicators must appear simultaneously in a short window around the common disclosure. • Greater information asymmetry • Higher trading volume • Krinsky & Lee 1996 • Kandel & Pearson 1995 • Barron et al 2002, 2005

  8. Hypothesis I • H1: After the adoption of XBRL, ceteris paribus, in a short period immediately following 10-K/10-Q filing events, information asymmetry increases. • As measured by abnormal price impact, the adverse selection component of bid-ask spread (Huang & Stoll, 1996)

  9. Hypothesis II • H2: After the adoption of XBRL, ceteris paribus, in a short period immediately following 10-K/10-Q filing events, trading volume increases due to lowered information-process costs and more timely information processes. • As measured by abnormal trading volume

  10. Model • AQS = α1+ α2*XBRL +∑ αi*CONTROLS+ε; Eq1 • API = α1+ α2*XBRL +∑ αi*CONTROLS+ε; Eq2 • AVOL = α1+ α2*XBRL +∑ αi*CONTROLS+ε; Eq3 • AES = α1+ α2*XBRL +∑ αi*CONTROLS+ε; Eq4 • ADDP = α1+ α2*XBRL +∑ αi*CONTROLS+ε; Eq5

  11. Dependent Variables

  12. Independent Variables

  13. Sample

  14. OLS Results All 10-K and 10-Q, First XBRL Filing Matched with Non-XBRL of One Year Ago

  15. OLS Results 10-K only, First XBRL Filing Matched with Non-XBRL of One Year Ago

  16. OLS Results 10-Q only, First XBRL Filing Matched with Non-XBRL of One Year Ago

  17. OLS Results All 10-K and 10-Q, all Filings between June 15, 2008 and Jun 14, 2012

  18. Conclusion • Reaffirms that the XBRL mandate facilitates the dissemination of information in public disclosure as well as improves the fusion of the public information with private information. • builds the link between the documented higher informational efficiency and market efficiency via price formation. • the XBRL mandate, in an imperfect market where the role of private information is inevitable, there is a cost to attaining higher market efficiency.

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