Does XBRL adoption reduce information asymmetry?

Journal of Business Research 64 (2011) 157–163

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Journal of Business Research

Does XBRL adoption reduce information asymmetry? Hyungwook Yoon a, Hangjung Zo a,⁎, Andrew P. Ciganek b a b

Department of Management Science, Korea Advanced Institute of Science and Technology (KAIST), Republic of Korea College of Business and Economics, University of Wisconsin-Whitewater, 800 West Main Street, Whitewater, WI 53190, United States

a r t i c l e

i n f o

Article history: Received 1 July 2009 Received in revised form 1 January 2010 Accepted 1 January 2010 Keywords: XBRL Information asymmetry Corporate disclosure Firm size Korean stock market

a b s t r a c t This paper examines whether or not XBRL (eXtensible Business Reporting Language) adoption reduces information asymmetry in a stock market context. Student t-tests and multiple regression analysis were employed to examine the effect of XBRL adoption on information asymmetry in the capital market. A significant and negative association exists between XBRL adoption and information asymmetry, which implies that the adoption of XBRL may lead to the reduction of the information asymmetry in the Korean stock market. In addition, the effect of XBRL adoption on reducing information asymmetry is stronger for large-sized companies than for medium-sized and small-sized companies. Based on these findings, the demand for XBRL-enabled applications and services in the capital market is expected to grow while governments should promote XBRL adoption for business reporting. © 2010 Elsevier Inc. All rights reserved.

1. Introduction Many companies use the World Wide Web (WWW or web) as one of the primary means for reporting corporate information (Debreceny and Gray, 2001). The content of corporate information on the web is not very different from financial disclosures on paper-based documents. This content has been standardized for human review, not for automatic location, acquisition, arrangement and classification. Information is hard to find unless one knows which form to search and the data in those forms cannot be downloaded into spreadsheets or other application software (SEC (U.S. Securities and Exchange Commission), 2006). As a result, corporate information on the web cannot adequately meet the demand of stakeholders for various analyses of corporate data. Additional technical components must be deployed that support the decision-making capabilities of stakeholders and XBRL (eXtensible Business Reporting Language) is an approach to achieve this. XBRL is one variant of XML (eXtensible Markup Language) for business reporting. XBRL defines financial data on the web with explicit semantics in a machine-readable format, making automated data analysis possible. Adopting XBRL facilitates communications among market players and enhances the quality of stakeholder decisions. Business reporting in the XBRL format is also important to

⁎ Corresponding author. Department of Management Science, Korea Advanced Institute of Science and Technology (KAIST), 119 Munji-ro, Yuseong-gu, Daejeon, 305-732, Republic of Korea. Tel.: +82 42 350 6311; fax: +82 42 350 6339. E-mail addresses: [email protected] (H. Yoon), [email protected] (H. Zo), [email protected] (A.P. Ciganek). 0148-2963/$ – see front matter © 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2010.01.008

filing companies. If a company provides financial reports in a highquality, standard format, investors are likely to appraise the company as less risky. This could lead to the decrease of capital cost and the increase of the firm's stock price. Diamond and Verrecchia (1991) report that if the level of disclosures is increased, the level of information asymmetry is decreased, resulting in more demand from investors. If the level of financial disclosures is increased by adopting XBRL, information asymmetry is expected to be reduced, which could lead to the decrease of the cost of capital and the increase of a firm's valuation. This study examines whether the adoption of XBRL has reduced the level of information asymmetry in the Korean stock market. Korea is one of the leading countries that have developed a mandatory filing program in XBRL format. This policy has been in effect in Korea since October 2007, thus the Korean stock market is an appropriate target market to investigate the initial effect of XBRL adoption. The principal focus of this study is to empirically examine whether XBRL adoption can reduce information asymmetry in the capital market. While previous studies have primarily investigated the effects of the shortterm provision of corporate information (e.g., earnings announcements) on information asymmetry, this paper focuses on the fundamental change of the technological environment affecting information asymmetry. The next section of the paper describes the concept and benefits of XBRL and reviews the literature of corporate disclosures and information asymmetry. Hypotheses about the relationship of XBRL and information asymmetry are then developed followed by a description of the data used in the analysis and how information asymmetry is measured. The next sections contain findings of the analysis along with a discussion of the implications of this research.

