Paper 4

How XBRL Affects the Cost of Equity Capital?
Evidence from Emerging Market1
Songsheng Chen, School of Management and Economics,

Beijing Institute of Technology,China
chenss@bit.edu.cn
Tel: 0086-10-68918413
Wenying Li, School of Management and Economics,

liwenyinginearnest@gmail.com
Donglin Wu, School of Management and Economics,

2120131615@bit.edu.cn
Acknowledgements: We thank professor Liyan Wang, Lina Wu from Peking

University, and other participants of the 12th International Symposium on Empirical
Accounting Research in China (ISEAR), held in Weihai City on Dec. 20th, 2013, for
their helpful comments on earlier drafts of this paper. We are especially grateful to
professor Prasad Padmanabhan from St. Mary’s University, and Sophie Kong
from Western Washington University for their constructive suggestions. Songsheng
Chen acknowledges financial support from the National Natural Science Foundation
of China(NSFC-71372016).
1
Since data in our analysis are fully available in CSMAR and Wind Database, we encourage readers to collect
these data directly from the two database as they need.
How XBRL Affects the Cost of Equity Capital:
Evidence from an Emerging Market
ABSTRACT
This study explores the impact of XBRL on CEC from the perspective of the full
financial information chain, and the research starts at the beginning of the information
chain – the intracompany environment – represented by corporate governance (CG)
and the dominant shareholder identity.
Using a one-group pre- and post-test design, we find that XBRL reduces CEC;
when there is a high level of CG, XBRL adoption leads to a greater reduction in CEC.
State-owned identity has a nonlinear relationship with CG – state-owned enterprises
(SOEs) with a low CG level experience less CEC reduction than non-state-owned
enterprises (NSOEs) after XBRL implementation, while the CEC of SOEs with high
CG levels reduces more than that of NSOEs.
Key words: XBRL, Cost of Equity Capital (CEC), Corporate Governance (CG),
SOEs
1
I. INTRODUCTION
Traditionally, the data items in PDF or HTML formats of financial reports cannot
be extracted automatically or combined into computers and analytical software. Users
have to collect, read, and justify the contents of documents in these formats manually,
increasing cost, difficulty, and opportunities for error in data comparison. XBRL is an
international financial reporting code used to tag financial and non-financial data to
standardize the preparation, publishing, and exchange of financial information in the
world (Boritz and No 2008).
XBRL was developed in 1998 by Charles Hoffman, and in 2002, XBRL
International, Inc. was established. XBRL technology not only integrates complex
financial information, but also assists in the analysis of financial and non-financial
data for investors, bondholders, or other users in the capital market (Kim et al. 2012;
Apostolou and Nanopoulos 2009)..
Our motivation for researching the effect of XBRL on the cost of equity capital
(CEC) is twofold. Prior researchers find that high earnings quality can decrease
information asymmetry (IA) (Greenstein and Sami 1994; Hagerman and Healy 1992;
Healy et al. 1999; Heflin et al. 2005; Leuz and Verrecchia 2000; Welker 1995; Brown
and Hillegeist 2007) and CEC (Amihud and Mendelson 1986; Kyle 1985; Diamond
and Verrecchia 1991; Botosan and Plumlee 2002; Easley et al. 2002; Lambert et al.
2007). Low IA can also decrease CEC (Francis et al. 2004; Francis et al. 2008;
Lambert et al. 2007; Florou and Pope 2012). Besides that, Research on the impact of
XBRL implementation on IA and thus CEC has yielded inconsistent results.
2
Blankspoor et al. (2012) and Liu et al. (2014) find an increase in CEC after XBRL
adoption, while Kim et al. (2012), Li et al. (2012), Yoon et al. (2011), Bai et al. (2012),
and Chen and Li (2013) provide evidence that XBRL decreases CEC. Using Chinese
data, we want to examine the effect of XBRL on CEC, both in the short- and
long-term ,period and to explain these conflicting conclusions. According to the
promotion destination of XBRL implementation, we initially hypothesize that XBRL
adoption decreases CEC.
Prior research has assessed XBRL’s impact on CEC primarily by looking at
information processing costs (Li et al. 2012) or direct IA (Yoon et al. 2011),, both of
which are external market responses. We begin inside the corporation and focus on
how different internal characteristics have different impacts on CEC. Our research
incorporates the full information supply chain: the interior of the corporation at the
front, XBRL as the information disclosure engine in the middle, and CEC as investors’
market response at the end. There is sufficient evidence to prove that corporate
governance (CG), one critical and inevitable factor when studying intracorporation
issues, plays an important role in financial reporting quality (FRQ) and CEC (Love
and Klapper 2004; Doidge et al. 2007). Since we hypothesize that the directional
effect of CG on CEC is the same as that of XBRL on CEC, we further hypothesize
that, with the collective and collaborative effect of the front and middle of the
financial information chain, high CG would lead to a greater reduction in CEC after
XBRL implementation.
China has a unique business ownership structure, with many state-owned
3
enterprises (SOEs). SOEs have different policies and greater resources than
non-state-owned enterprises (NSOEs), which impacts investors’ perceptions and leads
to different CECs. Researchers find mixed and confusing evidence regarding the
relationship between state ownership and firm performance and, therefore, CEC (Sun
et al. 2002; Ben-Nasr et al. 2012; Ng et al. 2009; Hess et al. 2010; Yu 2013). Since
SOEs both have inefficient board mechanisms, which increase CEC, and an invisible
government guarantee, which negatively affects CEC, we hypothesize that state
ownership has a nonlinear connection with CEC and that the reduction in CEC after
XBRL implementation is significantly different for SOEs and NSOEs.
[Insert Figure 1 here]
To test our hypotheses, we obtain firm-year observations from 2005 to 20111
from China’s publicly listed A-share firms. We construct a one-group, pre- and post-
design to test whether XBRL affects CEC and design matched pairs to find out how
XBRL affects CEC in the case of different corporate characteristics. We use Dhaliwal
et al. ’s (2005) and Claus and Thomas’s (2001) models (referred to subsequently by
the creators’ initials, DH and CL models) to measure CEC, and design a system of
CG.
Our results show that, XBRL adoption decreases CEC by leading to better FRQ
and decreased IA, and results in lower CEC for firms with high CG. State ownership
has a U-shaped relation to CEC. In China, SOEs generally experience a greater
reduction in CEC after XBRL adoption than NSOEs, but this result is primarily driven
1
To eliminate the influence of the global financial crisis in 2008, we dropped the 2008 data. For our three-year
pre-and post-test design, the pre-test period is from 2005 to 2007, and the post-test period is from 2009 to 2011.
4
by high CG SOEs. Low CG SOEs actually have less of a reduction in CEC than
matched NSOEs. The robustness of our results is demonstrated by: 2) using the
capital asset pricing model (CAPM); a market-based method, to measure CEC; 1)
testing whether XBRL improves FRQ, measured by timeliness, accrual quality,
smoothness and discretionary accruals; 3) using stepwise regression for CG; 4) using
SUR method to test H2 and H3; 5) controlling for financial crisis influence.
Section II of our paper introduces XBRL adoption and develops hypotheses;
Section III describes the data and empirical design; Section IV presents and discusses
the empirical results; Section V reports the robustness test results; and our
summarization and conclusions are in Section VI.
II. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
2.1 Why China?
We choose China for our research because it is leading developing countries in
adopting and deploying XBRL in financial reporting, by having a mandatory program
for its use. All publicly listed firms in the Shanghai and Shenzhen stock exchange
centers have been required to report financial statements in XBRL format and PDF
files simultaneously since the beginning of 2009 2. As to the effect of XBRL on IA,
recent studies have shown mixed results. Using US data from June 15, 2008 to June
14, 2010, Blankespoor et al. (2012) uses a one-year, pre- and post-design and find an
increase in IA. Kim et al. (2012), on the other hand, saw a decrease in IA. Li et al.
(2012) use a three-year pre- and post-design covering the period from April 4, 2005 to
2
For more information about XBRL in China, see China’s XBRL on two websites: Shenzhen stock exchange
center: http://xbrl.cninfo.com.cn/XBRL/stocklist.jsp and Shanghai stock exchange center:
http://listxbrl.sse.com.cn/ssexbrl/companyInfoAction.do
5
April 30, 2012, including both voluntary and mandatory programs, and identify a
decrease in IA. It seems that sample sizes and period lengths are possible reasons for
the differing results. In the short-term period, XBRL appears to increase adverse
selection but, in the long-term, decreases transaction costs. Adding to the uncertainty
is the difference in results worldwide. Data from a mandatory program in Korea led
Yoon et al. (2011) to conclude that, in the short-term, XBRL decreases IA. Bai et al.
(2012) finds the same for Japan’s mandatory program. In China, Liu et al. (2014)
chooses 2001-2003 as the pre-phase period and 2004-2006 as the post-phase, and
finds an increase in IA. Chen and Li (2012) look at the six months before and after
XBRL implementation and argue that XBRL decreases IA by choosing October 2005
as the starting of XBRL’s implementation .However, Since 2004, the Shanghai stock
exchange center requires 50 firms to use the XBRL format for their 2003 annual
report submissions; 118 firms voluntarily submit their annual reports in the XBRL
format. Beginning in 2004, all publicly listed firms are required to submit XBRL
format and PDF files, but the firms can choose the XBRL format submission time. It
is until 2009 that all publicly listed firms simultaneously submitted their 2008 annual
reports in both XBRL format and as PDF files. Between 2004 and 2007, China’s
XBRL program is similar to the US’s voluntary program which often see untimely
submissions and potentially small sample sizes; therefore, we choose 2008, the year
that XBRL became simultaneously with traditional files and can be visited by
investors simultaneously, as the starting point for our study, in order to eliminate
self-selection bias. Testing the short- and long-term effects of XBRL on IA and CEC
6
is important, as China now has the third largest market capitalization in the world, and
is sure to become increasingly important to global investors.
China also has a unique intracompany environment. In China, many listed firms
are SOEs, and their internal governance mechanisms, such as Boards of Directors and
Supervisory Boards, are often inefficient, with undeveloped operations, providing a
unique setting for SOE’s research stream. All of these characteristics affect FRQ and
IA. Therefore, the intracompany environment in China provides a representative
perspective to assess how XBRL adoption affects CEC.
2.2 XBRL and CEC
2.2.1 Earnings Quality, IA, and CEC
Our study is based on information risk theory. Information risk mainly derives
from governance risk caused by agent costs (Ashbaugh et al. 2004), as well as poor
disclosure quality ((Leuz and Verrecchia 2004).A fundamental role of accounting
information in financial markets is to serve as a basis for capital allocation
(Bhattacharya et al. 2011) and the theory of information risk indicates that
information risk premium affects CEC, a basic explanation of which is the IA theory
(Admati 1985).
Our empirical research derives from three theory streams. It has been well
established that an increase in information quality leads to a decline in CEC (Lambert
et al. 2007). Francis et al. (2004) examines the relationship between CEC and seven
attributes of earnings quality and finds a negative relationship between earnings
