DOES XBRL ADOPTION REDUCE THE COST OF EQUITY CAPITAL?

Oliver Zhen Li* Yupeng Lin Chenkai Ni National University of Singapore August 2012

Abstract XBRL filing reduces investors information processing cost. We find that XBRL adoption results in a significant reduction in firms cost of equity capital and that this effect is stronger in firms with small size, high growth, low analyst coverage and illiquid stocks. We also show that firms experience an increase in analyst coverage, forecast accuracy and a decrease in forecast dispersion after XBRL adoption. Further, XBRL adoption improves firms stock liquidity. Finally, the effect of XBRL adoption on the cost of equity capital, analyst behavior and stock liquidity is weaker for voluntary filers than for mandatory filers. In sum, we provide strong evidence supporting the argument that information processing cost significantly affects the cost of equity capital. Keywords: XBRL, cost of equity capital, analyst forecast, liquidity, information processing cost

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* Department of Accounting, NUS Business School, Mochtar Riady Building, #07-19, 15 Kent Ridge Drive, Singapore 119245. Email: bizzhenl@nus.edu.sg.

Electronic copy available at: http://ssrn.com/abstract=2131001

DOES XBRL ADOPTION REDUCE THE COST OF EQUITY CAPITAL?

I. INTRODUCTION The introduction of XBRL (eXtensible Business Reporting Language) in financial reporting is a significant regulation change in recent years. As a part of the SECs plan aimed at replacing the EDGAR system with the Interactive Data Electronic Application (IDEA) system, XBRL enables market participants to retrieve and analyze firms financial information more easily and at a lower cost. The SEC expects XBRL adoption to reduce the information processing cost and improve firms information environment (SEC Final Rule, Release No. 33-9002). A vast literature documents that an improvement in information environment due to regulation changes, such as IFRS adoption, results in a reduction in the cost of capital (Daske, Hail, Leuz and Verdi, 2008; Li, 2010). However, there are also reasons to be skeptical about the expectation that simply adopting XBRL reduces the cost of capital from economic perspectives as XBRL adoption does not necessarily introduce brand new information to the market (SEC Final Rule, Release No. 33-9002). The purpose of our study is to explore the cost of equity effect of XBRL adoption. There are several reasons why XBRL adoption is expected to reduce the cost of equity capital. First, XBRL reduces information processing cost and mitigates delays in the incorporation of information into stock prices (Sims, 2003, 2006). In particular, Sims (2006) shows that agents with limited information processing capacity behave as if facing noises which change systematically as the dynamic properties of the economy change. Thus, information processing cost could lead to delays in the incorporation of information into asset prices or create noises in information (Peng, 2005). Consequently, information processing capacity constraints affect investors required equity premium either because
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Electronic copy available at: http://ssrn.com/abstract=2131001

investors under-diversify their risks (Peng, 2005; Luo, 2008, 2010) or because they face the adverse selection problem (Rock, 1986). Second, a reduction in information processing cost can affect analyst behavior. Barth, Kasznick and McNichols (2001) argue that analyst coverage depends on the cost of following a firm. As XBRL reduces information processing cost, firms with complicated information can gain more analyst coverage (Bhushan, 1989) and therefore more information will be provided to the public. In this situation, information asymmetry is mitigated and investors demand a lower equity premium (Botosan and Plumlee, 2002; Easley, Hvidkjaer, and OHara, 2002). Third, XBRL adoption reduces informational barriers which separate small investors from large investors who have more financial resources (SEC Final Rule, Release No. 339002) and increases competition among investors. Hence, XBRL adoption impacts the size of the investor base, and consequently the depth of the market. If the market becomes more liquid, investors require a lower premium for bearing less liquidity risk (Amihud and Mendelson, 1986; Kyle, 1985; Diamond and Verrecchia, 1991; Easley and OHara, 2004). We empirically test the prediction that XBRL adoption reduces the cost of equity capital by using a sample of 11,280 observations, representing 2,302 firms during the period from 2003 to 2011. To construct our cost of equity measures, we rely on four different methods (Gebhardt, Lee and Swaminathan, 2001; Claus and Thomas, 2003; Gode and Mohanram, 2003; and Easton, 2004). We conduct multivariate analyses by regressing firms cost of equity capital on an indicator for XBRL adoption, along with other common determinants of the cost of equity capital. We find that there is a 60 basis point decrease in the cost of equity capital after firms XBRL adoption. This finding is consistent with Luos (2008, 2010) theoretical prediction that information processing capacity constraints result in a higher
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cost of equity capital. For firms with small size, high growth, low analyst coverage and low stock liquidity, we find that they experience a greater reduction in the cost of equity capital due to XBRL adoption than others. These findings support our prediction that a reduction in information processing cost reduces the cost of equity capital through larger analyst coverage and more stock liquidity. To strengthen our argument, we examine these specific channels through which information processing cost impacts the cost of equity capital. We find that analyst coverage and forecast accuracy increase, and forecast dispersion decreases after XBRL adoption. These results are consistent with Barth, Kasznik and McNicholss (2001) finding that analyst coverage depends on the cost of following a firm. In addition, using multiple measures of stock liquidity, we find that liquidity significantly increases after firms XBRL adoption. These findings are consistent with the literature on information asymmetry and stock liquidity (Kyle, 1985; Amihud and Mendelson, 1986; Diamond and Verrecchia, 1991; Easley and OHara, 2004). They also support the prediction of Mertons (1987) attention model that a greater investor attention shifts the demand curve for that security and thereby reduces the cost of equity capital. Taken together, evidence here is consistent with the view that XBRL adoption helps investors and analysts collect and analyze information, and enhances the markets awareness of adopting firms. To substantiate our inference, we investigate whether the cost of equity effect of XBRL adoption differs for voluntary filers and mandatory filers. We repeat our multivariate analysis by including an indicator for voluntary filers, and an interaction term between the voluntary indicator and the XBRL adoption indicator. Our analysis suggests that the cost of equity effect of XBRL adoption is weaker for voluntary filers than for mandatory filers. An explanation for this finding is that the voluntary program and the mandatory program
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differ significantly in the treatment of the interactive data and the timeliness of data submission. First, the voluntary program was only an experiment and the SEC cautioned investors not to rely too heavily on voluntary filings. Second, while the voluntary program treats interactive data as only a supplement to official financial statements, the mandatory program treats it as official filings. Finally, mandatory filings are more timely submitted than voluntary filings. Because of these differences, voluntary adoption does not reduce the information processing cost and consequently the cost of equity capital as much as mandatory adoption. In supplemental analysis, we further investigate why voluntary firms do not experience a significant reduction in the cost of equity capital after XBRL adoption. We first confirm the validity of the cost of equity effect for voluntary firms by showing that the effect of XBRL adoption on analyst behavior and stock liquidity is also weaker for voluntary adopters. Next, we investigate whether the more stringent requirements for voluntary filers under the mandatory program help voluntary filers realize a further reduction in the cost of equity capital. The logic of the analysis is that, as voluntary filers are subject to the same rules as mandatory filers after June 15, 2009, the cost of equity reduction effect of XBRL for mandatory filers should also apply to voluntary filers. We find that voluntary filers experience a further reduction in the cost of equity capital after they are subject to the same requirements as mandatory filers do. Our study makes the following contributions. First, we provide empirical evidence supporting the argument of Sims (2003, 2006) and Peng (2005) that information processing capacity plays an important role in determining asset prices. Due to the unobservability of information processing capacity (cost), previous studies are unable to fully address the measurement problem and establish a link between information processing cost and the
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cost of equity capital.1 Using XBRL adoption as a clean natural experiment, we provide first hand result on how information processing cost affects the cost of equity capital. We also contribute to the asset pricing literature which establishes a link between information asymmetry and the required cost of equity capital (Amihud and Mendelson, 1986; Kyle, 1985; Diamond and Verrecchia, 1991; Easley and OHara, 2004). Second, we provide evidence on the economic consequence of XBRL adoption. Highlighted in the SECs final release, feedbacks on the proposal release suggest that there is significant variation in practitioners attitudes towards XBRL adoption. While most of the repliers are agreeable with XBRL adoption, significant concerns have been raised over the cost versus the benefit of the interactive data. Our study highlights the benefit of XBRL adoption by showing that firms experience a significant reduction in the cost of equity capital after XBRL adoption. This result is a timely feedback to the SEC which believes that interactive data reporting can increase the amount of financial data available to investors through increased coverage of commercial products (e.g., sell-side analysts) and a larger scope of the information made available to market participants. Third, we point out the importance of the mandatory program over the voluntary program. As the voluntary program allows too much flexibility for filers, it does not generate enough reliability and timeliness for the interactive data filings, and the cost of equity effect is weaker for voluntary filers than for mandatory filers. Our evidence supports the SECs mandate that all firms be required to conduct interactive filings. The remainder of the paper proceeds as follows. Section II introduces the institutional background of XBRL and develops hypotheses. Section III describes the data and empirical
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Among the few, Cohen and Lou (2010) use conglomerate firms to proxy for the complexity of information processing and find that complicated processing yields higher returns. The concern of their approach is that conglomerate firms might also proxy for other firm characteristics such as size, distress or even unobservable characteristics. 5

design. Section IV presents and discusses empirical results. Section V summarizes and concludes.