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2. Literature review 2.1. XBRL XBRL is a standard XML reporting language to enhance the efficiency, reliability and accuracy of financial reporting. Data in XBRL format does not need to be converted from one application to another because data are independent of applications by using standard tags for data items (Farewell, 2006). XBRL can support both financial and non-financial data contexts, which distinguishes XBRL from traditional financial documents (Debreceny et al., 2005). The use of standard tags in XBRL documents allows for the specific identification, automatic exchange, and reliable extraction of financial information across different software applications. Many businesses, regulators, and investors can benefit from XBRL. XBRL helps integrate disparate business reporting procedures across business reporting jurisdictions; reduces the costs of compliance with reporting regulations and data-quality assurance services; and facilitates the communication between businesses and financial markets. XBRL facilitates continuous reporting for investors on companies' operations by enabling the capture, integration, processing, and reporting of disparate information in common formats. XBRL reduces the cost associated with obtaining and assimilating information from businesses and the cost associated with international business reporting standards (Weber, 2003). With the adoption of XBRL, financial information can be optimized for machine creation, publication, discovery, consumption, and reuse, and XBRL enables supply chains of information for business reporting to communicate among players more efficiently (Debreceny et al., 2005). For example, the use of financial data in XBRL format can help enhance the effectiveness and efficiency of post-merger integration. In addition, the information flow between material providers and logistic companies can be streamlined, and this contributes to the increase of efficiencies in supply chains. XBRL supports the decision-making process for investments by enabling a powerful search capability for various financial data. Novice through expert investors are able to easily search and compare data items which have similar or the same tags. Hodge et al. (2004) argues that although the information in the footnote of financial statements is important, novice investors have a difficult time thoroughly analyzing the data due to their lack of experience and the relative position of the data. XBRL-enabled searching technology resolves this problem. The tags of XBRL provide additional information to investors because these metadata describe the meaning of data items. Russo (1977) reports that information should be presented in a usable display format, illustrated through an experimental study finding that information organized in a single list format enhances the decisionmaking capabilities of users. Hodge et al. (2004) applies those results to a comparative analysis of alternative accounting choices across companies and found that users could easily identify the differences of discretional accounting choices so search-facilitating technology like XBRL can improve the transparency of financial reporting. A recent survey indicates that additional XBRL benefits include cost savings due to an increased data processing capability, decreased data redundancy, increased efficiency, and decreased cost of bookkeeping (Pinsker and Li, 2008). 2.2. Financial reporting process and XBRL in Korea All publicly-held firms electronically file their periodic and other financial reports through the DART (Data Analysis, Retrieval and Transfer) system in Korea. Most financial report filings, including periodic financial statements, are mandatory while others are voluntary. Annual reports must be submitted within 90 days after the end of the fiscal year while semi-annual and quarterly

reports must be submitted within 45 days after the end of each fiscal quarter. The DART system, which is equivalent to the EDGAR (Electronic Document Gathering and Retrieval) system in the U.S., was developed in August 1998 with the initial pilot service of the system in April 1999. Paper filings have not been allowed since January 2001 so most data in important corporate disclosure reports are freely available online. In addition, more than 60% of transactions in the Korean stock market are executed via electronic transaction systems. Most investors in Korea can get information related to their investment decisions and trade stocks electronically. The Korean stock market complies with all international standards of financial disclosure and was incorporated into the FTSE (Financial Times Stock Exchange) global equity index series in September 2008. The Korean stock market does not have designated market makers, which is different from the U.S. stock market. Most transactions are executed directly between sellers and buyers via computerized trading systems. Korea is a leader in adopting and deploying XBRL in financial reporting, ahead of the U.S., Japan, and the EU, by having a mandatory filing program in XBRL format. All publicly-held firms in Korea have been required to report financial statements in XBRL format since October 1, 2007 (FSS (Financial Supervisory Service), 2007). The companies listed in the KOSPI (Korea Composite Stock Price Index) and the KOSDAQ (Korean Securities Dealers Automated Quotations) must file their financial reports, including annual, semi-annual, and quarterly reports, to the DART system using XBRL format. 2.3. Corporate disclosure and information asymmetry Corporate disclosure is mandatory or voluntary activities for providing information about a firm's performance and governance to outside investors and is one of the fundamental elements for the efficiency of the capital market (Healy et al., 1995; Shaw, 2003). Efficiencies in the capital market are achieved when financial information, including statements, footnotes, management discussion, analysis and forecasts, are circulated seamlessly among various stakeholders. Government agencies require public companies to disclose their financial statements (SEC (U.S. Securities and Exchange Commission), 2009) to enable these efficiencies. Corporate disclosure provides investors with a common pool of knowledge for investment decisions. Insufficient corporate disclosure is closely related to the problem of information asymmetry as information asymmetry creates inefficiencies in the capital market. Information asymmetry occurs when one party in a transaction has more or better information than another (Biswas, 2004; Grewala et al., 2003; Kulkarni, 2000). Frankel and Li (2004) report that the request for reducing information asymmetry in the capital market led to the creation of the 1934 Securities Act. Benston (1973) explains that the rationale behind the disclosure requirements of the 1934 Securities Act was to build a fair and efficient capital market. Benston (1973) insists that fairness is a significant issue to the capital market, and that all investors should have the same level of access to corporate financial information. Lev (1988) emphasizes the need for public regulation mandating the disclosure of corporate financial information to reduce information asymmetry in the capital market. Diamond (1985) argues that the disclosure of corporate information can serve as an incentive for producing private information, and companies can raise the welfare of their security holders through the disclosure of financial information. The increased level of corporate disclosure can reduce proxies of information asymmetry, including bid–ask spread. Research examining mandatory disclosure (Greenstein and Sami, 1994; Hagerman and Healy, 1992; Leuz and Verrecchia, 2000) as well as voluntary disclosure (Healy et al., 1999; Heflin et al., 2005; Welker, 1995) has found similar effects on information asymmetry in the capital market.

