XBRL Adoption, Information Asymmetry, Cost of Capital, and Reporting Lags

The voluntary and mandatory introduction of a new information technology, XBRL, in 2006 and 2007 by the Financial Supervisory Services of Korea has significantly affected capital markets, possibly through a reduction in the information asymmetry between firms and users of financial information. This study examines how changes in the information environment attributable to XBRL adoption affect the cost of capital and whether the adoption reduces reporting lags for both voluntary and mandatory filers. Using a 152 firm-year sample, this study finds evidence that the cost of equity capital declined after XBRL adoption, and this decline was greater for voluntary filers with higher information asymmetry. Mandatory filers also experienced incremental reductions in their costs of equity capital after the adoption. Additionally, this study finds evidence that financial reporting lags decrease for both voluntary and mandatory adopters after the adoption. Firms with reduced reporting lags after the adoption experience reduction in cost of capital.


Introduction
Technological development reduces information asymmetry among capital market participants, and thus is expected to reduce the cost of capital. The timeliness and comparability of financial information are key elements that affect information asymmetry between providers and users of the information in capital markets. Although the adoption of eXtensible Business Reporting Language (hereafter XBRL) as a capital market disclosure mechanism significantly affected the iBusiness timeliness and comparability of financial information, few studies examine the effects of a technological environment change on the cost of capital.
With the rapid development of Internet and information technology (IT), the environment for financial disclosure has also changed. Given this technology advancement, information users can now gain real-time access to information through various channels. In particular, information users are moving from the news media and paper-based disclosure system to Internet-based electronic disclosure system, enabling corporate disclosures to be updated and available to interested parties in real time. In addition, the electronic disclosure system has led to another groundbreaking improvement in the information environment of capital markets, which is the introduction of the XBRL-based disclosure system.
The XBRL system is particularly useful for accounting information under internationally standardized taxonomies, allowing information users to easily search for and facilitate the detection and collection of information. Through the XBRL taxonomy, the accounting information became standardized, and therefore easily comparable across firms in capital markets. Therefore, the XBRL taxonomy provides more timely and relevant accounting information for decision makers. an improvement in both the information environment and accounting transparency. Therefore, an analysis of the effect of XBRL adoption on Korean capital markets can provide useful insights for countries considering XBRL adoption. In this study, we examine how changes in the financial information environment attributable to XBRL adoption affect the cost of capital.
Firms must incur higher expenses to adopt and maintain the new system. However, at the same time, they are able to reduce the costs associated with information asymmetry between management and outside information users through more timely and comparable information. XBRL adoption benefits information users through the provision of more customized data search and retrieval functions. Further, information users may view firms using XBRL as more transparent and as providing higher quality financial information; hence, users are more likely to evaluate such firms more favorably than those not using XBRL.
If financial information users-investors in particular-view XBRL adoption as good news, then they are willing to pay a higher price for shares of firms under the XBRL system. Therefore, in this study, we examine the association between XBRL adoption and the cost of capital. In addition, firms suffering from high information asymmetry are more likely to experience a greater benefit 95 iBusiness when the XBRL system is introduced. Thus, we also examine whether firms experiencing high information asymmetry experienced lower cost of capital than others on XBRL adoption. Meanwhile, XBRL adoption may also affect information producers from the perspective of information production efficiency. In order to examine the effect of the adoption on information production efficiency, this study investigates whether the adoption reduces reporting lags for both voluntary and mandatory filers. Also, we examine whether this reduction in reporting lags affects the cost of capital.
We find evidence that voluntary filers of XBRL experience a decrease in the cost of equity capital after XBRL adoption. The decrease in the cost of equity capital appears more pronounced for firms with higher information asymmetry.
In the case of mandatory XBRL filers, similar reductions in the cost of equity capital are identified after the adoption. Together, these results suggest that XBRL adoption reduces the cost of capital regardless of the nature of adoption (i.e., voluntary and mandatory). In addition, we find evidence that reporting lags are reduced for both voluntary filers and mandatory filers after XBRL adoption, suggesting an improvement in information processing efficiency. We also find that a reduction in reporting lag causes reduction in the cost of capital. The results of this study suggest that the introduction of new information technology may benefit capital market participants by reducing their cost of capital via the improvement of timeliness of disclosure. This study provides useful insights to regulators and firms who are considering mandatorily or voluntarily adopting new information technology for their capital markets.