II. INSTITUTIONAL BACKGROUND AND HYPOTHESIS DEVELOPMENT XBRL Adoption XBRL is a list of standard tags which are machine-readable and can be mapped to items in financial statements. The list of tags is similar to a dictionary which contains numerous financial and economic concepts that can be easily read and understood by software applications.2 Using this technology, each element of the financial statement can be assigned to one standard tag. An XBRL filing is thus a combination of these tagged data which are standardized for all firms and could be processed by commercially available products. According to the SEC, XBRL is one such language (computer markup language) that has been developed specifically for business and financial reporting. From the perspective of investors and other parties who are interested in retrieving firms financial information, they currently no longer have to manually read and key in data to conduct financial analysis as the interactive data can be directly downloaded into spreadsheets and be processed by software applications. The decision to mandate XBRL adoption lies in the long term goal of the SEC to replace the current EDGAR disclosure system with an interactive data disclosure system. The SEC has administered a disclosure system aimed at protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital information. As per the SEC, it has always been trying to improve the accessibility and usefulness of the information that it

Source: http://www.sec.gov/spotlight/xbrl/what-is-idata.shtml. 6

collects, stores, and disseminates.3 In earlier years, the disclosure system was paper-based and filers delivered or mailed paper documents to the SEC. During the 1990s, the SEC initiated the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system in which firms are required to submit electronic financial statements stored in HTML or ACSII formats. With the wide-spread use of the Internet, the SEC has managed to improve the information environment by making firms financial statements more easily available to investors. The current XBRL system, which contains interactive data, is a step that is believed to be capable of further improving the accessibility and usefulness of data. By tagging financial statements in a standardized way, firms generate files that can be processed by software applications (SEC Final Rule, Release No. 33-9002). To test the feasibility of XBRL adoption, the SEC initiated a voluntary filing program in March, 2005. Under this program, firms could voluntarily choose to tag their SEC filings and submit XBRL files, as specified in the SECs final rule for the voluntary program (SEC Final Rule, Release No. 33-8529). After several years of experimentation, the SEC issued three final rules in early 2009 mandating XBRL adoption for all firms. The initial phase-in period treats firms in different ways. Specifically, firms with public float above $5 billion are required to submit filings in interactive data format for fiscal periods ending on or after June 15, 2009. Other large accelerated filers are required to submit interactive data for fiscal periods ending on or after June 15, 2010.4 Finally, all remaining filers are subject to the same submission requirement for fiscal periods ending on or after June 15, 2011. Under the mandatory program, firms now need to provide financial statement information in the
3 4

Source: http://www.sec.gov/spotlight/xbrl/oid-history.shtml. Large accelerated filers, as defined in Rule 12-b under the Securities Exchange Act of 1934, are those issuers that have common equity held by unaffiliated persons with a value of at least $700 million, have been subject to the Exchange Acts periodic reporting requirement for at least 12 months, have filed at least one annual report, and are not eligible to use the disclosure requirements available to smaller reporting companies for its periodic reports. 7

interactive data format to the SEC and also post it on their corporate websites. The rule applies to periodic and current reports, transition reports, registration statements, as well as Forms 8-K or Forms 6-K that contain revised or updated financial statements (SEC Final Rule, Release No. 33-9002). While the mandate of XBRL adoption has been identified as a move towards improving information environment and capital market efficiency, the SEC has specifically emphasized the following potential benefits.5 First, financial statement information in the interactive data format can help investors, analysts and other interested parties retrieve and analyze information more easily and at a lower cost. Second, interactive data reporting will increase the amount of data available to investors through increased coverage by commercial products (e.g., sell-side analysts) as information processing cost is reduced. Third, as the interactive data format increases firms exposure to analysts and investors, firms, especially small ones, should realize a lower financing cost.

Hypothesis Development In this section, we develop our hypotheses by discussing the impact of XBRL adoption on information processing cost and thereby the cost of equity capital. We focus on the economic consequence of XBRL adoption. Specifically, we are interested in whether a reduction in information processing cost due to XBRL adoption will result in a reduction in firms cost of equity capital. As per the SEC, adopting interactive data reporting will benefit capital market participants in various ways, including an easier access to financial information and increased information made available to investors, among other benefits. First, interactive data make it easier for investors to collect and analyze financial
5

Please refer to the section IV Cost-Benefit Analysis in SECs Final Release for the mandatory program (Release No. 33-9002), http://www.sec.gov/rules/final/2009/33-9002.pdf. 8

information. The current text formatted documents require investors to conduct manual key entries to translate data into a format that suits statistical analysis and aggregation. XBRL filings provide data in a machine readable format and enable investors to collect and analyze data more easily. If information can be considered as moving through a channel, XBRL enlarges this channel and reduce delays or noises in output. Second, there is an increase in available information and investors awareness of firms filing interactive data. Financial tagging in XBRL includes footnotes and supplemental tables which can generate more machine-readable information to investors. This likely reduces information processing cost for all market participants. Peng (2005) suggests that an increase in the information processing capacity will increase the informativeness of stock prices and reduce the required premium. Luo (2008, 2010) theoretically demonstrates a required premium due to limited information processing capacity as households do not fully smooth their consumption flow when there are delays in information. Thus, we expect XBRL adoption to increase investors information processing capacity and reduce the cost of capital. Third, as analyst coverage is negatively associated with the cost of following firms (Barth, Kasznik and McNichols, 2001), we expect it to increase after XBRL adoption. As the SEC claims, easier access to more standardized information may increase coverage by commercial products or institutions (e.g., financial analysts). Such an effect will more likely happen for small firms that usually have less coverage. Analysts are able to mitigate information asymmetry among different agents (Hong, Lim and Stein, 2000; Barth and Hutton, 2004). Finally, a reduction in information processing cost reduces informational barriers that separate small investor from large investors who have more financial resources. Thus, more investors will be attracted to firms adopting XBRL filing (SEC Final Rule, Release No. 33-9002). Such an increase in the demand for a security will lead to more
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competition between large and small investors and an improvement in the informativeness of stock prices (Kyle, 1985). Based on the above arguments, we believe that XBRL adoption will reduce information processing cost and subsequently firms cost of equity capital. This leads to our first hypothesis: Hypothesis 1: XBRL adoption reduces firms cost of equity capital. We also examine potential channels through which interactive data help reduce firms cost of equity capital. We identify two mechanisms, analyst behavior and stock liquidity. According to the SEC, one potential benefit of XBRL adoption is an increase in the coverage of commercial products and institutions that provide corporate financial services (e.g., financial analysts). Interactive data make it easier for analysts to collect, aggregate and analyze financial information, inducing more analysts to cover adopting firms. Barth, Kasznik and McNichols (2001) suggest that analyst coverage depends on the cost of following the firm and is negatively associated with the effort analysts expend. Similarly, Bhushan (1989) argue that information acquisition cost is negatively associated with analyst coverage. Hence, as XBRL adoption reduces information processing cost, it should increase analyst coverage. In addition, as XBRL filing also requires firms to tag footnotes and supplemental tables, there is the potential that more information is made available to analysts in a machine readable format. As documented by Lang and Lundholm (1996), firms with more informative disclosures have larger analyst following, less dispersion in analyst forecasts, and less volatility in forecast revisions. We expect forecast accuracy of financial analysts to increase and forecast dispersion to decrease due to XBRL adoption. XBRL adoption can also impact stock liquidity which in turn affects the cost of equity capital. As suggested by the SEC (2009), XBRL would benefit small investors by relaxing
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constraints on their information processing capacity. Hence, more investors are attracted to firms adopting XBRL and thereby increase their stock liquidity as the depth of the market increases. Furthermore, XBRL adoption also reduces information asymmetry among market participants. The cross-sectional difference in the informativeness of stock prices largely depends on the amount of information acquired by investors. A reduction in the cost of information acquisition can induce more competition among informed and less informed investors and thereby improve price informativeness (Kyle, 1985). For firms with a less severe information problem, investors are relatively confident in a stock transaction as it would occur at a fair price. Consequently, the increase in trading volume will ultimately increase liquidity in a firms stock. Thus, we expect that XBRL adoption will increase a stocks liquidity and therefore reduce the cost of equity capital (Amihud and Mendelson, 1986, 1988; Kyle, 1985; Brennan and Subrahmanyam, 1996; Brennan, Chordia, and Subrahmanyam, 1998; Peng, 2005). The above arguments lead to our second and third hypotheses: Hypothesis 2: XBRL adoption increases analyst coverage, enhances forecast accuracy, and reduces forecast dispersion. Hypothesis 3: XBRL adoption increases stock liquidity. Firms adopting XBRL can be classified into two groups: voluntary adopters and mandatory adopters. The SEC initiated the voluntary program in 2005. Prior accounting literature suggests that voluntary adoption of a better disclosure practice or accounting standards (e.g., IFRS) may send a signal to investors about a firms better reporting incentives and reduce the cost of equity capital (Leuz and Verrecchia, 2000; Daske, Hail, Leuz and Verdi, 2008). However, as XBRL adoption does not necessarily increase the extent of disclosure of brand new information but only reduces information processing cost, we may not be able to find similar results as those documented in the IFRS literature. In order
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to figure out the real impact of XBRL adoption on voluntary adopters, we investigate differences in rules between the mandatory program and the voluntary program. The rules for the mandatory XBRL program are significantly different from those of the voluntary program in the following respects. First, the SEC claims that the voluntary program was an experiment to help it assess the feasibility of the XBRL filing system, and that investors should not rely too heavily on the data of voluntary filings when making investment decisions. Second, while the voluntary program treats interactive data as only a supplement to official financial statements, the mandatory program treats it as official filings. Finally, there is a big difference in the timing requirement of XBRL filings. Specifically, in the voluntary program, there is no submission time requirement for XBRL filings and firms are allowed to provide their interactive data at any time they want. Not surprisingly, significant delays exist for voluntary filers (Blankespoor, Miller and White, 2012). However, the mandatory program forces firms to provide their financial statements and interactive data at the same time. In addition, firms also need to post the interactive data on their websites on the same day. Thus, due to the delay in the voluntary reporting regime, market participants are less likely to be attracted to stale information and thereby voluntary reporting does not necessarily substantially reduce information processing cost. To briefly summarize, the mandatory program makes XBRL filings more reliable and timely while the voluntary program does not necessarily result in a significant efficiency improvement in information processing. We argue that firms participating in the voluntary program are less likely to be able to directly reduce their cost of equity capital through a reduction in investors information processing cost. In addition, we argue that firms participating in the voluntary program are less likely to be able to indirectly reduce their cost of equity capital through attracting more analysts or increasing their stock liquidity.
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These arguments lead to our fourth hypothesis and two ancillary hypotheses: Hypothesis 4: The cost of equity capital reduction effect of XBRL adoption is lower for voluntary filers than for mandatory filers. Hypothesis 4 (a): The ability of XBRL adoption in affecting analyst behavior is weaker for voluntary filers than for mandatory filers. Hypothesis 4 (b): The ability of XBRL adoption in increasing stock liquidity is weaker for voluntary filers than for mandatory filers.

