Impact of Extensions in XBRL Disclosure on Analysts' Forecast Behavior

Abstract

SYNOPSIS This paper examines the impact of abnormal extensions in eXtensible Business Reporting Language (XBRL) on analysts' forecasting behavior in the U.S. In this analysis, abnormal extensions reflect XBRL extensions that exceed the expected level for industry peers. In 2009 the Securities and Exchange Commission (SEC) permitted U.S. registrants to use the extensions to provide greater details about transactions and events unique to their reporting circumstances. Critics argue that the reporting discretion permitted under the mandate will complicate and impede financial analysis. The SEC and proponents contend that the extensions improve registrants' financial information environment and facilitate financial analysis. Our findings are that abnormal extensions are positively associated with the number of analysts who follow the firm and forecast accuracy, but negatively associated with forecast dispersion. The results are weaker during the first year and stronger during later years of the XBRL-based reporting. Moreover, the effect of the abnormal extensions on the forecasting variables is greater for filers with many business segments and/or harder-to-read financial statements. Our findings provide strong support for the SEC's policy that allows registrants to create extensions as a means of enhancing the quality and interpretation of financial disclosures.

Digital corporate reporting and value relevance: evidence from the US and Japan

“…Meanwhile, archival research looking at other user response measures during ongoing XBRL adoption find support for expectation that XBRL reduces cost of debt (e.g., Kaya and Pronobis, 2016;Lai et al, 2015), timeliness of financial reports (e.g., Du and Wu, 2018), information processing costs (e.g., Blankespoor, 2019) and as expected, increase loan amounts (e.g., Kaya and Pronobis, 2016), shareholder wealth and earnings surprises (e.g., Chen et al, 2018;Yen and Wang, 2015), analyst following (Felo et al, 2018;Li and Nwaeze, 2018), ownership breadth (Kim et al, 2018) and stock return synchronicity (Dong et al, 2016).…”

“…For example, studies looking at ongoing adoption of XBRL find support for expectations that XBRL will reduce cost of capital (e.g., Chen et al, 2015), analyst forecast errors (e.g., Felo et al, 2018;Li and Nwaeze, 2018), information asymmetry (e.g., Cong et al, 2014;Kim et al, 2012;Yoon et al, 2011) and information risk (e.g., Hao and Kohlbeck, 2013;Kim et al, 2012), increase trading volume (e.g., Cong et al, 2014;Hao and Kohlbeck, 2013), and improve the information environment (measured as event return volatility, information efficiency, change in standard deviation of stock returns around XBRL reporting dates and bid-ask spreads) (Li and Nwaeze, 2015).…”

Digital Corporate Reporting: Research Developments and Implications

“…More customised reporting, measured by XBRL extensions, is found to be positively associated with indicators of information efficiency (Li and Nwaeze 2015), value relevance (Cormier et al 2019) and negatively associated with the bid-ask spread (Li and Nwaeze 2015). Li and Nwaeze (2018) find that additional XBRL disclosure extensions used by preparers in excess of what is used in the industry are positively associated with analyst following and forecast accuracy and negatively associated with forecast dispersion. Similar findings are replicated by Cormier et al (2019), who also find support that the XBRL extensions are positively associated with analyst following.…”

The roles of XBRL and processed XBRL in 10‐K readability

“…7 Some researchers find that custom XBRL tags provide relevant financial information (Li & Nwaeze, 2015) and enhance the quality and interpretation of financial disclosures (Li & Nwaeze, 2018).…”

“…The two measures are numerically different Li's (2018). financial complexity measure includes non-monetary items, whileHoitash and Hoitash's (2018) ARC does not.…”