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For example, the disclosure of segment information (Greenstein and Sami, 1994) and the disclosure of the present value of oil and gas reserves (Boone, 1998; Raman and Tripathy, 1993) are associated with the decline of bid–ask spread. Schrand and Verrecchia (2004) argue that the disclosure activity followed by an IPO is inversely related to bid–ask spread. Leuz and Verrecchia (2000) compare the bid–ask spread of the Neuer Market in Germany, which requires a relatively higher level of disclosure, with the Frankfurt Exchange, which requires a relatively lower level of disclosure. The results demonstrated that the stocks listed in the Neuer Market had a smaller bid–ask spread and higher liquidity than those listed in the Frankfurt Exchange. 3. Hypotheses XBRL enhances the information searching capability of investors, which reduces information asymmetry in the capital market. XBRL achieves this by improving the quality of information rather than increasing the quantity of information. XBRL facilitates a continuous flow of information, which is vital for the democratization of markets (Debreceny et al., 2005). The improved, transparent, and real-time financial reporting and disclosure of data in XBRL format reduces the firm's cost of capital (XBRL International, 2002). Pinsker and Li (2008) found that XBRL use is associated with an increased level of reporting transparency. Hodge et al. (2004) argue that novice investors are more likely to benefit from using an XBRL-enabled search engine than professional financial analysts. Hunton and McEwen (1997) find that more accurate analysts use a directive information search strategy while less accurate analysts employ a sequential search strategy. This indicates a theoretical relationship between information search strategies and forecast accuracy. Frederickson and Miller (2004) found that professional analysts use well-defined valuation models, while novice investors use ill-defined and heuristic-based valuation models. The use of XBRL is more likely to change the analysis behavior of novice investors than that of professional analysts because the tags and taxonomy of XBRL provide a powerful and straightforward searching and analyzing capability. An increased level of corporate disclosure reduces information asymmetry in the capital market (Greenstein and Sami, 1994; Hagerman and Healy, 1992; Healy et al., 1999; Heflin et al., 2005; Leuz and Verrecchia, 2000; Welker, 1995). Increases in the transparency and quality of information occur following the adoption of XBRL to report corporate financial information (Debreceny et al., 2005; Pinsker and Li, 2008). Investors of all experience levels benefit from the powerful searching capability of XBRL (Frederickson and Miller, 2004; Hodge et al., 2004). Based on these discussions, XBRL adoption reduces information asymmetry in the capital market by increasing the level of corporate disclosures. H1. XBRL adoption reduces information asymmetry in the capital market. The U.S. Securities and Exchange Commission (SEC) has proposed a regulation that requires companies to disclose the financial information in XBRL format based on a phase-in schedule. The SEC plans to apply this regulation to 500 large companies in 2009 and expand to the remaining companies in three years. This step-wise approach by the SEC implies that the benefits of adopting XBRL may be related to firm size; in particular, that the benefits may be greater for large companies than for small companies. This is consistent with research that has found a positive and significant association between firm size and corporate disclosure (Botosan, 1997; Cooke, 1989; Premuroso and Bhattacharya, 2008). The effect of breadth of market attracted is larger for large firms, which receive the largest benefit from reduced information asymmetry (Diamond and Verrecchia, 1991). Large firms must attract large