III. DATA, DESIGN AND VARIABLES Data We collect XBRL filings from EDGARs database of Interactive Data Filings and RSS Feeds. For each XBRL filing, we obtain its filing time, form type, reporting period, and firm identity. As our empirical design focuses on firms XBRL adoption, we use firms initial XBRL filings to define adoption. The earliest filing time for each firm ranges from Apr 04, 2005 to Apr 30, 2012. Our XBRL sample contains 5,751 firms that are also included in the Compustat database. Excluding financial firms (SIC codes: 6000-6999) and utility firms (SIC codes: 4900-4949) leaves with us 4,337 firms. To estimate the cost of equity capital, we obtain stock price information from CRSP and analyst forecast data from I/B/E/S. We identify firm-year observations from 2003 to 2011. We choose 2003 as the beginning year to ensure two years worth of observations before the initiation of voluntary XBRL reporting in 2005. Following Dhaliwal, Krull, Li and Moser (2005), we estimate the cost of equity capital at the end of June each year. We require each firm-year to have current stock price and positive earnings forecasts during the following two years.6 Consistent with Dhaliwal, Krull, Li and Moser (2005), we require all four cost of
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Positive earnings forecast are necessary inputs to construct the cost of equity capital using the methods in Gode and Mohanram (2003), and Easton (2004). 13

equity estimates to be non-missing to construct our average cost of equity measure. Our main analysis also includes various control variables such as size, market-to-book ratio, leverage, beta, long term growth rate, and analyst forecast dispersion. Data required for the construction of such variables are obtained from Compustat, CRSP and I/B/E/S. We require all these variables to have non-missing values. Our final sample has 11,280 firmyear observations, including 2,068 mandatory filers and 234 voluntary filers.

Empirical Design and Variable Definitions To investigate the impact of XBRL adoption on the cost of equity capital, we conduct a multivariate regression analysis in which the dependent variable is the cost of equity capital, and the variable of interest is an indicator (XBRL) that equals one if an observation occurs after a firms initial XBRL filing, and zero otherwise. Following previous literature (Dhaliwal, Krull, Li and Moser, 2005; Li 2010), we rely on four estimation models to construct measures of the cost of equity capital: Gebhardt, Lee and Swaminathan (2001), Claus and Thomas (2003), Gode and Mohanram (2003) and Easton (2004). Individual measures of the implied cost of equity could introduce measurement errors into the analysis (Easton and Monahan, 2005), we thus rely on the average of the four measures to draw our conclusion (Li, 2010). However, we also report results of individual measures separately in our main analysis. As for control variables, we follow prior literature and include factors that have been shown to affect the cost of equity capital. We control size (SIZE) and market-to-book ratio (MB) as Fama and French (1992) argue that they are the two key determinants of expected stock returns. We include leverage (LEV) as it is shown to be positively associated with expected returns (Fama and French, 1992). We include market beta (BETA) to control for a
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firms systematic risk. It is generated from estimating the CAPM using daily stock return data from CRSP. We also include the long term growth rate (LNGROW) and analyst forecast dispersion (LNDISP) following Gebhardt, Lee and Swaminathan (2001). We include year indicators to address potential time series variation in the cost of equity capital for all firms as the variation in firms initiating time of XBRL filings makes it possible for us to control for year fixed effects. In addition, industry effects are also controlled based on the Fama-French 48-industry classification. Finally, to address potential within-firm correlation of error terms, we cluster standard errors by firm. Our formal regression model is as follows: ICCRFi,t+1 = 0 + 1XBRLi,t+1 + 2SIZEi,t + 3MBi,t + 4LEVi,t + 5BETAi,t + 6LNGROWi,t + 7LNDISPi,t + Industry Effects + Year Effects + 1i,t+1, where detailed variable definitions are presented in the appendix.

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IV. EMPIRICAL RESULTS Descriptive Statistics Table 1 presents descriptive statistics of key variables. We winsorize all continuous variables using the 1% and 99% percentile cutoffs. We subtract the risk free rate, measured by the annualized yield on a 10-year Treasury note, from the estimated cost of equity measures to arrive at equity premium. Equity premium ranges from 4.9% to 6.6% using different estimation methods, and the average of the four measures is 5.7%. Standard deviation of the average equity premium is 4.2% which is slightly less than the mean value. Voluntary filers observations represent 12.2% of the full sample. In addition, 11.3% of the observations are subsequent to firms initial XBRL filings. Table 2 presents Pearson correlations between key variables. The four estimates of the
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cost of equity capital are highly correlated, with correlations ranging from 0.55 (between the GLS and GM estimates) to 0.87 (between the GM and CT estimates). The average cost of equity capital appears to be negatively correlated with the voluntary indicator and positively correlated with the XBRL indicator. It is negatively correlated with size, marketto-book ratio, and positively correlated with leverage, market beta, long term growth and analyst forecast dispersion.

XBRL Filing and the Cost of Equity Capital Table 3 presents multivariate regression results. We report coefficient estimates and tvalues based on robust standard errors clustered by firm. We use as dependent variable the mean value of the four equity premiums in the first column, and the four individual measures separately in the next four columns. In all models, we find a significant reduction in the cost of equity capital after firms initial XBRL filings (-0.006, t = -3.840 for the average measure; -0.003, t = -2.673 for the GLS measure; -0.010, t = -4.216 for the CT measure; -0.006, t = -3.534 for the GM measure; -0.004, t = -2.372 for the ET measure). These results provide support for Hypothesis 1 that XBRL adoption decreases the cost of equity capital. Economically, based on the average measure, the estimated coefficient translates into a 60 basis point reduction in the cost of equity capital after firms initiate XBRL filings. With regard to control variables, we find that firms with large size or high market-tobook ratios have a lower cost of equity capital. High leverage firms, which potentially have high risks, tend to have a higher cost of equity capital. Firm systematic risk (BETA) is also positively associated with the cost of equity capital. Consistent with Gebhardt, Lee and Swaminathan (2001), high growth firms have a higher cost of equity capital. Finally,
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analyst forecast dispersion is positively associated with the cost of equity capital, consistent with Gebhardt, Lee and Swaminathans (2001) prediction.

Potential Mechanisms Linking XBRL Adoption and the Cost of Equity Capital In this section, we investigate potential mechanisms that explain why XBRL adoption helps firm reduce the cost of equity capital. Specifically, we conjecture that, as XBRL adoption makes it easier for analysts to retrieve and analyze information, analyst coverage would increase for firms that have initiated XBRL filings. In addition, to the extent that XBRL adoption potentially makes information more easily available to analysts, for example, through tagging footnotes and making them more standardized and interpretable, we would also expect analyst forecast accuracy to improve and analyst forecast dispersion to decrease. With regard to stock liquidity, as XBRL adoption provides individual investors easier access to firm information, and increases the markets awareness of stocks, we expect liquidity to increase for firms that have initiated XBRL filings.

Cross-sectional Variation in the Effect of XBRL Adoption on the Cost of Equity Capital Before directly testing Hypotheses 2 and 3, we provide some evidence on the crosssectional variation of the effect of XBRL adoption on the cost of equity capital. If the two channels help explain why XBRL filings reduce firms cost of equity capital, then such an effect should be more significant in firms with low analyst coverage and low liquidity. We test the above conjecture by stratifying firms based on various measures of information environment and stock liquidity that have been extensively used in prior literature, such as size, market-to-book ratio, book leverage, analyst coverage, idiosyncratic risk, the Amihud measure of price impact and the bid-ask spread. Firms with small size,
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high market-to-book ratio, high leverage, low analyst coverage and high idiosyncratic risk are believed to be in a poor information environment and have low liquidity. We further provide two direct measures of stock liquidity following Fang and Peress (2009) and Daske, Hail, Leuz and Verdi (2008): higher values of both the Amihud measure and the bid-ask spread to indicate lower stock liquidity. We sort firms based on the ranking of these measures during the year before they adopt XBRL. We then add to Equation (1) interaction terms between XBRL and indicators for firms in poorer information environment and with more illiquidity. We also add analyst coverage, idiosyncratic volatility and two illiquidity measures directly in the model. We present results in Table 4. We find that, for firms in better information environment or with higher stock liquidity, XBRL adoption results in a 30 to 40 basis point reduction in the cost of equity capital. Moreover, the effect of XBRL filings on the cost of equity capital is larger for firms in poorer information environment or with lower stock liquidity. Specifically, the coefficients on the interaction terms are all negative and significant (0.010, t = -5.165 for XBRLSMALL; -0.003, t = -1.912 for XBRLHIGH_MB; -0.003, t = 1.740 for XBRLHIGH_LEV; -0.009, t = -4.813 for XBRLLOW_COV; -0.006, t = -3.279 for XBRLHIGH_RISK; -0.011, t = -5.341 for XBRLHIGH_AMIHUD; -0.008, t = -4.152 for XBRLHIGH_SPREAD). These results suggest that analyst behavior and stock liquidity could potentially explain the effect of XBRL adoption on the cost of equity capital. In the following section, we direct investigate how XBRL adoption affects analyst behavior and stock liquidity.