XBRL
XBRL allows information users to process financial data on a real-time basis in their customized forms. Thus, unlike previous paper-based or HTML-based disclosure systems, XBRL offers information users a user-friendly way to search and retrieve relevant data. As information providers, firms can easily prepare, change, transfer, retrieve, and share financial information once they install the internationally standardized XBRL taxonomy. Under the XBRL taxonomy, each accounting item has its own tag that is internationally standardized. Thus, the XBRL tagging system is considered an object-oriented language. More specifically, XBRL is a flexible and comprehensive system that processes data and has the following characteristics.
1) Encapsulation: Each accounting item is defined as a unique class using a standardized tagging mechanism; hence, each item can be systematically processed.
2) Inheritance: By using established reusable codes, XBRL extends its function and enables the characteristics of a higher-class type within the taxonomy to transfer to those of lower-class types. Thus, a lower-class type shares the characteristics and functions of a higher-class type. 3) Polymorphism: As an object-oriented language, XBRL has common commands that can achieve objects in various ways depending on the class type.
For example, a supervisor orders two employees to arrange documents by using the same command code. However, each employee can conduct the same command in a different way. More specifically, under the same command, a way of realization may be different, and therefore, the results may not be the same.
Utilizing these characteristics, information users retrieve and use the processed data for their own purposes and with confidence that the accounting data possess common characteristics and a common structure.

Related Literature and Hypotheses Development
Reducing information asymmetry by improving the information environment surrounding the corporate world has been of significant interest to practitioners Before the adoption of XBRL, the HTML-based disclosure system required immense effort and significant time for retrieval of relevant information because it only provided plain-text format information owing to the limited ability of HTML to search for functions within texts. Moreover, HTML requires transferring manually collected data to a form that is compatible with the data analysis program. However, XBRL, with its standardized taxonomy and unique tags representing each accounting item, allows users to execute various commands to retrieve the information of interest from financial statements, including footnotes and supplementary schedules. In addition, the data retrieved using the XBRL system is compatible with various statistical analysis software packages such as Excel, SPSS, and SAS; furthermore, the data can reduce information processing time.
The costs associated with information production and acquisition can be significantly lower when information is compatible and processing time is reduced [26]. Because standardized information under the XBRL taxonomy allows users to easily retrieve relevant data and compare firms, the financial information provided by firms improves both transparency and integrity. In turn, such improvements reduce information asymmetry and the likelihood of prediction errors.
Chen, S., Harris, L., Li, W., & Wu, D. [27] report that the cost of equity declined after XBRL adoption in China depending on state ownership level. Li, O., Ni, C., & Lin, Y. [28] state that XBRL can reduce the delays and noise associated with the information production process by expanding information channels.
Leuz, C., & Verrecchia, R. [29] indicate that voluntary adoption of an enhanced financial disclosure system can be interpreted as a positive signal of management's willingness to disclose high-quality information to investors.
We note that the cost of capital is one of the most important concerns of man-  [37] also argue that management has an incentive to voluntarily disclose information to reduce the information asymmetry between themselves and investors and eventually reduce the resulting cost of capital. Pinsker, R., & Li, S. [38] mention that XBRL also leads to lower operating costs to produce information; in addition, XBRL provides a "first-mover" advantage to voluntary XBRL filers in the market (e.g., reduced costs of capital). Based on this discussion, we develop the following hypothesis in the alternative form to relate voluntary XBRL adoption to the cost of capital.
Hypothesis 1: The cost of equity capital for voluntary XBRL filers decreases after adoption.
Healy, P., & Palepu, K. [36] state that information processing costs decline if a common language-facilitating more effective communication among information providers and users-is available for disclosure rules on financial statements.
Although no guarantee exists that firms disclose more information under the XBRL system, XBRL enhances accessibility through comparable and standardized accounting information. With better accessibility, both the standardized reporting language and the system reduce the information asymmetry between firms and financial information users. Further, an improved information environment gives investors access better opportunities and increases stock liquidity [36]. An improved information environment also provides minority shareholders in a vulnerable position with relatively greater benefits [39].
When firms voluntarily decide to adopt a new advanced technology, such as XBRL, they must bear all of the costs associated with the adoption and settlement. At the same time, firms with greater information asymmetry due to a poor information environment are more likely to experience a greater benefit via the adoption of XBRL [40]. Moreover, firms with greater information asymmetry must incur higher expenses because of the necessity to improve information environment and monitor the quality of information. Thus, the effect of voluntary XBRL adoption on the cost of capital to be more pronounced when information asymmetry is greater. On the basis of this discussion, we develop Hypothesis 2 in an alternative form to relate voluntary XBRL adoption with higher information asymmetry and the cost of capital.
Hypothesis 2: On voluntary adoption, the cost of equity capital of XBRL filers with higher information asymmetry decreases more than that of XBRL filers with lower information asymmetry.
The effect of voluntary XBRL adoption on the reduction in information asymmetry would be greater than mandatory XBRL adoption because voluntary adoption may represent management's intention to improve disclosure quality [29]. In addition, voluntary adoption can be interpreted as the outcome of effective corporate governance in capital markets [41]. Kim, J., & Shi, H. [42] report that voluntary IFRS adopters experience an increase in the number of analysts following and an improvement in analyst forecast accuracy. Their findings are consistent with the notion of an improved information environment. Previous studies also report that the amount of voluntary disclosure reduces the cost of capital [43] [44] and improves the predictability and value relevance of the accounting information [45] [46]. Consistent with these studies, Daske, H., Hail, L., & Leuz, C., & Verdi, R. [47] report that firms that voluntarily adopt IFRS experience a more positive effect on firm value than those that adopt IFRS for a first-time mandate.
The effect of voluntary XBRL adoption may be different from that of IFRS because the adoption itself does not increase the amount of information but, rather, improves information visibility and accessibility [28]. In addtion, the XBRL operating environment in the United States and Korea may not be the same. For example, the United States initiated VFP in 2005, and mandated XBRL filing in 2009 for firms with more than $5 billion and in 2011 for the remaining public firms. By contrast, in Korea, XBRL filing was mandated for all public firms after one year of voluntary adoption. More specifically, a four-year time difference existed from VFP to the first mandatory adoption in the United States, whereas only one year existed after the VFP implementation in Korea. Thus, US firms had relatively sufficient time to acquire the necessary knowledge to effectively implement and utilize XBRL. However, the one-year period in Korea after the implementation of VFP may not have been sufficient to differentiate the effect of voluntary and mandatory XBRL filings. Thus, the effect of the adoption on the capital markets may not differ significantly for mandatory adopters in 2007 and for voluntary adopters in 2006 in Korea. By studying Korean case, those contries considering a prompt XBRL adoption over a short time period can gain useful iBusiness insights for their policy decision. Given this discussion, we develop the following null hypothesis to relate voluntary XBRL adoption relative to mandatory adoption to the cost of capital.
Hypothesis 3: After the adoption of the mandatory XBRL filing program, the decreasing cost of equity capital of voluntary XBRL filers is the same as that of mandatory XBRL filers.