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holdings from institutional investors who make large trades and are thus more concerned about future liquidity than smaller groups of investors (Diamond and Verrecchia, 1991; Greenstein and Sami, 1994; Zhou, 2007). Large firms also receive greater attention from investment analysts and the media (Chiang and Venkatesh, 1988). Many researchers argue that firm size is negatively associated with proxies for information asymmetry, including bid–ask spread (Chiang and Venkatesh, 1988; Easley et al., 2002; Greenstein and Sami, 1994; Hasbrouck, 1991; Leuz and Verrecchia, 2000). Weber (2003) argues that the advantage of adopting XBRL is more likely to be greater for large companies that conduct cross business reporting jurisdictions than for small companies that operate within a single business reporting jurisdiction because XBRL helps integrate distinct business reporting procedures. Based on these discussions, the benefits of XBRL adoption is likely to be greater for large companies than for small companies. H2. The effect of XBRL adoption on reducing information asymmetry is stronger for large companies than for small companies. 4. Method The primary objective of this paper is to examine whether XBRL adoption reduces information asymmetry in the capital market. The Korean stock market was selected as the target for this study since all public companies have been reporting financial information in XBRL format since October 2007. This section identifies measures for information asymmetry, followed by a discussion of the data collection procedure and analysis method. 4.1. Information asymmetry measures A few proxy measures for information asymmetry, including bid– ask spread, trading volume, and stock price volatility, have been proposed (Leuz and Verrecchia, 2000). The bid–ask spread refers to the difference between the price quoted by buyers and the price quoted by sellers for a given security. If information asymmetry does not exist in the capital market, which means that all market players have the same information, the bid–ask spread should be zero. A positive association exists between information asymmetry and bid– ask spread because as information asymmetry increases, the bid–ask spread also increases. The bid–ask spread has been used extensively to measure the degree of market efficiency. The trading volume indicates the amount of securities for the given period of time. If information asymmetry decreases, the intention of selling and buying tends to increase, resulting in an increase in trading volume; a negative relationship exists between these two measures. Stock price volatility is defined as the variation (or standard deviation) of return from a given security for a specific period of time. Volatility generally represents uncertainty or risk in the capital market. If the information asymmetry of the capital market is low, and the market is efficient, the stock price volatility tends to be low. Wang (1993) argues that increases in information asymmetry can cause stock price volatility to increase because the adverse selection among traders becomes more severe. Among the three proxy measures, the bid–ask spread is a common and appropriate measure for information asymmetry (Leuz and Verrecchia, 2000). Trading volume and price volatility are closely related with information asymmetry, but many factors other than information asymmetry influence these measures. Clarke and Shastri (2000) empirically compared the different proxy variables to measure information asymmetry and illustrated that market microstructurebased measures (e.g. bid–ask spread) are superior to other measures such as analysts' forecasts measures and investment opportunity set measures. Aitken and Frino (1996) and Stoll (1989) recommend that the bid–ask spread be used as a proxy for information asymmetry. The

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bid–ask spread is effective in both a quote-driven and an order-driven market, such as the Tokyo Stock Exchange, the Paris Bourse, and the Korea Stock Exchange. Several types of spread for information asymmetry have been commonly employed in the previous research including effective spread, quoted spread, and adverse selection component of spread. Adverse selection component of spread is inappropriate in this study because no market makers exist in the Korean stock market. Spreads are hardly decomposed by inventory cost, order processing cost, and adverse selection component. Effective spread is a better measure for information asymmetry since most transactions occur at prices between quoted bid prices and quoted ask prices (Heflin et al., 2005). This study used daily closing bid and ask prices instead of transaction-based prices. Based on these discussions, this study followed Boone's (1998) approach and employed the relative quoted spread as a proxy measure for information asymmetry, which can be computed using the following formula: Ask Price−Bid Price : Relative Spread =  Ask Price + Bid Price 2