quality and CEC. Firms with good earnings quality have more expansive voluntary
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disclosures, which is associated with a lower CEC (Francis et al. 2008). Theory
predicts that higher quality financial reporting can improve stock market liquidity and
consequently reduce the cost of capital (Florou and Pope 2012).
Second, the significantly positive relationship between IA and the CEC has been
demonstrated in prior studies (Amihud and Mendelson 1986; Kyle 1985; Diamond
and Verrecchia 1991; Botosan and Plumlee 2002; Easley et al. 2002). Easley and
O’Hara (2004) identify the proportion of information that is public versus private as a
determinant of CEC. In their model, uninformed investors face an undiversifiable risk
that arises from asymmetric information; an increase in the amount of private
information increases the required rate of return. However, Lambert et al. (2007)
dispute that it is IA per se that causes the CEC effect in pure competition settings,
such as the one in Easley and O’Hara (2004). Rather, reducing IA can affect CEC
only when the reduction in asymmetry is accompanied by an increase in the average
level of information precision.
Third, prior research also indicates that an increased level of corporate disclosure
reduces IA in the capital market (Greenstein and Sami 1994; Hagerman and Healy
1992; Healy et al. 1999; Leuz and Verrecchia 2000; Welker 1995). If investors differ
in their ability to process earnings-related information, poor earnings quality can
result in differentially informed investors and exacerbate IA (Diamond and Verrecchia
1991; Kim and Verrecchia 1994). Welker (1995) conducts the first empirical study to
document an inverse association between disclosure quality and bid-ask spreads.
Heflin et al. (2005) also finds that higher quality disclosures are associated with
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greater liquidity. In a recent study, Brown and Hillegeist (2007) find an association
between disclosure quality (based on AIMR scores) and the probability of informed
trade (PIN) measure.
2.2.2 XBRL Impact
Since XBRL provides investors with an effective way to prepare, publish,
exchange, and analyze financial information (Boritz and No 2008; Debreceny and
Robertsson 2001; Hodge et al. 2004; Stantial 2007), it has the potential to reduce IA
by improving information disclosure quality and decreasing information processing
costs (Yoon et al. 2011). Diamond and Verrecchia (1991). Diamond and Verrecchia
(1991) report that, if the level of disclosure is increased, the level of IA is decreased,
resulting in more demand from investors. Therefore, if XBRL adoption leads to an
increase in the level of financial disclosure, IA should decrease, which could lead to a
decrease in CEC and an increase in the firm's valuation. Li et al. (2012) finds that
XBRL adoption results in a significant reduction in CEC by reducing investors’
information processing costs. We use China Data to investigate whether, in China,
XBRL adoption reduces firms’ CEC from the perspective of improving FRQ. We
expect that, after XBRL adoption, there will be a change in the two paths' strengths,
and hypothesize the following:
H1: XBRL adoption reduces CEC.
2.3 XBRL and CG
Under the divergence between management and ownership rights, principals
entrust professional agents to manage a firm’s operations. An agency risk is generated
9
when management has an incentive to maximize their self-interest rather than firm
value, creating IA problems between shareholders and managers, and IA creates a
moral hazard problem. Agency costs also arise when investors cannot discern the true
economic value of the firm, which is partially a function of the indistinguishable
quality of management, i.e., IA leads to adverse selection problem. This lack of
transparent financial information results in greater information risk being imposed on
the shareholder. Without adequate controls, effective monitoring, and transparent
financial information, rational investors will price-protect against expected agency
costs, effectively raising the firm’s CEC.
CG encompasses a broad spectrum of mechanisms intended to mitigate agency
problems by increasing the monitoring of managements’ actions, limiting managers’
opportunistic behavior, and reducing the information risk borne by shareholders
(Ashbaugh et al. 2004). The study of this issue is motivated by the economic theory
that greater disclosure lowers IA (e.g., Glosten and Milgrom 1985; Diamond and
Verrecchia 1991; Healy et al. 1999) and estimation risk (e.g., Barry and Brown 1996;
Lang and Lundholm 1996) and, therefore, CEC (Botosan 1997; Botosan and Plumlee
2002).
Prior research (Coombes and Watson 2000; Doidge et al. 2007; Kermani 2008)
suggests a negative relationship between other CG mechanisms and CEC, indicating
that CG enhances firm value by reducing CEC. The results show that investors are
willing to pay a premium for good CG and, in fact, already do so. Good CG can create
greater investor protection, which increases investors’ willingness to provide
10
financing, which should be reflected in lower costs and greater availability of external
financing (Love and Klapper 2004). Additionally, there is strong evidence that good
non-disclosure CG leads to good earnings quality (Lin, Jerry W. et al. 2010; Pergola et
al. 2009; Iyengar et al. 2010; Haw et al. 2011). Since XBRL creates a natural linkage
between FRQ, external investors, and CEC, we use different levels of CG to
determine how XBRL affects CEC. According to our analysis, XBRL and CG should
have the same directional effect on both FRQ and CEC. With better financial
information provided by high CG at the front of the financial information chain, the
effect of XBRL on CEC, as an information disclosure engine in the middle of the
information chain, will be greater. Therefore, our second hypothesis is as follows.
H2: High CG leads to greater reduction in CEC after XBRL adoption.
2.4 XBRL and Identity of Dominant Shareholders
Based on China’s unique ownership structure, in state-owned firms, the
government intervenes in firms’ operating decisions by imposing taxes, supervision,
licensing requirements, approvals, etc., resulting in inefficiency in governance boards
as well as checks and balance mechanisms. This impact is particularly evident in
emerging markets, such as China (Sun et al. 2002; Ben-Nasr 2013). SOEs also serve
as the government’s tools for achieving political and social objectives. As a result,
SOEs have less of an incentive than NSOEs to provide transparent financial reports to
outside shareholders, leading to increased information risk. With higher agency cost
and information risk, outside investors usually ask for a risk premium as a result of
higher CEC from SOEs more often than from NSOEs (Huyghebaert and Wang
11
2012).Since XBRL can decrease CEC, we assume that SOEs could benefit more from
XBRL use and, to some extent, decrease their CEC more, than NSOEs.
On the other hand, however, political connections can also provide SOEs
with priority access to rare natural and intellectual resources, beneficial tax policies,
and can lower their financial costs (Ng et al. 2009; Hess et al. 2010; Yu 2013)). Under
this invisible government guarantee, outside investors may not absolutely require a
higher risk premium and thus a higher CEC for SOEs. Therefore, state ownership
would have a nonlinear association with CEC. Since XBRL can decrease CEC, as we
hypothesize, it is unclear whether SOEs experience a greater reduction in CEC than
NSOEs after XBRL implementation, and we hypothesize the following:
H3: State ownership has a nonlinear relation with CEC and there is a
significant difference in CEC reduction between SOEs and NSOEs after XBRL
implementation.
III. SAMPLE SELECTION AND RESEARCH DESIGN
3.1 Sample Selection
Our sample included firms from a broad cross-section of different industries, all
of which traded on the Shanghai and Shenzhen A-share stock markets during the
period of 2005 through 2011. Since XBRL adoption in China began at the end of
2008, we are able to compare the firms’ CECs for the three-year period before and
after XBRL adoption. We eliminate financial firms from the sample because they face
regulations that other firms do not. We also eliminate firms with missing codes in the
China Securities Markets and Accounting Research Database (CSMAR) and the
WIND database. Moreover, high-frequency stock market transaction data are
12
collected from the WIND database. All of the continuous firm-year variables included
in our tests are required to have non-missing values, and are Winsorized at the 1st and
99th percentiles.
To test our hypothesis that XBRL reduces CEC, we use a one-group pre- and
post-test design. The major advantage of this is that it allows for adopters, in the
pre-adoption phase, to serve as their own control group to evaluate post-adoption
effects (Brazel and Dang 2007). Firms are selected that have data available for at least
one year before 2008, during the time span of t-1 to t-3, and at least one year after
year 2008, during the time span of t+1 to t+3. See Table 1 for sample selection
procedures (Panel A) and sample sizes (Panel B). 3
[Insert table 1 here]
3.2 CEC Analysis
To test H1, we examine the effect of XBRL on CEC via a pre- and post-test
design, dropping 2008 data to control for the impact of the financial crisis. Therefore,
the primary independent variable is a dummy variable, XBRL, which is set to 1 for
the years after XBRL adoption (2009 to 2011) and 0 for the years before XBRL
adoption (2005 to 2007).
Following previous literature (Claus and Thomas 2001; Dhaliwal et al. 2005), we
rely on two estimation models to construct measures of CEC. We also report results of
individual measures separately in our analysis.
Our model estimates CEC as follows:
3
The number of observations for each year is different because not all firms selected have data
available from 2005 to 2011, the same condition as the different variables shown in Table 1.
13
Our first measure of CEC is based on this model (Dhaliwal et al. 2005) (called
the DH model in the later literature).
(1)
(2)
(3)
(4)
Where:
Our second measure of CEC is based on this model (Claus and Thomas 2001)
(called the CL model in the later literature).
(5)
(6)
g = the yield on 5-year treasury bonds minus 3%
For the control variables, we use those that have been shown to affect CEC. We
control size (SIZE) and market-to-book ratio (MB), which Fama and French (1992)
argue are the two key determinants of expected stock returns. Leverage (LEV) is
included, as it is positively associated with expected returns. We add market beta
(BETA) to control for a firm’s systematic risk and include the long-term growth rate
14
(LNGROW) and analyst forecast dispersion (LNDISP), following Li et al. (2012). We
include year indications to address potential time series variation in CEC and to make
it possible to control for fixed year effects. Industry effects are also controlled. Our
formal regression model is as follows:
(7)
3.3 CG Impact
In China, CG is taken into account by researchers later than in western
countries. We design and divide CG into five subgroups. First, we choose ownership
concentration, as do Dahlquist and Robertsson (2001), and management structure, as
used by Bushee et al. (2010). We add SOE/NSOE and reclassify these as Ownership
Structure and Board Governance. Quality of disclosure is also important to consider
because it is the board of directors that manages information disclosure in annual
reports, which is related to CG (Haniffa et al. 2002; Abdelrazik et al. 2013). Corporate
social responsibility is another measure of CG, which reflects the quality of CG. An
important advantage of governance structures and systems for corporate social
responsibility research is their formal nature, which makes the nature of the
interactions between firms and their stakeholders much easier to identify (Graaf and
Stoelhorst 2013). On average, better-governed corporations tend to pursue a more
socially responsible agenda through increased corporate social responsibility practices
(Ntim and Soobaroyen 2013). Therefore, disclosure and ethics, as measures of