Research Model
Managers tend to reduce the possibility of adverse selection and the cost of capital through disclosures. Healy, P., & Palepu, K. [36] state that the technological innovation in a firm's financial reporting system engenders the creation of a new communication channel among investors and reduces the cost of voluntary information disclosures. Advancements in internet-based reporting systems increase the quality of information disclosures. Therefore, introducing an innovative voluntary disclosure system based on XBRL reduces the cost of information for investors and ultimately reduces a firm's cost of capital. To test Hypothesis 1, the following empirical model is used.
(Hypothesis 1, see Table 1 MTB: total market value t-1 scaled by the book value of total equity capital t-1 ; RDEBT: total debt to total assets ratio; ROA: net income scaled by total assets; PLIST: natural logarithm of the number of years since a firm was listed on the markets; and, DIND: dummy variables to control the effects of industries.     spreads as a proxy for information asymmetry. A bid-ask spread is the price difference divided by the average of two prices-the ask price preference and the bid price preference-of the firm. We categorize the sample into two groups: firms with high and low asymmetric information. We define the high information asymmetry group as firms with a spread price higher than the median and the low group as firms with a spread price lower than or equal to the median (i.e., HIGHSPREAD is 1 for firms with a spread price higher than the median, and 0 otherwise). We include an interaction variable, VOLPOST*HIGHSPREAD, in MTB: total market value t-1 scaled by the book value of total equity capital t-1 ; RDEBT: total debt to total assets ratio; ROA: net income scaled by total assets; PLIST: natural logarithm of the number of years since a firm was listed on the markets; and DIND: dummy variables to control the effects of industries.

Sample Selection
Initial for the pre-and post-mandatory periods (four years). Second, we consider the issue of a "good target-to-matching sample ratio following [59]. We select "1:2 voluntary-to-mandatory" sample firms with similar firm sizes in the same industry. Table 2  To test the differences in the variables between these two periods, we classify