ð1Þ

4.2. Analysis methods A t-test and multiple regression analysis were employed to examine the effect of XBRL adoption on information asymmetry in the capital market. The difference of the means of information asymmetry between the pre-adoption and post-adoption period can be detected by using a paired t-test. A multiple regression analysis can determine whether XBRL adoption reduces the level of information asymmetry and whether the effect of XBRL adoption is stronger for large-sized companies than medium-sized and small-sized companies. Information asymmetry is a dependent variable, and XBRL adoption is the main explanatory variable in the regression model. Firm size, trading activity, volatility, and stock price are included as control variables in the regression model because research has indicated that these variables have a close association with information asymmetry. These control variables have been added to the model for explaining the variance of information asymmetry. The relative spread in the regression model was computed by using Eq. (1) on a daily basis. XBRL adoption was treated as a categorical variable. The pre-XBRL adoption period was coded as 0 and the post-XBRL adoption period was coded as 1. Firm size was measured by a firm's market value of equity. Previous research has found that information asymmetry is negatively associated with firm size (Chiang and Venkatesh, 1988; Easley et al., 2002; Greenstein and Sami, 1994; Hasbrouck, 1991; Leuz and Verrecchia, 2000). Large firms tend to have high trading activities and receive more attention from media and investment analysts. The level of information asymmetry for large-sized firms is likely to be lower than that of small-sized firms. Firm size should be negatively associated with information asymmetry, which is measured by relative spread. Turnover rate indicates the trading volume in a given time period for a specific firm divided by the total number of shares of the firm's stock. Like trading volume, turnover rate reflects the degree of trading activity. Trading activity has a negative association with information asymmetry (Copeland and Galai, 1983). Stocks with high trading activities have more liquidity, attract more uninformed investors, and increase the likelihood that important information can be reflected in stock price. A negative association should exist between turnover rate and relative spread. As stated earlier, stock price volatility has a positive association with relative spread. In quote-driven markets, volatility indicates the degree of uncertainty or risk. In a high volatile

market situation, market makers may quote with high spread to compensate for the risk (Kanagaretnam et al., 2007). The stock price metric is the average stock price of each firm for a given time period. Some researchers argue that stock price is positively associated with relative spread (Amihud and Mendelson, 1986; Glosten and Harris, 1988), while other studies propose that stock price should be negatively associated with relative spread (Venkatesh and Chiang, 1986). The relationship between stock price and relative spread is not conclusive because a market environment with high information asymmetry challenges investors to accurately evaluate a firm's performance. The following regression model, which includes all the variables discussed above, examines whether XBRL adoption reduces information asymmetry in the capital market: Spreadit = β0 + β1 XBRLit + β2 Sizei + β3 Turnoverit + β4 Volatilityit + β5 StockPriceit + εit

ð2Þ

where i denotes firm and t denotes either pre-adoption period or post-adoption period. 4.3. Data All public companies in Korea have been required to submit their financial information in XBRL format since October 2007. To investigate the effect of XBRL adoption on the Korean stock market, the pre-adoption period is December 2006 to August 2007, while the post-adoption period is December 2007 to August 2008. The target periods were selected based on three factors. First, the two months after XBRL adoption (October and November 2007) have been excluded from the analysis since all public companies in Korea are required to submit quarterly reports within 45 days from the end of the quarter. October and November 2007 were excluded because the initial effect of XBRL adoption could not be confirmed during these months. Second, the period after August 2008 was not included as a target period because the global financial crisis, caused by the collapse of major investment banks in the U.S., severely impacted the Korean financial market beginning in September 2008. The Korean stock market was distorted due to this exceptional crisis, so the period from December 2007 to August 2008 (nine months) was used as the postadoption period. Finally, the pre-adoption period included the period from December 2006 to August 2007 (nine months). The same calendar months were examined for both periods to minimize seasonal effects. Only transaction data of common stocks was examined. Transaction data was excluded where trading volume was zero and either bid price or ask price was zero. The transaction data was obtained from the Korea Exchange (KRX) database, which consists of 550 Korean firms. 5. Findings 5.1. Descriptive statistics Table 1 presents the descriptive statistics of variables for the preadoption and post-adoption periods and also shows a comparison of the sample means for each variable between the pre-adoption and the post-adoption period. The paired t-test indicates that the means of all the variables are significantly different between the pre-adoption period and the post-adoption period (all the p-values are less than 0.01 or 0.05). The mean of the relative spread for the post-adoption period (0.77%) is slightly higher than that for the pre-adoption period (0.64%), which is in conflict with hypothesis H1. A number of variables, such as XBRL adoption, firm size, turnover rate, and stock price, may also influence the increase of the relative spread. A

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Table 1 Descriptive statistics and comparison of sample means: pre-adoption period and post-adoption period. Pre-adoption period

Post-adoption period

t-test

Variable

Min

Max

Mean

S.D.