15
corporate social responsibility, are included in our CG system. Finally, managerial
behavior is included because it also plays an important role in CG. (See the system of
CG in Appendix B). Using PCA, we then investigate the principle components and
calculate the firm-year CG scores. We conduct a multivariate regression as follows:
(8)
where Gov means the CG scores, and we expect a negative and significant sign of the
interactive variable XBRL*Gov.
To test the different effects of XBRL on CEC under different levels of CG (i.e.,
H2), high and low CG groups are divided by two quartile methods. One pair is
divided by median and another pair is chosen from the lower quartile (25%) and upper
quartile (75%) of CG scores.
3.4 Identity of Dominant Shareholders Impact
To test H3, we use a matched–pair design to determine if the identity of
dominant shareholders (i.e., SOEs and NSOEs) affects XBRL’s impact on CEC. We
also conduct regression analysis to test the relationship between state ownership and
CEC. SOEs are divided into two groups by CG score (i.e., high CG and low CG), and
the groups are used to determine whether and how CG level influences differences in
the effect of XBRL adoption on CEC between SOEs and NSOEs.
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IV. EMPIRICAL RESULTS
4.1 CEC Analysis
We investigate whether XBRL has an impact on CEC, as measured by the DH
model (Dhaliwal et al. 2005, as described in Section 3.2), the CL model (Claus and
Thomas 2001, as described in Section 3.2), and the average value of the DH and CL
models. Panel A, Table 2 shows that the descriptive statistics do not indicate the
existence of any extreme values, rDH(Diff=-0.023, t=-4.9), rCL(Diff=-0.047,
t=-1.897), and the average of rDH and rCL(Diff=-0.037, t=-9.635), all have
significant differences before and after XBRL adoption. Significant differences are
also observed for all of the control variables (Size, Mb, Lev, Beta, Lngrow, Lndisp)
before and after XBRL adoption. Panel B, Table 2 indicates that the correlation matrix
does not show any apparent multicollinearity problems and that CEC appears to be
negatively correlated with the XBRL indicator.
To test whether the value of CEC significantly decreases or increases after
XBRL adoption, we conduct the multivariate regression analysis discussed in the
previous section. Table 3, Panel A presents the regression results, reporting coefficient
estimates, and t-values based on robust standard errors. In all three of the models,
there is a significant reduction in CEC after firms’ initial XBRL filings (coeff.=-0.06,
t=-6.53 for the DH measure; coeff.=-0.03, t=-2.06 for the CL measure; coeff.=-0.02,
t=-2.18 for the average result). These results provide support for H1, that XBRL
adoption decreases CEC. From an economic perspective, the estimated coefficients
17
translate into a range of basis point reductions, from 172 to 600 basis points in CEC,
after firms initiated XBRL filings.
With regard to control variables, we find that firms with large size (take
mean(re) for example, Coeff.=-0.0042, t=-2.12) and high market-to-book value (take
mean(re) for example, Coeff.=-0.0038, t=-2.45) have a lower CEC, while high
leverage firms (take mean(re) for example, Coeff.=0.0039, t=3.59) tend to have a
higher CEC. High growth firms (take rCL for example, Coeff.=-0.017, t=-3.53) have a
lower CEC.
When analyzing the one-year, pre- and post-test design, as shown in Table 3,
Panel B, we find that XBRL decreases CEC; the results are the same in both the
two-year and three-year pre- and post-test designs. In China, XBRL helps to reduce
CEC in the short-term, as in the Japan and Korea markets, and in the long-term, as
seen in the US market. The reason for the difference between our results and Liu et
al. ’s (2014) and their similarity to Chen and Li’s (2013), all using data from Chinese
firms, may be the use of different starting points for XBRL implementation. As
mentioned in Section II, it seems more appropriate to choose 2008 as the XBRL
mandatory starting point when testing XBRL’s effect on capital markets.
We also find no evidence that XBRL increases IA in China in the short-term
period as it does in the US market. One potential influencing factor may be the
cultural differences between Eastern Asia and the US. Hofstede et al. (1997) states
that cultural differences across nations or regions will lead people to have different
18
judgments and actions, and Liu et al. (2014) further finds that the effect of XBRL on
investors’ forecast accuracy is affected by national culture. However, there are other
potential explanations for XBRL’s differing effects on CEC, such as differences in
investors’ acquisitions and characteristics in different capital markets. More study is
required to determine whether cultural differences are the cause of the differing
effects of XBRL on CEC in the short- and long-term periods.
4.2 CG Analysis
To test H2, following prior research (Dahlquist and Robertsson 2001; Bushee et
al. 2010; Haniffa and Cooke 2002; Graaf and Stoelhorst 2013; Ntim and Soobaroyen
2013), we build a corporate governance system with the five CG subgroups and
conduct a principal component analysis (PCA) to analyze the elements of CG (See
Appendix B). The first four subgroups, Ownership Structure, Board Governance,
Managerial Behavior, and Disclosure, account for 95.3 percent of CG. Table 4 shows
the CG scores for the 7-year period from 2005 to 2011, where we see CG scores
increasing significantly each year. Two elements of CG, Ownership Structure and
Board Governance, have a greater impact on CG scores than Managerial Behavior
and Disclosure.
Using the CG scores described above, we perform a multivariate regression
analysis to test the effect of CG on the impact that XBRL has on CEC (Table 5). For
the full sample, a significant and negative correlation between the interactive effects
of XBRL*governance and CEC (Coeff.=-0.025, t=-1.68) is observed, as expected.