XBRL Filings and Analyst Behavior Following Dhaliwal, Li, Tsang and Yang (2011), we cover three dimensions of analyst
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behavior: analyst coverage, forecast accuracy and forecast dispersion. We test the following three models for our analyses: LNCOVi,t+1 = 0 + 1XBRLi,t+1 + 2SIZEi,t + 3STDROEi,t + 4INVPRCi,t + 5RETVARi,t + 6RDi,t + 7ROAi,t + 8CORRi,t + Industry Effects + Year Effects + 2i,t+1, ABS_FEi,t+1 = 0 + 1XBRLi,t+1 + 2SIZEi,t + 3STDROEi,t + 4RDi,t + 5ROAi,t + 6CORRi,t + 7EPSi,t + 8LNCOVi,t + 9HORIZONi,t + Industry Effects + Year Effects + 3i,t+1, DISPi,t+1 = 0 + 1XBRLi,t+1 + 2SIZEi,t + 3STDROEi,t + 4RDi,t + 5ROAi,t + 6CORRi,t + 7EPSi,t + 8LNCOVi,t + 9HORIZONi,t + Industry Effects + Year Effects + 4i,t+1, where LNCOV is the natural log of the number of analysts covering the firm during the year; ABS_FE is the absolute forecast error defined as the actual annual earnings per share minus the median value of forecasts during the year, deflated by stock price at the beginning of the year; finally, DISP is the standard deviation of analysts forecasts of annual earnings per share during the year, deflated by stock price at the beginning of the year. We also incorporate various control variables that can affect analyst behavior. We include firm size (SIZE) as Bhushan (1989) suggests that large firms have more brokerage or investment banking businesses for analysts brokerage houses, and affect analysts forecasting behavior. We control for the inverse of stock price (INVPRC) as Brennan and Hughes (1991) suggest that it proxies for the brokerage commission rate. To address the concern that analysts are more likely to follow firms with higher return variability (Bhushan, 1989), we include STDROE defined as the standard deviation of return on equity during the previous four quarters, and RETVAR defined as the standard deviation of daily stock returns during the year. We include R&D expense (RD) as it is related to information asymmetry (Aboody and Lev, 2000). The correlation between ROE and stock returns during
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(3)

(4)

the previous four quarters (CORR) measures the difficulty in predicting firms earnings, and ROA captures firm profitability (Dhaliwal, Li, Tsang and Yang, 2011). For analyses on analyst forecast accuracy and forecast dispersion, we include earnings per share (EPS) to capture the magnitude of earnings surprises (Ali, Chen and Radhakrishnan, 2007), analyst coverage (LNCOV) and forecasting horizon (HORIZON) (Dhaliwal, Radhakrishnan, Tsang and Yang, 2012). Year and industry fixed effects are also included. Table 5 presents results on how XBRL filings affect analyst coverage, forecast accuracy and forecast dispersion. In the first column, the coefficient on XBRL is positive and significant (0.229, t = 8.935), indicating that analyst coverage significantly increases after firms initiate XBRL filings. In the second column, the coefficient on XBRL is negative and significant (-0.004, t = -2.119), suggesting that XBRL adoption helps increase analyst forecast accuracy. In the third column, we find that XBRL filings help reduce analyst forecast dispersion. The coefficient on XBRL is negative and significant (-0.008, t = -5.368). These results support Hypothesis 2.

XBRL Adoption and Stock Liquidity Earlier, we provide evidence that firms with low stock liquidity experience a greater decrease in the implied cost of equity capital. In this section, we directly test whether XBRL adoption helps firms increase their stock liquidity and consequently reduce the implied cost of equity capital. Generally, there are three possible dimensions of stock liquidity: tightness, depth and resiliency. We use the bid-ask spread (i.e., the annual median of daily quoted spreads, measured at the end of each trading day as the difference between the bid and ask prices divided by their midpoint) to measure tightness as it reflects how far the bid or ask prices
20

diverge from the mid-market prices. Depth refers to the volume of trades possible without moving the prevailing market prices. Conventionally, it can be measured by the daily absolute stock return divided by dollar trading volume (Amihud, 2002). Market resiliency gives a picture of potential market depth, which cannot be observed from prevailing order flows. There is no clear-cut approach to measure resiliency, and one approach is to examine the turnover rate measured by total traded shares divided by share outstanding (Cremers and Mei, 2007). We also complement our analysis with other measures such as dollar volume (US$ trading volume during the year) and the percentage of days with zero return (Fang and Peress, 2009). We take the nature log for all measures (except the percentage of days with zero return) to ensure stationarity of these variables. We estimate the following empirical model: LIQUIDITYi,t+1 = 0 + 1XBRLi,t+1 + 2SIZEi,t + 3MBi,t + 4LEVi,t + 5BETAi,t + 6LNGROWi,t + 7LNDISPi,t + 8RETVARi,t + Industry Effects + Year Effects + 5i,t+1. Our dependent variable is one of the aforementioned individual liquidity measures constructed using daily trading and return data during the year. We include a number of control variables following prior literature. In particular, liquidity can arise from private information, inventory risk for market makers, or search problems (Amihud, Mendelson and Pedersen, 2005). We use several measures to proxy for these determinants of liquidity, namely, size, market-to-book ratio, leverage, analyst forecast dispersion and stock return volatility. We also include year and industry fixed effects. Table 6 presents results on how XBRL filings affect stock liquidity. Except for the specification with liquidity measured as the percentage of zero return days, we find consistent results that XBRL filings increase stock liquidity in all other four specifications. The coefficient on XBRL is positive and significant when the dependent variable is stock
21

(5)

turnover (0.318, t = 10.874) or dollar trading volume (0.372, t = 10.447) as high values of both measures indicate higher liquidity. It is negative and significant when liquidity is measured using the Amihud Ratio (-0.354, t = -8.703) or the bid-ask spread (-0.325, t = 12.570) as high values of both measures indicate lower liquidity. These results support Hypothesis 3. In the above analysis, we show that XBRL adoption increases stock liquidity as it increases the size of the investor base by reducing informational barriers between small and large investors (SEC Final Rule, Release No. 33-9002). However, Blankespoor, Miller and White (2012) find that XBRL adoption results in a decrease in liquidity around 10-k filing dates. Their argument is that, as XBRL adoption benefits large investors more than it benefits small investors, the increased heterogeneity among investors aggravates the adverse selection problem faced by small investors, and hence stock liquidity is reduced instead of being enhanced. Their results appear to be opposite to ours. The following reasons could potentially explain the difference between these two studies. First, Blankespoor, Miller and White (2012) investigate the short-run effect of XBRL adoption on liquidity around 10-k filing dates. In contrast, our paper investigates the long-run effect. While the lack of tools to utilize XBRL formatted statements may be a temporary constraint for small investors (Blankespoor, Miller and White, 2012), such non-recurring setup cost is less important in the long-run and the adverse selection problem due to the setup cost can also be attenuated in the long-run. Second, sample periods are substantially different between the two studies. The sample period in Blankespoor, Miller and White (2012) ranges from 2008 to 2009, covering 333 mandatory filers while our sample period ranges from 2003 to 2011. We include both mandatory and voluntary XBRL adopting firms and cover 2,068 mandatory filers and 234 voluntary filers. In doing so, our design and results are less likely
22

to suffer from potential sample selection bias or small sample bias. To summarize, Blankespoor, Miller and Whites (2012) finding does not necessarily contradict our argument that XBRL adoption reduces the implied cost of equity capital. It is possible that the negative correlation between XBRL adoption and stock liquidity in Blankespoor, Miller and Whites (2012) short-run analysis can reverse in the long-run when the setup cost becomes less important.

Voluntary Filers In this section, we investigate whether the effect of XBRL adoption on the cost of equity capital is different for voluntary filers versus mandatory filers. Prior literature suggests that voluntary adoption of better accounting standards such as the IFRS can send a signal to the market about a firms better financial reporting incentive, in addition to the supposed beneficial effect of the accounting standards that applies to mandatory adopters (Li, 2010). Since financial reporting incentive is negatively associated with the cost of equity capital, voluntary adoption of XBRL could be expected to have a stronger effect in reducing the cost of equity capital, similar to voluntary IFRS adoption, other things equal. However, there are significant differences between IFRS adoption and XBRL adoption, and the effect of voluntary XBRL adoption on the cost of equity capital can be different from that of voluntary IFRS adoption. First of all, XBRL does not necessarily increase the amount of brand new information available to investors and the signaling effect is likely weaker for XBRL voluntary adopters, compared with IFRS voluntary adopters. Second, and more importantly, the voluntary and mandatory programs for XBRL adoption differ significantly from each other in terms of procedures, requirements and timeliness. Specifically, the voluntary program initiated in
23

2005 by the SEC was experimental and was designed to help the SEC evaluate the feasibility of the XBRL filing system. The reliability of the data is not clear. In addition, the mandatory program treats XBRL filing as a part of the official financial statements while the voluntary program does not. Further, under the voluntary program, a firm can choose to submit an XBRL filing at any time it wants, while it is required to submit the XBRL filing on the same day it submits an SEC filing under the mandatory program. All these arguments suggest that the voluntary program does not necessarily result in a similar effect of reducing the cost of equity capital as the mandatory program does.

Voluntary Filers and the Cost of Equity Capital To empirically test the effect of voluntary adoption of XBRL on the cost of equity capital, we include an indicator (VOLUNTARY) which equals one for voluntary filers, and its interaction with the XBRL indicator. The interaction term captures the difference in the effect of XBRL adoption on the cost of equity capital between voluntary and mandatory filers. The regression model is as follows: ICCRFi,t+1 = 0 + 1XBRLi,t+1 + 2VOLUNTARYi + 3XBRLi,t+1VOLUNTARYi + 4SIZEi,t + 5MBi,t + 6LEVi,t + 7BETAi,t + 8LNGROWi,t + 9LNDISPi,t + Industry Effects + Year Effects + 6i,t+1.

(6)

Table 7 presents regression results. In all models, we still find a significant reduction in the cost of equity capital after firms XBRL adoption, as reflected in the negative and significant coefficients on the XBRL indicator. More interestingly, the interaction term XBRLVOLUNTARY has positive and significant coefficients (0.007, t = 3.459 using the average measure; 0.012, t = 3.773 using the CT measure; 0.007, t = 2.870 using the GM measure; and 0.007, t = 2.686 using the ET measure), except when we use the GLS method to estimate the cost of equity capital. These results suggest that the effect of XBRL
24

adoption on reducing the cost of equity capital is weaker for voluntary adopters, supporting Hypothesis 4. Moreover, an F-test in the first model suggests that the effect of voluntary XBRL adoption on the cost of equity capital is not significant (-0.008 + 0.007 = -0.001, t = 0.41). In addition, we find that the coefficient on the voluntary indicator is insignificant, suggesting no systematic difference in the cost of equity capital between voluntary and mandatory filers before XBRL adoption.