Min

Max

Mean

S.D.

t

p-valuea

Relative spread Firm size Turnover rate Volatility Stock price

0.0013 1.01 × 104 0.0003 0.0164 5.65 × 102

0.0332 8.70 × 107 0.0796 0.0838 1.29 × 106

0.0064 1.30 × 106 0.0087 0.0403 4.20 × 104

0.0038 4.92 × 106 0.0095 0.0091 1.12 × 105

0.0013 9.51 × 103 0.0002 0.0156 3.38 × 102

0.0270 8.99 × 107 0.0842 0.0820 1.30 × 106

0.0077 1.43 × 106 0.0059 0.0419 4.43 × 104

0.0047 5.20 × 106 0.0082 0.0107 1.11 × 105

11.76 3.04 − 9.51 4.64 2.50

0.00 0.00 0.00 0.00 0.01

Relative spread is the average of daily bid–ask spread computed by Eq. (1). Firm size (in Korean million won) is the average of a firm's market value (closing price multiplied by the number of shares outstanding). Turnover rate indicates the average daily share turnover (daily trading volume divided by the firm's number of shares outstanding). Volatility means the average daily stock price volatility computed by the difference between daily highest price and lowest price divided by the average of the highest and the lowest. Stock price (in Korean won) is the average daily stock price. a p-values are two-tailed.

multiple regression analysis method was performed to identify the effects of these explanatory variables on the relative spread. 5.2. Multiple regression results A multiple regression analysis using Eq. (2) examined the effect of XBRL adoption on information asymmetry. Regression analyses assume that variables have a normal distribution. A logarithmic transformation of the data was performed to ensure that the normality assumption was met. Mahalanobis' (1936) distance was computed using the data to identify outliers, and no significant outliers were found. The Pearson correlation coefficients (Table 2) and variance inflation factors (VIF) (Table 3) were calculated to identify multicollinearity concerns in the dataset. Despite a relatively high correlation between firm size and stock price (0.64), all of the VIF values are less than 10. Multicollinearity is not a concern in the dataset (Myers, 1990). In addition, a visual examination of the scatter plot of the standardized residuals and the Breusch–Pagan test (Breusch and Pagan, 1979) were performed to detect the problem of heteroscedasticity. The residuals are normally distributed but evidence of heteroscedasticity exists from the Breusch–Pagan test (χ2 = 140.63, p-value = 0.00). The method of White's (1980) standard errors was employed to solve the heteroscedasticity problem. The multiple regression analysis (Table 3) show that the regression model significantly predicts relative spread (F ratio = 1323.68) and five independent variables, including XBRL adoption, firm size, turnover rate, volatility, and stock price, which explains 86% of the variation in relative spread (adjusted R2 = 0.86). All independent variables are significantly associated with the dependent variable. The regression coefficient for XBRL adoption is − 0.05 and is significantly related to relative spread (p-value = 0.00). The information asymmetry of the Korean capital market, measured by relative spread, was significantly reduced after XBRL was adopted in Korea, which supports hypothesis H1. The coefficient for firm size is both significant and negative. This result indicates that firm size is negatively associated with information asymmetry. Turnover rate is also negatively related to information asymmetry. Opposite of these findings, the analysis shows that volatility and stock price have a significantly positive association with information asymmetry in the