19
Specifically, for firms with better CG, XBRL adoption resulted in a 68 basis-point
reduction in CEC (Coeff.=-0.068, t=-3.03). These results suggest that the effect of
XBRL on CEC is greater in firms with high CG, with a better FRQ, and substantiate
H2. The results of an analysis of the control variables are consistent with the
aforementioned regression regarding XBRL’s effect on CEC.
We also divide CG into two equal parts by median quartile and find that high
CG helps XBRL to reduce more CEC; this finding is robust and immune from the
quartile division method.
4.3 Identity of Dominant Shareholders Impact
We examine the effect of state ownership on CEC and the regression results in
the first column of Table 6, Panel A show a U-shaped correlation between state
ownership and CEC, as we hypothesize in H3. Initially, state ownership has a negative
relationship with CEC; however, beyond a certain level (about 38.16 percent), state
ownership is positively associated with CEC. Although state ownership is not high
enough, SOEs can also take advantage of political connections to obtain more
valuable resources than NSOEs, contributing to better firm performance (Sun et al.
2002) and lower CEC. When state ownership is above a certain level, these
controlling shareholders have more power to intervene and weaken the corporate
monitoring mechanism for their own self-interest and decision making, which
negatively impacts the incentive of small outside investors (Huyghebaert and Wang
2012), leading to a higher CEC.
20
We also set out to determine whether state-ownership has a greater impact on
the reduction of CEC after XBRL adoption. For this analysis, we construct a
matched-pair design of SOEs and NSOEs, by controlling for size and industry factors.
The second and third columns in Table 6, Panel A show that there is a significant
difference in the effect of XBRL on CEC between SOEs and NSOEs, supporting H3.
(The untabulated results of t-tests to check for differences in CEC between SOEs and
NSOEs are: rDH=0.1602 for SOEs, rDH=0.1650 for NSOEs, t=-3.5343). XBRL
adoption results in a significantly greater basis point reduction (121 basis points) in
CEC for SOEs than for NSOEs (108 basis point reduction), suggesting that the effect
of XBRL on CEC is greater for SOEs than for NSOEs.
Does that mean SOEs necessarily have higher CG than NSOEs? Since CG is
negatively associated with CEC, there is also a nonlinear relation between state
ownership and CG. According to the U-shape, we divide SOEs into two parts by the
quartile method. SOEs above the upper and below the lower quartiles usually have
low CG than the ones in intervals between 25 percent and 75 percent. We choose
SOEs at a low CG level to create matched pairs with NSOEs and carry out a process
similar to that shown in Table 6, Panel B. The results show that SOEs with low CG
experience less reduction in CEC than matched NSOEs, after XBRL adoption. Within
SOEs, the ones with high CG experience more of a reduction in CEC than matched
NSOEs.
We conclude that SOEs with high CG experience a greater reduction in CEC
than NSOEs, and that NSOEs benefit more after XBRL adoption than SOEs when the
21
SOE has low CG. Not all SOEs will have a higher CG level than NSOEs, but CG is a
critical factor for the effect of XBRL on CEC within both SOEs and NSOEs. This
indicates that improving the corporate control mechanism contributes substantially
and addressed during SOEs’ stock reform to maximize firm value.
Notably, there are mixed results regarding the relationship between state
ownership and firm performance and, therefore, CEC. Ben-Nasr et al. (2013) finds a
positive relationship between state ownership and CEC, while Sun et al. (2002) sees
the relationship between state ownership and firm performance represented by a
concave curve. Ng et al. (2009) and Yu (2013) find a convex curve between state
ownership and firm performance, while our results show a convex curve between
state ownership and CEC. A possible explanation for the differences may be the
sample sizes and sample selection period. In 2005, China carried out split share
structure reform, which means that there will be substantial differences in SOEs
before and after 2005. Most of the studies mentioned above choose samples either
before 2005 or with 2005 data included. Results about state ownership’s relation to
CEC may change along with the reform process and time span. Our sample period
from 2005 to 2011 is post-reform, in order to eliminate changes resulting from reform
and to maintain the credibility of our results. Future studies can explore these issues
and testify regarding these potential hypotheses.
V. ROBUSTNESS TESTS
We hypothesize that XBRL adoption improves information quality, and greater
22
disclosure enhances stock market liquidity and reduces the estimation risk associated
with investors’ assessments, leading to a decrease in CEC. To test the robustness of
our results, we choose financial reporting proxies to substantiate the finding that
XBRL increases FRQ. Second, we change the measure of CEC to see if XBRL’s
effect on CEC changes correspondingly. If the results remain the same, our results
related to H1-H3 are robust. We use another measure of CG stepwise regression to
check the robustness of our H2 results. Finally, we control for the impact of the
financial crisis during our sample period.
5.1 Does XBRL Really Improve FRQ in China?
As mentioned in Section II, investors can benefit more when analyzing financial
information by using XBRL, since XBRL standardizes financial disclosure and
eliminates costly manual processes (Yoon et al. 2011; Kim et al. 2012). As a result,
financial information will become more understandable, more accurate, and available
more rapidly (SEC 2009), which translates to improved FRQ. In our robustness
testing, we verify whether XBRL improves FRQ in China.
5.1.1 Measurement of FRQ
Following previous literature (Francis et al. 2004), we construct four measures of
FRQ, proxied by accrual quality, smoothness, discretionary accruals and timeliness4,
4
The reason we did not choose other methods of Francis (2004) is that studies of accounting conservatism in
China have shown controversial results. Early studies showed little evidence of conservatism in East Asian
countries (Ball et al. 2003), and similar results were shown for China (Ball et al. 2000). More recent studies going
beyond 2000 also showed controversial findings. Du and Du (2010) studied the relationship between accounting
standards, fair value, and accounting conservatism based on Chinese data from 1998 to 2008. They found that,
although the level of conservative accounting varies to some extent during different phases of fair value’s
application, Chinese listed firms showed conditional accounting conservatism in 2006 to 2008. Zhao (2004) also
found that Chinese firms adopted significantly higher levels of accounting conservatism since 1998. Chen and
Huang (2006) tested the time-series properties of accounting conservatism in China and found the level of
23
to see if XBRL improves FRQ and confirm that our result is robust.
Smoothness is calculated by the ratio of firm j’s standard deviation of net income
divided by lagged total assets, to its standard deviation of cash flows from operations
divided by lagged total assets, Smoothnesst   ( NI t ) /  (CFOt ) . Large values of
Smoothness indicate less earnings smoothness(Francis et al. 2004).
Following (Francis et al. 2004), our measure of timeliness is based on the
explanatory power of the following equation:
(9)
where
Equation (9) is the estimate on a firm- and year-specific basis, using rolling
five-year windows. We use as the dependent variable and use the opposite
value of the adjusted R2 as the value of timeliness; as a result, larger values of
timeliness imply less timeliness.
accounting conservatism increased after 1998, and Chinese firms showed significant evidence of accounting
conservatism after 2001. The above studies examined the existence of accounting conservatism using
measurements suggested by Basu (1997). Xia and Zhu (2009) studied the same topic using measurement suggested
in Ball and Shivakumar (2005) using samples from 1999 to 2006. Their results showed that the negative
relationship between total accruals and operating cash flows is more evident for firms with negative operating cash
flow. However, the predicted mitigated negative relationship by the model of the relationship between accruals and
cash flow is mainly caused by non-operating accruals. For these reasons, persistence, predictability, and relevance
are used less often than the other four proxies.
24
Our measure of accrual quality is based on Dechow and Dichev’s (2002) model
relating current accruals to lagged, current, and future cash flows from operations:
(10)
We estimate this equation using rolling five-year windows. These results yield
five firm- and year- specific residuals, , t=t-4,…,t, which form the basis for the
accrual quality metric, , equal to the standard deviation
of firm j’s estimated residuals ( ). Large values of
correspond to poor accrual quality.
As for control variables, we follow prior literature that has been shown to affect
financial reporting quality. Dechow and Divhev (2002) find that accrual quality is
inversely associated with firm size, and positively related to cash flow variability,
sales variability, operating cycle, and incidence of losses. Firm size is the log of total
25
assets (Size) and the cash flow variability is calculated as the standard deviation of the
firm’s rolling five-year cash flows from operations, scaled by total assets. Sales
variability is defined as the standard deviation of the firm’s rolling five-year sales
revenues, scaled by total assets and operating cycle is the log of the sum of the firm’s
days accounts receivable and days inventory. Finally, incidence of negative earnings
realizations is measured as the firm’s proportion of losses over the prior five years.
We examine the relationship between XBRL and FRQ using four proxies –
accrual quality, timeliness, smoothness, and discretionary accruals and the
multivariate regression is as follows:
(11)
Panel A, Table 7 presents descriptive statistics of key variables of FRQ. The
values of accrual quality, smoothness, and absolute discretionary accruals (ADA) are
significantly smaller after XBRL adoption, which means that the XBRL can improve
earnings quality. Standard deviations of accrual quality, smoothness, and ADA are
very small. Panel B, Table 7 shows Pearson correlations between the key variables of
earnings quality and accrual Quality. Accrual quality appears to be negatively
correlated with XBRL adoption. It is also negatively correlated with cash flow
variability, sales variability, operating cycle, and incidence of negative earnings
realizations, but positively correlated with firm size.