Voluntary Filers, Analyst Behavior and Stock Liquidity To further examine the difference between voluntary adopters and mandatory adopters, we revisit our analyses on analyst behavior and stock liquidity. We expect the effect of XBRL adoption on analyst behavior and stock liquidity to be weaker for voluntary adopters than for mandatory adopters. We employ the following regression models to investigate this prediction: LNCOVi,t+1 = 0 + 1XBRLi,t+1 + 2VOLUNTARYi + 3XBRLi,t+1VOLUNTARYi + 4SIZEi,t + 5STDROEi,t + 6INVPRCi,t + 7RETVARi,t + 8RDi,t + 9ROAi,t + 10CORRi,t + Industry Effects + Year Effects + 7i,t+1, ABS_FEi,t+1 = 0 + 1XBRLi,t+1 + 2VOLUNTARYi + 3XBRLi,t+1VOLUNTARYi + 4SIZEi,t + 5STDROEi,t + 6RDi,t + 7ROAi,t + 8CORRi,t + 9EPSi,t + 10LNCOVi,t + 11HORIZONi,t + Industry Effects + Year Effects + 8i,t+1, DISPi,t+1 = 0 + 1XBRLi,t+1 + 2VOLUNTARYi + 3XBRLi,t+1VOLUNTARYi + 4SIZEi,t + 5STDROEi,t + 6RDi,t + 7ROAi,t + 8CORRi,t + 9EPSi,t + 10LNCOVi,t + 11HORIZONi,t + Industry Effects + Year Effects + 9i,t+1.

(7)

(8)

(9)

Results in Table 8 are consistent with our expectations. For mandatory adopters, XBRL filings help attract analyst coverage, increase forecast accuracy and reduce forecast dispersion, consistent with our previous findings. However, XBRLVOLUNTARY has a negative and significant coefficient (-0.180, t = -4.020) in the analyst coverage specification,
25

suggesting that the effect is weaker for voluntary adopters, supporting Hypothesis 4 (a). With regard to analyst forecast accuracy and dispersion, the coefficients on the interaction term are insignificant, though their signs are also opposite to the estimates for mandatory adopters We next examine the liquidity effect of voluntary XBRL adoption by estimating the following regression: LIQUIDITYi,t+1 = 0 + 1XBRLi,t+1 + 2VOLUNTARYi + 3XBRLi,t+1VOLUNTARYi + 4SIZEi,t + 5MBi,t + 6LEVi,t + 7BETAi,t + 8LNGROWi,t + 9LNDISPi,t + 10RETVARi,t + Industry Effects + Year Effects + 10i,t+1.

(10)

Table 9 reports regression results. We find that XBRL has a positive (negative) effect on firm liquidity (illiquidity), which means that mandatory adopters experience an improvement in stock liquidity. Further, such an effect is weaker for voluntary adopters. The coefficients on XBRLVOLUNTARY are opposite to those on the XBRL indicator in all five specifications. These results are consistent with Hypothesis 4 (b) that voluntary filings have a less significant effect on stock liquidity and therefore have a weaker impact on the cost of equity capital.

Change in Rules for Voluntary Filers While we have shown that, voluntary filers generally experience a smaller reduction in the cost of equity capital, one significant change in rules for voluntary XBRL filings is of particular interest to us. In the phase-in period of the mandatory program from June 2009 to June 2011, firms that are not required to submit XBRL filings, but who voluntarily choose to do so, are also subject to the same rules that apply to mandatory adopters. In other words, the differences in submission procedure, requirement, and timeliness that we
26

discuss earlier no longer exist between voluntary adopters and mandatory adopters during that period and the difference in the cost of equity effect of XBRL adoption between voluntary and mandatory filers should disappear or at least diminish. In other words, voluntary filers should experience a decrease in the cost of equity capital of similar magnitude as mandatory filers after June 15, 2009, the beginning of the phase-in period of the mandatory program. To empirically test this argument, we add to our main regression model an interaction term between VOLUNTARY and an indicator variable indicating the time period after June 15, 2009 (POST09). We expect the coefficient on the interaction term to be negative. Note that we cannot individually control POST09 as we have already included year fixed effects in our model. The model specification is as following: ICCRFi,t+1 = 0 + 1XBRLi,t+1 + 2VOLUNTARYi + 3XBRLi,t+1VOLUNTARYi + 4POST09i,t+1VOLUNTARYi + 5SIZEi,t + 6MBi,t + 7LEVi,t + 8BETAi,t + 9LNGROWi,t + 10LNDISPi,t + Industry Effects + Year Effects + 11i,t+1.

(11)

Results in Table 10 are consistent with our expectation. First, XBRL still has a negative and significant coefficient (-0.008, t = -5.085), meaning that in general mandatory filers have a lower cost of equity capital after initiating XBRL filings; second, XBRLVOLUNTARY has a positive and significant coefficient (0.014, t = 5.693), suggesting that the effect is weaker for voluntary adopters; most importantly, we find that the interaction term POST09VOLUNTARY has a negative and significant coefficient (-0.010, t = -4.232). This suggests that voluntary filers experience a further reduction in the cost of equity capital after 2009. An F-test of the combination of the above three coefficients shows that the effect of XBRL filing on the cost of equity capital is significant for voluntary filers after 2009 (-0.008 + 0.014 - 0.010 = -0.004, t = -1.86).

27

Potential Self-selection of Voluntary Adopters As voluntary adopters may self-select into the XBRL filing program, there could exist a potential selection bias that contaminates our results. However, to the extent that voluntary adoption sends a signal to the capital markets about a firms better reporting incentive as in the IFRS setting (Li, 2010), we should observe a stronger cost of capital reduction effect of XBRL for voluntary firms than for mandatory firms. So far, we find the opposite result. Nevertheless, we directly address self-selection by implementing a Heckman two-stage regression here. The first-stage equation is: Pr(VOLUNTARYi = 1) = (0 + 1DENSITYi,t + 2ICCRFi,t + 3SIZEi,t + 4MBi,t + 5LEVi,t + 6BETAi,t + 7LNGROWi,t + 8LNDISPi,t + 9LNCOVi,t + 10RETVARi,t + 11SPREADi,t + Year Effects + 12i,t+1), where we estimate a probit model in which the dependent variable is an indicator (VOLUNTARY) that equals one for voluntary adopters and zero for mandatory adopters. For control variables, we include the prior years cost of equity capital (ICCRFAVG), total asset (SIZE), market-to-book ratio (MB), leverage (LEV), market beta (BETA), long term growth rate (LNGROWTH), analyst forecast dispersion (LNDISP), analyst coverage (LNCOV), stock price volatility (RETVAR), bid-ask spread (SPREAD), and finally, the industry XBRL density (DENSITY) defined as the percentage of firms that have adopted XBRL previously in the same industry as an instrument. We expect our industry density measure to positively affect a firms choice of voluntary XBRL adoption. Panel A, Table 11 shows that the coefficient on DENSITY is positive and significant (0.779, t = 1.912), consistent with our expectation. The second-stage equation is: ICCRFi,t+1 = 0 + 1XBRLi,t+1 + 2VOLUNTARYi + 3XBRLi,t+1VOLUNTARYi + 4SIZEi,t + 5MBi,t + 6LEVi,t + 7BETAi,t + 8LNGROWi,t + 9LNDISPi,t + 10IMRi,t+1
28

(12)

+ Industry Effects + Year Effects + 13i,t+1,

(13)

where we construct the Inverse Mills Ratio (IMR) from the first-stage probit regression and include it as an additional control variable. Results in Panel B, Table 11 indicate that previous conclusions remain qualitatively unchanged. Mandatory adopters enjoy a reduction in the cost of equity capital after XBRL adoption. The coefficient on XBRL is negative and significant (-0.006, t = -3.427). The coefficient on the interaction term VOLUNTARYXBRL is positive and significant (0.004, t = 1.946), meaning that the cost of equity reduction effect of XBRL adoption is weaker for voluntary adopters. As suggested by Francis, Lennox and Wang (2012), the Heckman model should be used cautiously, especially when there is a lack of a good instrument in the first stage. Hence, we warn our readers about the interpretation of these selection model results and rely on our main specification to draw conclusions.

V. SUMMARY AND CONCLUSION In this paper, we examine the impact of XBRL adoption on the cost of equity capital. Specifically, we find that XBRL adoption results in a significant decrease in the cost of equity capital. In addition, we find that small firms, firms with high growth, low analyst coverage and illiquid stocks benefit more from XBRL adoption. We also show that XBRL adopting firms experience an increase in analyst coverage, forecast accuracy, and a reduction in forecast dispersion. Further, XBRL adoption enhances stock liquidity. These results suggest that a reduction in information processing cost can indirectly affect the cost of equity capital through affecting analyst behavior and increasing stock liquidity. Finally, we investigate the difference between voluntary adoption and mandatory adoption. We find that the effect of XBRL adoption on the cost of equity capital, analyst behavior and stock
29

liquidity is lower for voluntary filers than for mandatory filers. The rationale behind these findings lies in that voluntary adoption does not necessarily drastically reduce information processing cost due to significant filing delays and less stringent filing requirements than mandatory adoption. In sum, we provide strong evidence supporting the argument that information processing cost affects the cost of equity capital. Our findings make a significant contribution to the literature on the link between information processing cost and asset prices as well as the economic consequence of enhancing financial reporting practices.