regression model. All of the relationships between the independent and dependent variables from the regression model are consistent to what was expected. The data was classified into three groups based on firm size to examine the effect XBRL adoption has on information asymmetry. The Korean government considers a firm large-sized with equity greater than 50 billion won (about 40 million U.S. dollars), small-sized with equity less than 8 billion won (about 6 million U.S. dollars), and medium-sized with equity between 8 billion and 50 billion won. Seventy-seven (77) small-sized firms, three-hundred and four (304) medium-sized firms, and one-hundred and sixty-nine (169) largesized firms were among the 550 firms in the data using the above classification. A multiple regression analysis was performed on the three datasets using Eq. (2). Table 4 presents the results of a multiple regression analysis based upon a firm's equity. XBRL adoption reduces information asymmetry only for the largesized companies. The regression coefficient of XBRL adoption for the large-sized companies is − 0.09 and is significantly associated with relative spread (p-value = 0.00). For the medium-sized and smallsized companies, the regression coefficient of XBRL adoption was not significant (p-values are 0.22 and 0.81 respectively). The effect of XBRL adoption on reducing information asymmetry is stronger for large-sized companies than for small-sized companies, which supports hypothesis H2. Almost all control variables, including firm size, turnover rate, volatility, and stock price, have a significant association with relative spread across the three datasets. The stock price of the large-sized companies was not significantly related to relative spread (p-value = 0.27), indicating that stock price does not have an effect on relative spread for the large-sized companies. The multiple regression results support that XBRL adoption reduces information asymmetry (hypothesis H1) and the effect of XBRL adoption is stronger for large-sized companies (hypothesis H2). Market-wide effects may also explain the trend of decreased information asymmetry in the capital market. To address this issue, (1) the overall trend of relative spreads in the Korean stock market were explored and (2) an additional regression was performed to determine whether the dummy variable (XBRL adoption) has a significant negative coefficient before XBRL adoption in Korea. Monthly relative spread data was collected for seven years from September 2001 to August 2008 since this period was the most recent, stable period in the Korean stock market. The Korean market

Table 2 Correlations among variables. Variable

1

1. 2. 3. 4. 5. 6.

0.12** − 0.71** − 0.56** 0.06* − 0.17**

** *

Relative spread XBRL adoption Firm size Turnover rate Volatility Stock price

p < 0.01 (two-tailed). p < 0.01 (two-tailed).

2

0.01 − 0.24** 0.06* − 0.02

3

0.02 − 0.21** 0.64**

4

5

**

0.50 − 0.35**

− 0.28**

Table 3 Results of multiple regression analysis. Variable

VIF

Beta

t

p-value

Model statistics

XBRL adoption Firm size Turnover rate Volatility Stock price

1.16 2.08 1.95 1.52 2.26

− 0.04 − 0.74 − 0.63 0.27 0.16

− 3.26 − 39.18 − 40.27 18.97 8.49

0.00 0.00 0.00 0.00 0.00

Dependent variable: relative spread N = 1100 Adjusted R2 = 0.86 F = 1323.68 (p-value = 0.00)

p-values are two-tailed. Standardized coefficients (Beta) are shown.

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Table 4 Results of multiple regression analysis depending upon firm's equity. Small-sized companies Variable XBRL adoption Firm size Turnover rate Volatility Stock price

Medium-sized companies

Large-sized companies

− 0.01 (− 0.24; 0.81) − 0.03 (− 1.26; 0.21) − 0.09 (− 3.47; 0.00) − 0.75 (− 20.30; 0.00) − 0.89 (− 22.84; 0.00) 0.45 (13.98; 0.00) 0.44 (10.84; 0.00)

Model statistics N 154 Adjusted R2 0.89 F (p-value) 244.48 (0.00)

− 0.67 (− 20.91; 0.00) − 0.83 (− 39.85; 0.00) 0.35 (14.08; 0.00) 0.25 (6.77; 0.00)

− 0.67 (− 12.91; 0.00) − 0.56 (− 17.51; 0.00) 0.28 (7.65; 0.00) 0.04 (0.93; 0.36)

608 0.77 409.74 (0.00)

338 0.78 238.25 (0.00)

p-values are two-tailed. Standardized coefficients (Beta) are shown with t values and p-values in parentheses.

was extremely unstable for nearly four years before September 2001 because Korea experienced a severe economic crisis. Korea officially escaped economic turmoil in August 2001. A simple regression on the data revealed no significant market-wide trend of decreased relative spreads during this period (adjusted R2 = − 0.004, β = −0.09, t = − 0.82, p-value = 0.42). “Pre” and “post” periods were examined using data from four years before the original analysis and a multiple regression analysis was performed to see if the results were the same as Table 3. By doing so, the “pre” period became December 2002 to August 2003 while the “post” period became December 2003 to August 2004. The periods from four years earlier were examined because they showed the most similar patterns of spreads to the original research periods. Table 5 shows the results of the multiple regression analysis. The dummy variable, XBRL adoption, has a significant positive coefficient. This is contrary to the original results in Table 3, which indicates that XBRL adoption drives the reduction of information asymmetry. No marketwide effect exists on the reduction of information asymmetry in the Korean stock market. 6. Discussion This paper examines whether XBRL adoption reduces the information asymmetry of the stock market in Korea. Data was collected from 550 companies in the Korean stock market to compare the level of information asymmetry, measured by relative spread, both before and after the adoption of XBRL. A multiple regression analysis showed that XBRL adoption reduced the information asymmetry of the Korean stock market. XBRL adoption reduces the time and cost to circulate corporate information in stock markets as well as enhances the compatibility of this information for integration among different information systems. XBRL adoption also increases the transparency and quality of corporate information in the capital market, which improves the search capability of XBRL and the circulation of corporate information. Finally, XBRL adoption facilitates corporate disclosure, which reduces the information asymmetry of the capital market. Table 5 Results of multiple regression analysis before adopting XBRL. Variable