We also perform a multivariate regression analysis to determine whether
26
XBRL actually increases FRQ after controlling for influential factors (Table 8). Using
four variables – accrual quality, smoothness, absolute discretionary accruals, and
timeliness – as proxies for FRQ, we find a significant and negative correlation
between XBRL and CEC. (Coeff.=-0.008, t=-5.492 for the accrual quality measure;
Coeff.=-1.227, t=-2.17 for the smoothness measure; Coeff.=-0.007, t=-2.13 for the
discretionary accruals; Coeff.=-0.006, t=-3.227 for the timeliness measure).
With regard to the control variables, we find that large firms have a lower value
for FRQ. , which denotes cash flow variability, whereas they tend to have a
higher value for accrual quality. Sales variability, operating cycle, and the incidence of
negative earnings realizations are also positively associated with FRQ.
5.2 Alternative Measure of CEC
Following Da et al.’s (2012) approach, we choose the CAPM to calculate the
expected return on equity:
E ( R)  R f
  [ E ( Rm)  R f ] (21)
where  indicates systematic risk, measured by using five-year monthly return data,
which is tradable capitalization-weighted prior to return measurement in month t; Rf is
risk-free rate, measured as one-year deposit interest rate5. As to E(Rm), the expected
market return is defined as yearly return of stock indexes – Shanghai composite
5
Rf in this study is weighted by the days from one adjustment date to the next adjustment date divided by 365
days, as announced by The People's Bank of China. During our period of study from March 17, 2005 to July 7,
2011, there were a total of 20 adjustments.
27
A-share index (code：000002) and Shenzhen composite A-share index (code：399107),
Pt
E ( Rm )  1
which is measured by the following equation： Pt 1 6
Panel A, Table 9 presents descriptive statistics of key variables of the CAPM
model. Consistent with previous results, using the CAPM model, CEC is significantly
different before and after XBRL adoption. Panel B, Table 9 documents that Pearson
correlations between key variables do not show any apparent multicollinearity
problems, and the Re (CAPM) appears to be negatively correlated with XBRL
adoption. It is negatively correlated with firm size, market-to-book ratio, and leverage,
and positively correlated with the market beta, analyst forecast dispersion, and
long-term growth. In general, R squares in Table 10 and Table 12 have high values,
compared with the ones in Tables 3, 5 and 6, indicating that market-based measures
seem to outperform accounting-based measures for calculating CEC.
The multivariate regression results (Table 10) indicate a significant and negative
correlation between XBRL and CEC (Coeff.=-1.656, t=-47.95) when the CAPM
model is used to measure CEC. The results of the control variables are consistent with
previous empirical results, confirming that the results related to H1 are robust.
We also assess how CG impacts the effect of XBRL on CEC, and how
XBRL’s effect on CEC differs for SOEs and NSOEs (Tables 11 and 12). Not all of the
results of the control variables are found to be consistent with previous results when
using rDH, rCL Mean of rDH, and rCL to measure CEC. There is a significant and
6
The reason we chose the composite A-share index rather than the component A-share index is that our sample
included most of the firms listed in the Shanghai and Shenzhen stock exchange centers, and the composite A-share
index can better represent our sample’s price exchange. Meanwhile, in China, there are two stock exchange centers
and the two composite A-share indexes are calculated separately, so we choose different composite A-share
indexes for listed firms from the corresponding stock exchange center.
28
negative correlation between XBRL and CEC, as shown in Table 11, and firms with
high CG experience a greater reduction in CEC after XBRL adoption
(Coeff.=-1.855483, t=-19.81) than those with low CG (Coeff.=-1.39341, t=-17.88).
Table 12 also shows that XBRL has a significantly negative effect on CEC, and that
SOEs have more of a reduction in CEC after XBRL adoption (Coeff.=-1.990475,
t=-19.48) than NSOEs (Coeff.=-1.928911, t=-19.92). Table 10 and Table 12 provide
the robustness results indicating that our conclusions regarding H1-H3 are sound.
5.3 Alternative Measure of CG: Stepwise Regression
Given that PCA is mainly dependent on statistics theory, to verify our findings for
H2, we employ stepwise regression to find the CG variables with the strongest
relationship to CEC. The three variables most related to CEC are Sindex (the
percentage of shares held by the top 10 shareholders, except the top 1 shareholders),
Bosunum (the total number of board directors and supervisory board members), and
Lnsalary (the logarithm of managerial salary) (Table 13). Compared with the CG
scores in Table 4, these three variables are respectively representative of three parts of
the CG system, specifically, Ownership Structure (Sindex), Board Governance
(Bosunum), and Managerial Behavior (Lnsalary). Further, the regression results
suggest that CG has a significant impact on CEC, and that XBRL still has a
29
significant and negative effect on CEC (Coeff.=-0.047, t=-3.87) after controlling for
CG.
5.4 SUR Method
The SUR method is a formal test to determine if there are significant
differences between the coefficients of different regressions (Bhattacharya 2001;
Blankespoor et al. 2012). Using the SUR method, we test to see if SOEs experience
significantly more reduction in CEC than NSOEs after XBRL implementation, as
documented in Section IV. Untabulated results show the same conclusions (For
SOEs, Chi-squared statistics and P-value are 77.15 and 0.000, Coeff. Of XBRL
=-0.12038, z=-6.17; For NSOEs, Chi-squared statistics and P-value are 95.28 and
0.000, Coeff. Of XBRL =-0.10841, z=-4.77). The robustness test of the findings
related to CG using SUR yields similarly stable results.
5.5 Controlling for the Financial Crisis
Since China’s mandatory XBRL program started in 2008, the control group
method for eliminating the financial crisis effect does not seem appropriate for our
study. At the same time, since the 2008 financial crisis increases IA and information
risk (Bai et al. 2012), there can be an increase in CEC that is counteracting the XBRL
effect. When firms in the financial industry are removed from the 2008 data, XBRL
decrease CEC; after removing the 2008 data entirely, XBRL decrease CEC even more
30
(three-year pre-and post-test design without 2008 data included: Coeff.=-0.06, t=-6.53;
with 2008 data included: Coeff.= -0.10678, t=-8.26 ).
VI. CONCLUSIONS AND IMPLICATIONS
This study investigates whether XBRL adoption decreases CEC and explains
how XBRL affects CEC from a new, intracompany perspective. Using the DH model,
the CL model, the mean model of rDH and rCL, and the CAPM model as measures of
CEC, we find that, in general, XBRL adoption reduces CEC, both in the short- and
long-term period. We also find that corporations’ internal environments play an
important role in the effect of XBRL on CEC. In China, state ownership has a
U-shaped nonlinear correlation with CEC, and the effect of XBRL on CEC in SOEs
significantly differs from that in NSOEs.
Specifically, high levels of CG with high FRQ reduce the impact of XBRL on
CEC. Although SOEs with low CG have a lower reductions in CEC than matched
NSOEs after XBRL adoption, high CG SOEs cause SOEs overall to experience a
greater reduction in CEC than NSOEs. Therefore, in China, CG level plays an
important role in information technology efficiency and capital cost for both SOEs
and NSOEs.
This study makes several contributions to the extant literature. First, we provide
substantial evidence of XBRL’s effect on capital markets and XBRL adoption in
practice. Our results are consistent with prior research (Yoon et al. 2011, Li et al.
2012), that the experiences of advocates of XBRL, such as the SEC and CSRC (China
Securities Regulatory Commission), should be of interest to other emerging markets
31
or other countries intending to adopt XBRL. Second, while prior research focuses
only on exterior market response, we provide a new perspective for testing the effect
of XBRL on CEC by starting with the internal environment of companies, and
establishing a linkage between IT efficiency and intracompany issues such as CG.
When testing and assessing IT efficiency, prior studies should account for the
influential factors of specific corporate characteristics. Third, by using the unique
Chinese capital setting, where most firms are state-owned, we enrich the research
stream of SOEs. In China, SOEs seem not always bad apples, and our research
suggests that it depends, to some extent, on CG, the result of which has immediate
benefits for foreign investors who are investing in SOEs’ in markets like China, and
international regulation collaborators.
There are also some limitations to our research. Because all publicly listed firms
are required to provide both PDF files and XBRL format files starting in 2008, for
lack of group that did not adopt XBRL during the sample period, we cannot use the
control group method to verify our results, although we employ alternative methods to
support our results’ robustness. At the same time, we choose a one-year pre-and
post-test design to examine the short-term effect of XBRL on CEC, without further
using quarterly data to test shorter-term effect.
Our study may provide some new ideas for further research. Firstly, future
studies can use the information technology suggested by our study, to test the
underlying mechanism between FRQ and the allocation efficiency of capital, with
both investment efficiency and CEC included. Studies can also adopt the same
32
method design we use to investigate the effect of XBRL on CEC across nations to
determine whether cultural differences play a significant role. Second, the findings
from the internal corporate perspective provided by this study can be used in future
research when accounting for the different impacts of the information environment
(e.g., disclosures and disclosure engines; information distribution; information
intermediaries, such as analysts) on allocation efficiency. Specifically, we offer
evidence that, within China, high CG helps XBRL to reduce CEC more than low CG.
It is still unclear, though, whether our results are transferrable across nations with
significantly different CG levels, such as China vs. the US. Furthermore, as to SOE’s
research streams, when testing and assessing SOEs’ performance and capital costs or
the privatization effect, researchers should also take the influence of CG into
consideration for achieving more detailed evidence.
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39
FIGURE 1
How XBRL Affects Cost of Equity(CEC)?
XBRL
Information
Environment
Disclosure Intermediation
Starting Point of our research:

Proxy: Proxy:
(?)
(+) Behavior Stock Price CEC
Corporate High FRQ Response
Governance
Low IA coscosts (-)
coscosts
(-)
ID of SOE (?) (?)

Dominant
Sharehold NSOE
ers
Interior Exterior
Notes:
 One point of (+) means that XBRL improves FRQ as evidenced by prior research
40
 Two points of (-) means that XBRL decreases IA and information processing
costs as evidenced by prior research
 Three points of (?) indicates uncertain results after XBRL adoption that we
hypothesize and attempt to investigate
Appendix A
APPENDIX A
Key Variable Definition
Variable Name Description
rDH The cost of equity estimated based on Dhaliwal et al. (2005).
rCL The cost of equity estimated based on Claus et al. (2001).
XBRL Indicator that equals one if the observation time of cost of
equity is after a firm’s initial XBRL filing, and zero
otherwise.
Size Natural log of total asset at the previous fiscal year end.
Mb Market-to-book ratio, defined as (market value+ total asset-
book value of common equity)/total asset, at the previous
year end.
Lev Leverage, defined as total debt, divided by total asset, at the
previous fiscal year end.
Beta Beta indicates systematic risk ,measured by using five-year
daily return data from CSMAR which is tradable
capitalization-weighted.
Lngrow 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.
Lndisp Natural log of analyst forecast dispersion estimated as the
standard deviation of analysts’ one-year-ahead EPS forecasts
in the previous year.
Size Log of total assets in the year.
The standard deviation of the firm’s rolling five-year cash
flows from operations, scaled by total assets.
The standard deviation of the firm’s rolling five-year sales
revenues, scaled by total assets.
Opera The log of the sum of the firm’s days accounts receivable and
days inventory.
NegEarn The firm’s proportion of losses over the prior five years.
Soeperc Percentage of state-owned shares
Soeperc2 Square of percentage of state-owned shares
41
AccrualQuality AccrualQuality is one of our financial reporting quality
measure which is used in Francis et al. (2004), equal to the
standard deviation of firm j’s estimated residuals. Large
values of AccrualQuality means poor accrual quality.
Smoothness Smoothness is one of our financial reporting quality measure
which is used in Francis et al. (2004), equal to the radio of
firm j’s standard deviation of net income divided by lagged
total assets, to its standard deviation of cash flows from
operations divided by lagged total assets. Large values of
Smoothness means less earnings smoothness.
DA DA is one of our financial reporting quality measure which is
used in Espinosa et al. (2007) and Gietzman et al. (2005).
Earn Earnt is calculated by yearly income before extraordinary
items ,scaled by market value at the end of year t-1
TA total accruals measured by Espinosa and Trombetta.(2007)
and Gietzmann and Ireland (2005)
Re Re is the cost of equity capital measured by CAPM model.
Rm Rm is the expected market return is defined as yearly return of
stock indexes.
Rf Rf is risk-free rate, measured as one-year deposit interest rate.
Appendix B
Appendix B
Corporate Governance System
Index Description
Ownership Top1 Percent of shares held by dominant shareholder
Structure (%).
S-index Percent of shares held by top 10 shareholders
except top 1 shareholders.
SOE/NSOE SOE=1 for state owned enterprises and 0
otherwise.
Board Bdceoshare Bdceoshare=1 for director board or CEO with
Governance shares of employed firm and 0 otherwise.
DDR Ratio of independent directors in director board.
Bosunum Total number of director board and supervisory
board.
Managerial Dividend Dividend=1 if cash dividends are paid in year t
Behavior and 0 otherwise.
Lnsalary Logarithm of managerial salary.
Disclosure Auop Audior Opinion of yearly financial reports.
AHB AHB=1 for firms issuing H shares or B shares
and 0 otherwise.
42
Big Big=1 for firms audited by big four
international and 0 otherwise.
Ethics Ethics Volume of donation in year t.
43
Table 1
Table 1
Sample Selection and Sample Size
Panel A: Selection Procedure
XBRL Effect on Cost of Equity Analysis(rDH)
Samples with A shares from 2005 to 2011 in SH & SZ stockmarkets 10709
Less: Samples in finance industry 440
Samples without Code ID in CSMAR and WIND 1265
Samples not meeting data requirements for analysis 6086
Samples selected for analysis 2,918
Corporate Governance Analysis
a
FRQ Analysis(smoothness)
a
Panel B: Sample Size
Year XBRL effect on Cost Corporate FRQ
of Equity Governance Analysis(smoothness)
Analysis(rDH ) Analysis No. of Observations
No. of Observations No. of Observations
-3 414 275 484
-2 552 385 479
-1 505 299 50
0 207 119 20
1 396 229 99
2 473 411 84
3 371 724 74
Final Sample 2,918 2,442 1,290
(No. of Firm
Years)
44
Table 2
Table 2
Panel A :Descriptive Statistics of Main Variables
XBRL=0 XBRL=1 Diff T-statistic
Variable Mean. Std. Median Mean. Std. Median
rDH 0.169 0.004 0.128 0.146 0.003 0.118 -0.023 -4.900***
rCL 0.560 0.024 0.588 0.513 0.010 0.526 -0.047 -1.897*
Mean 0.140 0.129 0.085 0.103 0.100 0.070 -0.037 -9.635***
Size 21.231 0.024 21.148 21.741 0.029 21.569 0.510 13.518***
Mb 1.915 0.024 1.647 2.210 0.038 1.753 0.038 6.561***
Lev 0.447 0.005 0.443 0.495 0.005 0.505 0.048 7.305***
Beta 1.075 0.007 1.096 1.047 0.005 1.076 -0.028 -3.393***
Lngrow 0.094 0.020 0.010 -0.052 0.022 -0.097 -0.146 -4.971***
Lndisp -0.043 0.015 0.064 -0.204 0.022 0.057 -0.161 -6.009***
Panel B :Pearson Correlations among Key Variables