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REFERENCES Aboody, D., and B. Lev. Information asymmetry, R&D, and insider gains. The Journal of Finance 55, 274766. Ali, A., T. Chen, S. Radhakrishnan. 2007. Corporate disclosures by family firms, Journal of Accounting and Economics 44, 238-286. Amihud, Y. 2002. Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets 5, 31-56. Amihud, Y., H. Mendelson, and L. Pedersen. Liquidity and asset prices. Foundations and Trends in Finance, Now Publishers, 2005. Amihud, Y. and H. Mendelson. 1986. Asset pricing and the bid-ask spread. Journal of Financial Economics 17, 223-249. Amihud, Y. and H. Mendelson. 1988. Liquidity and asset prices: Financial management implications. Financial Management 7, 5-15. Barth, M. and A. Hutton. 2004. Analyst earnings forecast revisions and the pricing of accruals. Review of Accounting Studies 9, 59-96. Barth, M. E., R. Kasznik and M. F. McNichols. 2001. Analyst coverage and intangible assets. Journal of Accounting Research 39, 1-34. Bhushan, R., 1989. Firm characteristics and analyst following. Journal of Accounting and Economics 11, 255-274. Blankespoor, E., B. Miller, and H. White. 2012. Initial evidence on the market impact of the XBRL mandate, working paper. Brennan, M. and P. Hughes, 1991. Stock prices and the supply of information. Journal of Finance 46, 1665-1691. Botosan, C. and M. Plumlee, 2002, A re-examination of disclosure level and expected cost of equity capital, Journal of Accounting Research 40, 21-40. Brennan, M.J., T. Chordia, and A. Subrahmanyam, 1998. Alternative factor specifications, security characteristics, and the cross-section of expected stock returns, Journal of Financial Economics 49, 345-373. Brennan, M. and A. Subrahmanyam. 1996. Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics 41, 441-464. Claus, J. and J. Thomas. 2001. Equity premia as low as a three percent? Evidence from analysts earnings forecasts for domestic and international stock markets. Journal of Finance 56, 1629-1666. Cremers, M. and J. Mei, 2007. Turning over turnover. Review of Financial Studies 20, 1749-1782. Daske, H., L. Hail, C. Leuz, and R. Verdi. 2008. Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research 46: 1058-1142. Dhaliwal, D. S., O. Z. Li, A. Tsang and Y. G. Yang. 2011. Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review 86 (1), 59-100. Dhaliwal D. S., L. Krull, O. Z. Li, and W. Moser. 2005. Dividend taxes and implied cost of equity capital. Journal of Accounting Research 43, 675708. Dhaliwal, D., S. Radhakrishnan, A. Tsang and G. Yang. 2012. Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, forthcoming.
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Diamond. D. W. and R. E. Verrecchia. 1991. Disclosure, liquidity, and the cost of capital. The Journal of Finance 46, 1325-1359. Easley, D., S. Hvidjaer and M. OHara. Is information risk a determinant of asset prices? The Journal of Finance 57(1), 2185-2221. Easley D., and M. O'Hara, 2004, Information and the cost of capital. The Journal of Finance 59, 1553-1583. Easton, P. 2004. PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital, The Accounting Review 79, 73-95. Easton, P. and S. Monahan. 2005. An evaluation of accounting-based measures of expected returns. The Accounting Review 80(2), 501-538. Fama, E. and K. French. 1992. The cross-section of expected stock returns. The Journal of Finance 47(2), 427-465. Fang, L. H. and J. Peress. 2009. Media coverage and the cross-section of stock returns. The Journal of Finance 64, 2023-2052. Francis, J., C. Lennox and Z. Wang. 2012. Selection models in accounting research. The Accounting Review, 2012, Vol. 87, 589-616. Gebhardt, W., C. Lee, and B. Swaminathan, 2001. Towards an implied cost of capital, Journal of Accounting Research 39, 135-176. Gode, D. and P. Mohanram. 2003. Inferring the cost of capital using the Ohlson-Juettner model. Review of Accounting Studies 8, 339-431. Grossman, S. and J. Stiglitz. 1980. On the impossibility of informationally efficient markets. American Economic Review 70, 393-408. Kyle, A. 1985. Continuous auctions and insider trading. Econometrica 53, 13151335. Leuz, C. and R. Verrecchia, 2000, The economic consequences of increased disclosure. Journal of Accounting Research 38, 91-124. Lang, M. and R. Lundholm. 1996. Corporate disclosure policy and analyst behavior. The Accounting Review 71(4), 467-492. Li, S. 2010. Does mandatory adoption of International Financial Reporting Standards in the European Union reduce the cost of equity capital? The Accounting Review 85, 607636. Luo, Y. 2010. Rational inattention, long-run consumption risk, and portfolio choice. Review of Economic Dynamics 13, 843-860. Luo, Y. 2008. Consumption dynamics under information processing constraint, Review of Economic Dynamics 11, 366-85. Merton, R. C. 1987. A simple model of capital market equilibrium with incomplete informatioin. The Journal of Finance 42, 483-509. Peng, L., 2005. Learning with information capacity constraints. Journal of Financial and Quantitative Analysis 40, 307-329. Rock, K., 1986. Why new issues are underpriced? Journal of Financial Economics 15, 187 212. Securities and Exchange Commission, Final Rule, Release No. 33-9002. 2009. Interactive data to improve financial reporting. http://www.sec.gov/rules/final/2009/33-9002.pdf. Sims, C. A. 2003. Implications of rational inattention. Journal of Monetary Economics 50, 665-90. Sims, C. A. 2006. Rational inattention: Beyond the linear-quadratic case. American Economic Review 96, 158-163.

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Appendix Key Variable Definitions Variable ICCRFGLS ICCRFCT ICCRFGM ICCRFET ICCRFAVG XBRL VOLUNTARY SIZE MB LEV BETA LNGROW LNDISP LNCOV ABS_FE STDROE INVPRC RETVAR RD ROA CORR HORIZON LNTURNOVER LNAMIHUD LNVOLDOLLAR LNSPREAD PER_ZERORET Definition The implied cost of equity capital estimated based on Gebhardt, Lee and Swaminathan (2001), minus the annualized yield of a 10-year Treasury note. The implied cost of equity capital estimated based on Claus and Thomas (2003), minus the annualized yield of a 10-year Treasury note. The implied cost of equity capital estimated based on Gode and Mohanram (2003), minus the annualized yield of a 10-year Treasury note. The implied cost of equity capital estimated based on Easton (2004), minus the annualized yield of a 10-year Treasury note. The average value of ICCRFGLS, ICCRFCT, ICCRFGM, ICCRFET. Indicator that equals one if the observation time of cost of equity capital is after a firms initial XBRL filing, and zero otherwise. Indicator that equals one if a firm voluntarily chooses to submit XBRL filings. Natural log of total asset at the previous fiscal year end. Market-to-book ratio, defined as (market value + total asset - book value of common equity deferred taxes)/total asset, at the previous fiscal year end. Leverage, defined as total debt, divided by total asset, at the previous fiscal year end. Market model beta, estimated from CRSP daily data during the prior year. Natural log of long term growth rate, where growth rate is estimated as the ratio of the mean two-year-ahead analyst consensus EPS forecast and the mean one-year-ahead analyst consensus EPS forecast. Natural log of analyst forecast dispersion estimated as the standard deviation of analysts one-year-ahead EPS forecasts in the previous year. Natural log of analyst coverage which equals the number of analysts covering the firm in the previous year. Absolute analyst forecast error, estimated as the difference between realized EPS and median analyst consensus EPS forecast, divided by the stock price at the previous fiscal year end. Standard deviation of return on equity (net income/common equity) in the previous four fiscal quarters. The inverse of stock price at the previous fiscal year end. Return volatility, estimated as the standard deviation of daily stock returns in the previous year. Research and development expense, divided by total asset at last fiscal year end. Net income deflated by total asset. Pearson correlation between stock return and ROE (return on equity) during the previous four quarters. The mean value of analyst forecast horizon (the number of days between the forecast date and the earnings announcement date). Natural log of total shares that have been traded divided by the number of shares outstanding during the year. Natural log of the mean value of Amihud liquidity ratio in the year. The Amihud ratio is estimated as the absolute daily stock return multiplied by 1,000,000, deflated by the daily dollar trading volume. Natural log of the mean value of daily dollar trading volume during the year. Natural log of daily bid-ask spread during the year. The spread is the difference between the ask price and the bid price, deflated by their midpoint. The percentage of days with zero stock return during the year.

33

Table 1 Descriptive statistics of key variables This table reports the summary statistics for the main variables used in our analysis. All variables are defined in the appendix. Variables Obs. Mean Std Q1 Median Q3 ICCRFAVG 11280 0.057 0.042 0.034 0.050 0.070 ICCRFGLS 11280 0.049 0.037 0.026 0.044 0.064 11280 0.057 0.060 0.027 0.046 0.069 ICCRFCT ICCRFGM 11280 0.058 0.042 0.035 0.051 0.070 11280 0.066 0.050 0.036 0.057 0.084 ICCRFET VOLUNTARY 11280 0.122 0.327 0.000 0.000 0.000 XBRL 11280 0.113 0.316 0.000 0.000 0.000 SIZE 11280 7.052 1.612 5.888 6.910 8.048 MB 11280 2.105 1.313 1.282 1.699 2.444 LEV 11280 0.196 0.181 0.014 0.173 0.310 BETA 11280 1.132 0.481 0.794 1.090 1.423 LNGROW 11280 0.249 0.374 0.095 0.161 0.292 LNDISP 11280 -2.994 1.191 -3.846 -3.010 -2.193