Results of Empirical Analyses
We test hypotheses using the three empirical models discussed in the previous  Table 4 presents the results of the first regression analysis using model (1)  Firms' debt ratio (RDEBT) also conveys positive and significant coefficient values under 1 percent, implying that "the higher the dependence on debt, the higher the cost of equity capital." BETA is negative and not significant using any cost of capital measures, a result that is inconsistent with the expectations but consistent with Cha, S., Chung, J., & Yoo, Y. [52], who study the features that affect the cost of equity capital in the Korean market. Next, Panel B of Table 4 shows a larger reduction in the cost of equity capital after XBRL adoption through the VFP for firms with higher information asymmetry. The level of information asymmetry was measured using bid-ask spreads. Consistent with the expectation, firms with high information asymmetry (HIGHSPREAD, higher bid-ask spreads) show a higher cost of equity capital (t = 1.96* -2.42**). These firms experienced larger declines in the cost of equity capital than those with low information asymmetry (VOLPOST*HIGHSPREAD, t = -2.56** --2.98***). Therefore, this result indicates that the cost of equity capital declined incrementally after voluntary XBRL adoption.
When the auhors conducted the same analysis using the scale value of bid-ask spreads (SPREAD), we found that a possible multicollinearity problem existed between VOLPOST and the interaction term of VOLPOST with bid-ask spreads (VOLPOST*SPREAD), indicating that bid-ask spreads also changed after XBRL adoption. For this reason, we used the dummy variable of bid-ask spreads instead of bid-ask spreads to capture the level of information asymmetry. The dummy variable, HIGHSPREAD, has a value 1 if a firm's bid-ask spread is greater than each year's median value of the bid-ask spreads. Nonetheless, we checked the results of the regression analysis using bid-ask spreads and attained results similar to those in Panel B, Table 4. The maximum VIF (variance inflation factor) value was reported at approximately 3.8, suggesting no severe multicollinearity problems. However, a strong correlation between VOLPOST and VOLPOST*SPREAD suggests possible changes in the level of bid-ask spreads after XBRL adoption, and VOLPOST almost explains these changes. That is, bid spreads also declined after XBRL adoption. Therefore, we need to understand that reducing information asymmetry leads to a reduction in the cost of capital. For this, a two-stage model should be considered to check reductions in the cost of equity capital through reductions in information asymmetry. 2SLS found that the level of information asymmetry significantly decreased after XBRL adoption (t = -1.99**) and provided the same results as in Table 4, despite controlling for changes in bid-ask spreads. The first and second hypotheses (H1 and H2) are supported by these empirical results.    Mandatory adopters are firms that first adopted the XBRL system in 2007.
Panel A of Table 1 Table 1).
We would like to determine whether any learning effects exist after mandato-

Supplementary Analyses: Efficiency-Timely Disclosure, Cost of Equity Capital, and Learning Effects
The primary purpose of adopting the XBRL system is to improve efficiency in information processing procedures by reducing the time and effort required for information production. This improved efficiency facilitates timely and more  However, with lengthened reporting lags, the adoption (VOLPOST) is insignificant. These results together imply that firms adopting XBRL experience benefits in terms of the savings of cost of capital only when they are able to reduce reporting lags. For those with shortened reporting lags, the effect of the first year of mandatory adoption (MANDPOST08) is negative and significant at the 1 percent level for all reporting lags. However, the effect of the second year of mandatory adoption (MANDPOST09) is generally insignificant except for those with unchanging or lengthening reporting lags only with regard to the date a firm's annual report is uploaded on the DART system (LAG_SIGN2FULL) (untabulated). In summary, the adoption of XBRL contributes to the improvement of information production efficiency in terms of reporting lags and also reduces the cost of capital. In particular, the effect of the adoption on the cost of capital tends to be greater for those with shortened reporting lags and also tends to be greater with time.

Conclusions
The voluntary adoption of XBRL-based financial disclosure systems has improved information users' accessibility, and therefore enables more timely and efficient decision-making for users. Improvements in the accessibility and availability of information reduce information asymmetry, which results in lowering the information risk recognized by users. Thus, we expect that XBRL adoption engenders a decline in a firm's cost of capital with respect to information risk.
The XBRL system is an object-data-oriented system based on XML and defines voluntary filers seem to experience "learning-by-doing" effects over time.
We find that the reporting lags are reduced for both voluntary filers and mandatory filers. This result suggests that XBRL adoption improves the efficiency of information producers. In particular, mandatory filers show incremental lag reduction with time. Also, we find that the greater the reduction of reporting lags, the higher the reduction of the cost of capital. In the case of audit report lag, voluntary filers experience a greater incremental reduction in the cost of capital as the lag shortens. This result suggests that those who voluntarily adopt XBRL prior to mandatory filing experience "learning-by-doing" effects over time.
This study provides evidence of the positive effect of an adoption of new information technology, not only for voluntary but also for mandatory adopters.
This positive effect is applicable not only for information users but also information producers. Countries that plan to or are about to adopt a new information technology system in capital market can gain useful policy insights from the results of this study. Future studies can extend this work to determine whether the positive effects of a new information technology system are sustained after changes in accounting standards such as IFRS, the legal environment, and corporate governance. Determinants of the adoption of new information technology can also provide useful information over mechanisms related to business decision-making by managers.