Variable XBRL rDH rCL Mean Size Mb Lev Beta Lndisp Lngro
s w
XBRL 1.00
rDH 0.04* 1.00
rCL -0.02 - 1.00
Mean -0.15* - - 1.00
Size 0.19* 0.02 -0.05 -0.0003 1.00
Mb 0.26* 0.01 0.01 -0.0505* -0.28* 1.00
Lev 0.18* 0.01 -0.02 0.0620* 0.24* -0.18* 1.00
Beta -0.00 -0.01 -0.00 0.0002 0.13* -0.14* 0.04* 1.00
Lndisp 0.12* -0.02 -0.02 0.0641* 0.27* 0.04* 0.01 0.03* 1.00
Lngrow -0.03* -0.01 -0.02 0.0001 0.01 -0.13* -0.03 0.05* 0.12* 1.00
*, **, *** indicates significant at the 0.10, 0.05 and 0.01 level, respectively.
All variables are defined in Appendix A.
45
Table 3
Table 3
Effect of XBRL adoption on the Cost of Equity(CEC)
Panel A: Effect of XBRL on CEC under three-year Pre- and Post-test Design
Variables DH Model CL Model Mean(DH and CL)
Const 0.07 -0.25 .1460
(1.33) (-2.77) *** (3.32)
XBRL -0.06 -0.03 -.0172
(-6.53) *** (-2.06) ** (-2.18) **
Size -0.000 -0.01 -.0042
(-0.22) (-3.53) *** (-2.12) **
Mb -0.002 0.003 -.0038
(-0.97) (1.14) (-2.45 ) **
Lev 0.10 0.06 .0399
(8.22) *** (2.72) *** (3.59) ***
Beta 0.04 0.002 .0094
(3.96) *** (0.13) (1.08)
Lngrow -0.01 -0.017 .00168
(-2.55) ** (-3.53) *** (0.74)
Lndisp -0.01 0.077 .0135
(-2.73) *** (1.93) * (4.55)
Industry Effects Yes Yes Yes
Year Effects Yes No Yes
Adj.R2 0.051 0.014 0.035
*,**,***indicates significant at 10 percent, 5 percent, and 1percent levels, respectively. T-statistics
are in parentheses.
The dependent variables are alternative measures of the cost of equity. The sample period is from
2005 to 2011. All regressions include the year and industry indicators.
46
Panel B: Effects of XBRL adoption on the CEC in Short- and
Long-term Period
Variables Three-year Two-year one-year
pre-and pre-and pre-and
post-test post-test post-test
Const 0.07 0.078 0.258
（1.18）（2.83）***
(1.33)
XBRL -0.06 -0.120 -0.005
（-8.95）*** （-0.27）
(-6.53) ***
Size -0.000 -0.001 0.000
（-0.45）（0.05）
(-0.22)
Mb -0.002 -0.006 -0.013
（-2.46）** （-3.12）***
(-0.97)
Lev 0.10 0.117 0.098
（7.25）*** （4.63）***
(8.22) ***
Beta 0.04 0.034 -0.001
（2.66）*** （-0.06）
(3.96) ***
Lngrow -0.01 -0.001 0.006
（-0.41）（1.14）
(-2.55) **
Lndisp -0.01 -0.006 -0.010
（-1.74）* （-2.53）**
(-2.73) ***
Year Effects Yes Yes Yes
Industry Effects Yes Yes Yes
Adj.R2 0.051 0.097 0.1361
*,**,***Denote significance at 10 percent, 5 percent, and 1percent levels,
respectively. T-statistics are in parentheses.
The dependent variables are the cost of equity capital(CEC) measured by DH model.
All regressions include the year and industry indicators.
47
Table 4
Table 4
Corporate Governance Scores
Dimension Index Score 2005 2006 2007 2008 2009 2010 2011
Top1 -0.089 -0.068 -0.052 -0.002 0.017 0.033 0.026
score% 0.816 1.226 2.349 0.062 -1.025 2.613 0.499

Ownership
Sindex -0.032 -0.021 -0.012 -0.005 0.000 0.002 0.015
Structure
score% 0.297 0.374 0.549 0.139 0.016 0.152 0.296
SOE/NSOE -0.012 -0.008 -0.006 -0.004 0.001 0.004 0.005
score% 1.218 1.739 3.186 0.323 -1.089 3.078 0.886
Bdceoshare -0.026 -0.018 -0.017 -0.007 -0.001 0.004 0.014
score% 0.239 0.318 0.765 0.214 0.056 0.343 0.276

Board
DDR 0.064 0.044 0.030 0.006 -0.009 -0.021 -0.020
Governance
score% -0.581 -0.782 -1.371 -0.184 0.551 -1.626 -0.378
Bosunum -0.032 -0.019 -0.011 -0.006 -0.003 0.005 0.015
score% -0.052 -0.123 -0.093 0.211 0.809 -0.883 0.178
Dividend 0.004 0.013 0.016 -0.005 -0.007 -0.006 -0.001

Managerial
score% -0.035 -0.225 -0.728 0.153 0.429 -0.470 -0.012
Behavior
Lnsalary 0.003 0.013 0.020 -0.001 0.000 -0.005 -0.006
score% -0.064 -0.463 -1.645 0.185 0.408 -0.840 -0.133
Auop 0.015 0.008 0.002 -0.003 -0.004 -0.002 -0.002
score% -0.133 -0.150 -0.111 0.102 0.262 -0.155 -0.039
Disclosure AHB -0.002 0.000 0.002 -0.002 -0.002 0.001 0.001
score% 0.018 0.005 -0.084 0.045 0.108 0.078 0.013
Big -0.001 0.000 0.006 -0.005 -0.008 -0.004 0.005
score% -0.102 -0.153 -0.449 0.282 0.871 -0.355 0.069
Total Score -0.109 -0.056 -0.022 -0.034 -0.016 0.013 0.052
This table shows the corporate governance scores. We divide the corporate governance system
into 5 dimensions with ethics included. Principle Components Analysis shows that the ethics is
48
less important than the other 4 dimensions, i.e. Ownership Structure, Board Governance,
Managerial Behavior, and Disclosure.
All variables are described in Appendix B.
Score% is the percentage and contribution direction of every index’s score,divided by total
scores .If one index’s score has the opposite sign with total scores, Score% of this index is
negative.
49
Table 5
Table 5
Effects of XBRL Adoption on the CEC under Different Levels of corporate
governance (CG)
Variables (0,25%) (0,50%) (50%,100%) (75%,100%) (0,100%)
Const -0.149 0.113 0.080 0.135 0.095
(-1.31) (1.41) (1.08) (1.32) (1.74) *
XBRL -0.032 -0.028 -0.067 -0.068 -0.049
(-1.24) (-1.53) (-4.15) *** (-3.03) *** (-4.02) ***
Size -0.011 -0.002 -0.002 -0.004 -0.002
(-2.09) ** (-0.48) (-0.59) (-0.86) (-0.69)
Mb 0.002 -0.001 0.005 0.003 0.002
(0.43) (-0.44) (1.52) (0.68) (0.77)
Lev 0.130 0.121 0.099 0.084 0.111
(4.81) *** (6.04) *** (4.99) *** (3.12) *** (7.9) ***
Beta 0.027 0.033 0.059 0.065 0.044
(1.21) (2.00) ** (3.82) *** (3.08) *** (3.92) ***
Lngrow -0.004 -0.010 -0.008 -0.009 -0.009
(-0.66) (-2.39) ** (-1.79) * (-1.73) * (-3.06) ***
Lndisp -0.007 -0.004 -0.013 -0.014 -0.009
(-1.05) (-0.75) (-3.49) *** (-2.89) *** (-3.17) ***
Cov 0.014
(1.16)
XBRL*Gov -0.025
(-1.68) *
Year Effects No No No No No
Ind Effects No No Yes Yes Yes
Adj.R2 0.058 0.0411 0.073 0.092 0.055
are in parentheses.