34

Table 2 Correlations between key variables This table presents Pearson correlations among the key variables used in our analysis. The p-values of the correlations are in italics. All variables are defined in the appendix. VOLUN Variables ICCRFAVG ICCRFGLS ICCRFCT ICCRFGM ICCRFET -TARY XBRL SIZE MB LEV BETA LNGROW ICCRFAVG 1.00 ICCRFGLS ICCRFCT ICCRFGM ICCRFET VOLUNTARY XBRL SIZE MB LEV BETA LNGROW LNDISP 0.78 0.00 0.96 0.00 0.89 0.00 0.86 0.00 -0.03 0.00 0.06 0.00 -0.08 0.00 -0.21 0.00 0.15 0.00 0.07 0.00 0.15 0.00 0.23 0.00 1.00 0.67 0.00 0.55 0.00 0.57 0.00 -0.01 0.21 0.10 0.00 0.06 0.00 -0.32 0.00 0.26 0.00 0.01 0.48 0.00 0.81 0.26 0.00 1.00 0.87 0.00 0.75 0.00 -0.03 0.00 0.03 0.00 -0.07 0.00 -0.18 0.00 0.13 0.00 0.06 0.00 0.12 0.00 0.20 0.00 1.00 0.64 0.00 -0.03 0.00 0.04 0.00 -0.12 0.00 -0.10 0.00 0.07 0.00 0.07 0.00 0.15 0.00 0.16 0.00 1.00 -0.04 0.00 0.05 0.00 -0.12 0.00 -0.17 0.00 0.10 0.00 0.12 0.00 0.23 0.00 0.21 0.00 1.00 0.18 0.00 0.17 0.00 0.00 0.83 0.01 0.30 0.02 0.06 -0.02 0.01 0.04 0.00 1.00 0.30 0.00 0.00 0.91 0.03 0.01 -0.02 0.06 -0.06 0.00 0.13 0.00 1.00 -0.22 0.00 0.32 0.00 -0.02 0.01 -0.19 0.00 0.27 0.00 1.00 -0.29 0.00 0.04 0.00 0.05 0.00 -0.17 0.00 1.00 -0.07 0.00 -0.03 0.01 0.14 0.00 1.00 0.11 0.00 0.11 0.00 1.00 0.01 0.37

35

Table 3 Effect of XBRL adoption on the cost of equity capital This table presents the effect of XBRL adoption on the cost of equity capital. The dependent variables are alternative measures of equity premiums, constructed by subtracting the annualized yield on a 10-year Treasury note from different measures of implied cost of equity capital, and their average (Gebhardt, Lee and Swaminathan, 2001; Claus and Thomas, 2003; Gode and Mohanram, 2003; and Easton, 2004). The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (twotailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. ICCRFGLS ICCRFCT ICCRFGM ICCRFET Variables ICCRFAVG XBRL -0.006 -0.003 -0.010 -0.006 -0.004 (-3.840)*** (-2.673)*** (-4.216)*** (-3.534)*** (-2.372)** SIZE -0.005 -0.003 -0.006 -0.005 -0.006 (-10.913)*** (-7.886)*** (-8.929)*** (-11.226)*** (-12.111)*** MB -0.005 -0.006 -0.006 -0.002 -0.005 (-12.196)*** (-12.840)*** (-10.903)*** (-6.094)*** (-11.371)*** LEV 0.033 0.037 0.043 0.022 0.031 (8.699)*** (6.746)*** (7.736)*** (6.333)*** (7.895)*** BETA 0.006 0.004 0.006 0.004 0.009 (5.102)*** (4.916)*** (3.265)*** (3.811)*** (6.767)*** LNGROW 0.014 0.002 0.017 0.013 0.027 (9.206)*** (1.435) (6.684)*** (7.784)*** (13.334)*** LNDISP 0.005 0.004 0.007 0.004 0.006 (9.087)*** (9.327)*** (7.827)*** (7.153)*** (10.048)*** CONSTANT 0.095 0.078 0.103 0.088 0.111 (19.814)*** (21.906)*** (14.475)*** (19.045)*** (20.182)*** Industry Effects Yes Yes Yes Yes Yes Year Effects Yes Yes Yes Yes Yes Obs. 11,280 11,280 11,280 11,280 11,280 0.267 0.381 0.178 0.172 0.248 Adj. R2

36

Table 4 Cross-sectional variation in the effect of XBRL adoption on the cost of equity capital This table presents the cross-sectional variation of the effect of XBRL adoption on the cost of equity capital. The dependent variable is the average of the four measures of equity premiums, constructed by subtracting the annualized yield on a 10-year Treasury note from different measures of implied cost of equity capital (Gebhardt, Lee and Swaminathan, 2001; Claus and Thomas, 2003; Gode and Mohanram, 2003; and Easton, 2004). The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (two-tailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. Variables (1) (2) (3) (4) (5) (6) (7) XBRL -0.004 -0.004 -0.004 -0.003 -0.003 -0.003 -0.003 (-2.539)** (-2.300)** (-2.390)** (-1.682)* (-2.272)** (-1.835)* (-1.788)* XBRLSMALL -0.010 (-5.165)*** XBRLHIGH_MB -0.003 (-1.912)* XBRLHIGH_LEV -0.003 (-1.740)* XBRLLOW_COV -0.009 (-4.813)*** LOW_COV 0.007 (6.777)*** XBRLHIGH_IRISK -0.006 (-3.279)*** HIGH_IRISK 0.012 (10.666)*** XBRLHIGH_AMIHUD -0.011 (-5.341)*** HIGH_AMIHUD 0.006 (5.568)*** XBRLHIGH_SPREAD -0.008 (-4.152)*** HIGH_SPREAD 0.007 (6.832)*** SIZE -0.005 -0.005 -0.005 -0.004 -0.003 -0.004 -0.004 (-11.017)*** (-10.921)*** (-10.915)*** (-8.214)*** (-6.476)*** (-7.678)*** (-8.191)*** MB -0.005 -0.005 -0.005 -0.004 -0.004 -0.004 -0.004 (-12.173)*** (-11.980)*** (-12.200)*** (-10.791)*** (-11.501)*** (-10.827)*** (-11.035)*** LEV 0.033 0.033 0.034 0.032 0.032 0.032 0.032 (8.663)*** (8.678)*** (8.622)*** (8.370)*** (8.335)*** (8.425)*** (8.407)*** BETA 0.006 0.006 0.006 0.006 0.002 0.006 0.006 (5.104)*** (5.041)*** (5.126)*** (5.370)*** (1.708)* (4.887)*** (4.963)*** 37

LNGROW LNDISP CONSTANT Industry Effects Year Effects Obs. Adj. R2

0.014 (9.164)*** 0.005 (9.129)*** 0.096 (19.865)*** Yes Yes 11,280 0.268

0.014 (9.196)*** 0.005 (9.091)*** 0.095 (19.815)*** Yes Yes 11,280 0.267

0.015 (9.221)*** 0.005 (9.070)*** 0.095 (19.787)*** Yes Yes 11,280 0.267

0.015 (9.337)*** 0.005 (9.271)*** 0.082 (17.114)*** Yes Yes 11,280 0.271

0.013 (8.682)*** 0.005 (8.427)*** 0.079 (15.402)*** Yes Yes 11,280 0.278

0.014 (8.994)*** 0.005 (9.199)*** 0.081 (15.071)*** Yes Yes 11,280 0.270

0.014 (8.926)*** 0.005 (9.105)*** 0.081 (15.462)*** Yes Yes 11,280 0.270

38

Table 5 Effect of XBRL adoption on analyst behavior This table presents the effect of XBRL adoption on analyst behavior. Dependent variables are analyst coverage (LNCOV), analyst forecast accuracy (ABS_FE), and analyst forecast dispersion (DISP), respectively. The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (two-tailed), respectively. Tstatistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. Variables LNCOV ABS_FE DISP XBRL 0.229 -0.004 -0.008 (8.935)*** (-2.119)** (-5.368)*** SIZE 0.323 0.001 0.001 (41.226)*** (2.334)** (1.968)** STDROE -0.038 0.038 0.029 (-1.008) (4.540)*** (4.748)*** INVPRC -0.486 (-14.072)*** RETVAR 1.890 (2.803)*** RD 0.022 -0.000 0.000 (4.925)*** (-0.539) (0.391) ROA 0.098 -0.079 -0.066 (1.929)* (-6.921)*** (-7.150)*** CORR 0.009 0.002 0.001 (0.948) (2.280)** (1.085) EPS -0.002 -0.002 (-2.752)*** (-3.298)*** LNCOV -0.004 -0.001 (-3.704)*** (-1.345) HORIZON 0.000 0.000 (12.945)*** (10.095)*** CONSTANT -0.306 -0.028 -0.007 (-4.808)*** (-5.433)*** (-1.882)* Industry Effects Yes Yes Yes Year Effects Yes Yes Yes Obs. 18,444 17,232 16,322 0.494 0.165 0.166 Adj. R2

39

Table 6 Effect of XBRL adoption on stock liquidity This table presents the effect of XBRL adoption on stock liquidity. Dependent variables are alternative measures of stock liquidity. The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (two-tailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. Variables LNTURNOVER LNAMIHUD LNVOLDOLLAR LNSPREAD PER_ZERORET XBRL 0.318 -0.354 0.372 -0.325 0.000 (10.874)*** (-8.703)*** (10.447)*** (-12.570)*** (0.535) SIZE 0.064 -1.144 1.005 -0.311 -0.003 (5.901)*** (-71.958)*** (73.133)*** (-41.831)*** (-16.477)*** MB 0.102 -0.613 0.548 -0.198 -0.003 (10.680)*** (-35.801)*** (36.795)*** (-24.328)*** (-20.878)*** LEV -0.174 1.234 -1.067 0.467 0.006 (-2.568)** (11.749)*** (-11.824)*** (9.234)*** (4.677)*** BETA 0.569 -0.675 0.541 -0.492 -0.009 (22.874)*** (-17.321)*** (16.877)*** (-24.819)*** (-17.075)*** LNGROW -0.127 0.188 -0.043 0.118 0.003 (-6.994)*** (6.081)*** (-1.668)* (7.467)*** (6.227)*** LNDISP 0.079 -0.009 0.024 0.013 -0.001 (10.505)*** (-0.742) (2.323)** (2.001)** (-6.108)*** RETVAR 8.512 27.327 -2.644 19.353 0.348 (7.194)*** (14.559)*** (-1.678)* (21.814)*** (15.152)*** CONSTANT 13.024 2.777 7.693 -3.521 0.035 (125.344)*** (17.435)*** (56.478)*** (-46.782)*** (19.076)*** Industry Effects Yes Yes Yes Yes Yes Year Effects Yes Yes Yes Yes Yes Obs. 12,940 12,940 12,940 12,940 12,940 0.336 0.798 0.786 0.644 0.271 Adj. R2