VIF

Beta

t

p-value

Model statistics

XBRL adoption Firm size Turnover rate Volatility Stock price

1.01 1.60 1.78 1.74 1.79

0.07 − 0.78 − 0.61 0.37 0.14

5.19 − 45.35 − 31.51 22.86 6.63

0.00 0.00 0.00 0.00 0.00

Dependent variable: relative spread N = 980 Adjusted R = 0.82 F = 906.27 (p-value = 0.00)

p-values are two-tailed. Standardized coefficients (Beta) are shown.

The effect of XBRL adoption on reducing information asymmetry is stronger for large companies than small companies. A negative association between firm size and information asymmetry is expected since many studies argue that larger companies are likely to have more trading transactions, attention from analysts, and media coverage than smaller companies (Chiang and Venkatesh, 1988; Diamond and Verrecchia, 1991; Greenstein and Sami, 1994; Zhou, 2007). This study confirmed that the effect of XBRL adoption on reducing information asymmetry is significant only for large companies. Four control variables, including firm size, turnover rate, volatility, and stock price, were examined to explain the variance of information asymmetry of the Korean stock market. As expected, firm size was negatively associated with information asymmetry. Corporate information from large companies is likely to be distributed more easily than that of small companies due to high trading activities and more attention from media and investment analysts. Turnover rate is also negatively related to information asymmetry. Stocks with a high turnover rate tend to attract more liquidity and investors, and the information about the stocks is likely to circulate around investors more frequently and rapidly. Volatility is positively associated with information asymmetry. Volatility indicates the degree of uncertainty or risk, so market makers in a highly volatile market tend to quote with a high spread to evade risk. Stock price is also positively related with information asymmetry. When a firm reports financial performance in a standard XBRL format, investors tend to evaluate the firm as less risky, possibly decreasing capital cost and increasing a firm's stock price. XBRL adoption also reduces information asymmetry, which may also raise the firm's stock price. The relationships between the control variables and information asymmetry from the Korean stock market are consistent with the findings of previous literature. 7. Conclusions and implications Accounting and finance research argues that an increased level of corporate disclosure lowers the information asymmetry of the capital market. Numerous experts insist that XBRL adoption enhances the transparency and quality of business reporting, so XBRL adoption should decrease the information asymmetry of the capital market. This study examines the relationship between XBRL adoption and information asymmetry in the capital market. This study supports the conclusion that XBRL adoption reduces the information asymmetry of the Korean stock market. Highly significant and negative associations between XBRL adoption and information asymmetry of the capital market were found after controlling for potentially confounding factors, such as firm size, turnover rate, volatility, and stock price. This study also examines the effect of XBRL adoption on reducing information asymmetry for large-sized firms over medium-sized and small-sized firms. The effect of XBRL adoption is stronger for large firms than for small firms. This study has a few limitations. First, a relatively short period after XBRL adoption (nine months) was examined. Korea was one of the leading countries in the world to require using XBRL in business reporting (FSS (Financial Supervisory Service), 2007), but less than two years later, the global financial crisis severely changed the capital market. Further analysis with a longer sampling window is necessary to verify the benefits of XBRL adoption. Second, the effect of XBRL adoption on reducing information asymmetry was examined, focusing on the benefits for investors. Future research should examine additional benefits of XBRL adoption for various stakeholders. This study also has several implications. First, evidence of the benefits from XBRL adoption was illustrated by examining the Korean stock market. These findings can be an empirical and theoretical foundation to accelerate the adoption of XBRL in other countries. The effect of XBRL on reducing information asymmetry enhances the quality of valuation for firms and decreases capital cost. The results of

H. Yoon et al. / Journal of Business Research 64 (2011) 157–163

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