40

Table 7 Effect of voluntary XBRL adoption on the cost of equity capital This table presents the difference in the effect of XBRL adoption on the cost of equity capital for voluntary and mandatory adopters. The dependent variables are alternative measures of equity premiums, constructed by subtracting the annualized yield on a 10-year Treasury note from different measures of implied cost of equity capital, and their average (Gebhardt, Lee and Swaminathan, 2001; Claus and Thomas, 2003; Gode and Mohanram, 2003; and Easton, 2004). The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (two-tailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. ICCRFGLS ICCRFCT ICCRFGM ICCRFET Variables ICCRFAVG XBRL -0.008 -0.004 -0.014 -0.008 -0.006 (-4.890)*** (-3.175)*** (-5.316)*** (-4.451)*** (-3.156)*** VOLUNTARY -0.001 0.001 -0.001 -0.001 -0.002 (-0.390) (0.720) (-0.418) (-0.357) (-1.075) XBRLVOLUNTARY 0.007 0.003 0.012 0.007 0.007 (3.459)*** (1.351) (3.773)*** (2.870)*** (2.686)*** SIZE -0.005 -0.003 -0.006 -0.005 -0.006 (-11.031)*** (-7.969)*** (-9.069)*** (-11.393)*** (-12.045)*** MB -0.005 -0.006 -0.006 -0.002 -0.005 (-12.170)*** (-12.864)*** (-10.859)*** (-6.038)*** (-11.340)*** LEV 0.033 0.037 0.043 0.022 0.031 (8.697)*** (6.757)*** (7.723)*** (6.322)*** (7.878)*** BETA 0.006 0.004 0.006 0.004 0.009 (5.052)*** (4.876)*** (3.210)*** (3.760)*** (6.745)*** LNGROW 0.014 0.002 0.017 0.013 0.027 (9.205)*** (1.433) (6.681)*** (7.782)*** (13.337)*** LNDISP 0.005 0.004 0.007 0.004 0.006 (9.118)*** (9.346)*** (7.860)*** (7.182)*** (10.073)*** CONSTANT 0.095 0.078 0.103 0.088 0.111 (19.856)*** (21.966)*** (14.508)*** (19.090)*** (20.205)*** Industry Effects Yes Yes Yes Yes Yes Year Effects Yes Yes Yes Yes Yes Obs. 11,280 11,280 11,280 11,280 11,280 0.267 0.381 0.178 0.173 0.248 Adj. R2

41

Table 8 Effect of voluntary XBRL adoption on analyst behavior This table presents the difference in the effect of XBRL adoption on analyst behavior for voluntary and mandatory adopters. Dependent variables are analyst coverage, analyst forecast accuracy, and analyst forecast dispersion respectively. The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (twotailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. Variables LNCOV ABS_FE DISP XBRL 0.294 -0.004 -0.008 (12.946)*** (-1.804)* (-4.936)*** VOLUNTARY -0.057 -0.003 -0.003 (-1.170) (-1.108) (-1.292) XBRLVOLUNTARY -0.180 0.000 0.001 (-4.020)*** (0.162) (0.446) SIZE 0.326 0.001 0.001 (43.586)*** (2.439)** (2.094)** STDROE -0.039 0.038 0.029 (-1.049) (4.536)*** (4.738)*** INVPRC -0.485 (-14.048)*** RETVAR 2.052 (3.048)*** RD 0.022 -0.000 0.000 (4.889)*** (-0.542) (0.386) ROA 0.099 -0.079 -0.066 (1.949)* (-6.917)*** (-7.145)*** CORR 0.009 0.002 0.001 (0.949) (2.284)** (1.094) EPS -0.002 -0.002 (-2.756)*** (-3.302)*** LNCOV -0.004 -0.001 (-3.743)*** (-1.381) HORIZON 0.000 0.000 (12.941)*** (10.091)*** CONSTANT -0.368 -0.029 -0.007 (-6.080)*** (-5.502)*** (-1.998)** Industry Effects Yes Yes Yes Year Effects Yes Yes Yes Obs. 18,444 17,232 16,322 0.495 0.165 0.166 Adj. R2

42

Table 9 Effect of voluntary XBRL adoption on stock liquidity This table presents the difference in the effect of XBRL adoption on stock liquidity for voluntary and mandatory adopters. Dependent variables are alternative measures of stock liquidity. The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (two-tailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. Variables LNTURNOVER LNAMIHUD LNVOLDOLLAR LNSPREAD PER_ZERORET XBRL 0.434 -0.492 0.501 -0.458 -0.001 (16.306)*** (-12.181)*** (14.280)*** (-18.848)*** (-1.479) VOLUNTARY -0.109 0.302 -0.244 0.115 0.001 (-2.444)** (3.281)*** (-3.107)*** (2.802)*** (0.905) XBRLVOLUNTARY -0.258 0.194 -0.205 0.305 0.003 (-4.868)*** (2.120)** (-2.677)*** (5.980)*** (3.141)*** SIZE 0.068 -1.153 1.012 -0.314 -0.003 (6.455)*** (-75.303)*** (76.602)*** (-42.755)*** (-16.339)*** MB 0.102 -0.614 0.549 -0.198 -0.003 (10.859)*** (-36.141)*** (37.176)*** (-24.598)*** (-20.892)*** LEV -0.180 1.247 -1.077 0.474 0.006 (-2.668)*** (11.890)*** (-11.969)*** (9.500)*** (4.728)*** BETA 0.572 -0.680 0.546 -0.495 -0.009 (22.992)*** (-17.448)*** (16.994)*** (-25.037)*** (-17.126)*** LNGROW -0.127 0.188 -0.043 0.118 0.003 (-7.010)*** (6.103)*** (-1.692)* (7.517)*** (6.236)*** LNDISP 0.078 -0.008 0.023 0.013 -0.001 (10.461)*** (-0.661) (2.253)** (2.151)** (-6.080)*** RETVAR 8.732 26.979 -2.339 19.106 0.346 (7.422)*** (14.468)*** (-1.494) (21.655)*** (15.074)*** CONSTANT 13.004 2.817 7.659 -3.499 0.035 (127.254)*** (18.005)*** (57.270)*** (-47.101)*** (19.132)*** Industry Effects Yes Yes Yes Yes Yes Year Effects Yes Yes Yes Yes Yes Obs. 12,940 12,940 12,940 12,940 12,940 Adj. R2 0.341 0.800 0.788 0.649 0.272

43

Table 10 Voluntary XBRL adoption and the cost of equity capital, the change in rules This table presents the change in rules on the effect of XBRL adoption on the cost of equity capital for voluntary adopters. The dependent variable is the average equity premium using the four individual measures. POST09 is an indicator that equals one if the observation time is after the initiation of the mandatory program. The sample period is from 2003 to 2011. All regressions include year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (two-tailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. Variables ICCRFAVG VOLUNTARY 0.001 (0.539) XBRL -0.008 (-5.085)*** XBRLVOLUNTARY 0.014 (5.693)*** POST09VOLUNTARY -0.010 (-4.232)*** SIZE -0.005 (-11.129)*** MB -0.005 (-12.208)*** LEV 0.033 (8.748)*** BETA 0.006 (5.096)*** LNGROW 0.014 (9.184)*** LNDISP 0.005 (9.143)*** CONSTANT 0.095 (19.881)*** Industry Effects Yes Year Effects Yes Obs. 11,280 0.268 Adj. R2

44

Table 11 Voluntary XBRL adoption and the cost of equity capital, controlling for self-selection This table presents the Heckman model of the effect of voluntary XBRL adoption on the cost of equity capital. In the first stage, we model the choice of voluntary adoption (indicator VOLUNTARY) as a function of the percentage of firms that have adopted XBRL in the same industry (DENSITY), last years cost of capital (PM_AVG), firm size (SIZE), market to book equity ratio (MB), leverage (LEV), market beta (BETA), long term growth (LNGROWTH), analyst forecast dispersion (LNDISP), analyst coverage (LNCOV), stock return variance (RETVAR), bid-ask spread (SPREAD), and year effects. In the second stage, we include an additional term to control self-selection (IMR). The dependent variable equals the equity premium constructed by subtracting the yield on a 10-year Treasury note from the average of four individual cost of equity measures (Gebhardt, Lee and Swaminathan, 2001; Claus and Thomas, 2003; Gode and Mohanram, 2003; and Easton, 2004). IMR is the inverse mills ratio constructed from the first stage probit model of voluntary adoption choice. The sample period is from 2003 to 2011. The regression includes year and industry indicators. Industries are defined as Fama-French 48 classifications. ***, ** and * indicate statistical significance at the 1%, 5% and 10 % level (two-tailed), respectively. T-statistics based on robust standard errors clustered by firm are reported in parentheses. All variables are defined in the appendix. Panel A: First-stage probit regression to estimate the choice of voluntary adoption Variables VOLUNTARY DENSITY 0.826 (1.976)** ICCRFAVG -0.251 (-0.389) SIZE 0.201 (11.282)*** MB 0.051 (3.176)*** LEV -0.427 (-3.542)*** BETA 0.241 (4.408)*** LNGROW -0.066 (-1.080) LNDISP 0.012 (0.687) LNCOV -0.067* (-1.912) RETVAR -4.866 (-1.540) SPREAD 27.934 (3.749)*** CONSTANT -2.684 (-14.272)*** Year Effects Yes Obs. 8,090 Pseudo R2 0.043

45

Panel B: Second-stage regression on the cost of equity capital, controlling for self-selection Variables ICCRF_AVG XBRL 0.095 (5.784)*** VOLUNTARY -0.006 (-3.427)*** XBRLVOLUNTARY 0.004 (1.946)* SIZE -0.008 (-9.470)*** MB -0.006 (-12.770)*** LEV 0.039 (8.100)*** BETA 0.004 (2.936)*** LNGROW 0.017 (8.657)*** LNDISP 0.004 (7.252)*** IMR -0.051 (-6.041)*** CONSTANT 0.100 (17.229)*** Industry Effects Yes Year Effects Yes Obs. 8,090 0.289 Adj. R2

46