The dependent variables are the cost of equity measured by DH model based on Dhaliwal et al
(2005). All regressions include the year and industry indicators.
(0,25%),(0,50%),(50%,100%),(75%,100%) refer to the different levels of the corporate
governance scores.
50
Table 6
Table 6
Effects of XBRL adoption on the CEC in SOEs and NSOEs
Panel A: Regression Results of State Ownership and CEC within SOEs and Effects of XBRL
Adoption on CEC in SOEs and NSOEs
Variables SOEs State-owned(SOE) Non state-owned(NSOE)
Const 0.091 0.095 -0.007

(0.95)
(0.95) (-0.05)
XBRL -0.136 -0.121 -0.108

***
(-6.69)
(-6.19) *** (-4.75) ***
Soeperc -0.002
(-1.94) *
Soeperc2 2.28E-5
(1.94) *
Size -0.002 -0.003 0.002

(-0.31)
(-0.63) (0.42)
Mb 0.002 0.003 -0.005

(0.51)
(0.74) (-0.97)
Lev 0.110 0.116 0.169

***
(4.5)
(5.02) *** (6.46) ***
Beta 0.045 0.042 0.054

**
(2.46)
(2.44) ** (2.54) **
Lngrow -0.008 -0.007 -0.010

(-1.59)
(-1.55) (-1.55)
Lndisp -0.012 -0.012 -0.003

(-2.31) **
(-2.51) ** (-0.54)
Years Effects Yes Yes Yes
Industry Effects No No No
Adj.R2 0.0734 0.063 0.079
51
are in parentheses.
The dependent variables are The dependent variables are the cost of equity measured by DH
model based on Dhaliwal et al (2005). All regressions include the year and industry indicators.
The first column is the regression result of the state ownership and cost of equity within the SOEs,
we find it is not the linear relationship. The second and third columns are the different effects of
XBRL adoption on the CEC in SOEs and matched NSOEs overall.
Panel B: Effects of XBRL adoption on the CEC in SOEs with low Corporate Governance
and Matched NOEs

Variables SOE NSOE
Const 0.037 0.170
(0.22) (1.16)
XBRL -0.120 -0.137
(-3.53) *** (-4.37) ***
Size 0.001 -0.007
(0.2) (-1.08)
Mb -0.009 0.003
(-1.19) (0.45)
Lev 0.143 0.119
(3.53) *** (3.39) ***
Beta 0.031 0.058
(1.01) (2.18) **
Lngrow -0.009 -0.006
(-0.94) (-0.87)
Lndisp -0.001 -0.007
(-0.13) (-0.98)
Year Effects Yes Yes
Industry Effects No No
Adj.R2 0.0643 0.0636
*,**,***indicates significant at 10 percent, 5 percent, and 1percent levels, respectively.
T-statistics are in parentheses.
In Panel B ,SOEs are the samples of SOEs in low level of corporate governance(CG),NSOEs
are matched pair after controlling for size and industry.
52
Table 7
Table 7
Descriptive Statistics and Pearson Correlation Matrix on FRQ
Panel A: Descriptive statistics
XBRL=0 XBRL=1
Variables Mean Std Median Mean Std Median DIFF t-statistic N
AccrualQuality 0.109 0.002 0.093 0.090 0.001 0.075 -0.019 -10.935*** 5393
Smoothness 2.011 0.465 0.488 0.971 0.084 0.430 -1.041 -1.874* 4773
DA 0.095 0.002 0.065 0.089 0.002 0.061 -0.006 -1.948** 4736
Size 9.357 0.012 9.331 9.557 0.010 9.494 0.200 12.312*** 5393
0.054 0.001 0.038 0.050 0.002 0.036 -0.004 -1.914* 5393
0.181 0.006 0.117 0.166 0.007 0.113 -0.015 -1.408 5393
Opera 2.197 0.011 2.167 2.151 0.009 2.125 -0.046 -3.147*** 5393
NegEarn 0.137 0.005 0.000 0.105 0.003 0.000 -0.033 -6.121*** 5393
Earn 0.024 0.079 0.023 0.030 0.057 0.027 0.005 3.122*** 7281
Ret 0.787 1.522 0.035 0.312 0.424 0.212 -0.476 -17.088*** 7281
*,**,***indicates significant at 10 percent, 5 percent, and 1percent levels, respectively.
Panel B: Correlation Matrix

Variables Accrual XBRL Size Opera NegEarn
Quality
AccrualQuality 1.00
XBRL -0.14* 1.00
Size -0.26* 0.16* 1.00
0.36* -0.05* -0.30* 1.00
0.12* -0.05* -0.04* 0.33* 1.00
Opera 0.16* -0.03* -0.17* 0.22* -0.21* 1.00
53
NegEarn 0.31* -0.08* -0.35* 0.34* 0.12* 0.11* 1.00
*denotes significant at the 5 percent level.
54
Table 8
Table 8
Effect of XBRL adoption on the FRQ
Variables Accrual Quality Smoothness DA Timeliness
Const 0.155 10.39223 .099467 -0.111
(10.615) *** (1.980) ** (3.630) *** (-7.132) ***
XBRL -0.008 -1.227 - 0.007 -0.006
(-5.492) *** (-2.17) ** (-2.13) ** (-3.227) ***
Size -0.011 -1.091255 -0.002 0.018
(-7.433) *** (-2.11) ** (-0.76) (11.580) ***
0.337 -4.291 -0.004 0.079
(16.667) *** (-0.67) (-0.20 ) (4.166) ***
0.012 0.307 -0.004 0.011
(2.165) ** (0.220) (-0.90) (2.255) **
Opera 0.010 0.507 0.004 -0.005
(5.987) *** (0.900) (2.140) ** (-3.187) ***
NegEarn 0.057 -1.074 0.003 -0.133
(13.365) *** (-0.67) (0.33) (-29.629) ***

Year Effects Yes No Yes Yes
Industry Effects No Yes Yes No
Adj.R2 0.197 0.098 0.011 0.182
are in parentheses.
This table presents the effect of XBRL adoption on the accrual quality, smoothness, discretionary
accruals and timeliness. The variables are from 2005 to 2011. All regressions include the year and
industry indicators.
55
Table 9
Table 9
Descriptive Statistics and Pearson Correlation Matrix on CAPM model
Panel A: Descriptive Statistics
XBRL=0 XBRL=1 N
Variables Mean Std Median Mean Std Median DIFF t-statistic
Re 0.733 1.783 0.968 0.216 0.024 0.125 -0.517 -38.789*** 2371
Beta 1.045 0.006 1.077 1.056 0.015 1.060 -0.011 -0.696 2371
Rm 0.710 1.623 0.967 0.219 0.021 0.125 -0.491 -41.279 2371
Year 2005 2006 2007 2008 2009 2010 2011
Rf 0.023 0.023 0.032 0.039 0.023 0.023 0.033
XBRL=0 0.026 0.039 XBRL=1 0.026

Panel B: Pearson Correlation Matrix
Variables XBRL Re Size Mb Lev Beta Lndisp Lngrow
XBRL 1.000
Re -0.623* 1.000
Size 0.245 * -0.092* 1.000
Mb 0.173 * -0.227* -0.190* 1.000
Lev 0.143 * -0.054* 0.223 * -0.180* 1.000
Beta -0.055* 0.107* -0.048* -0.192* -0.009 1.000
Lndisp -0.144* 0.050* -0.062* -0.129* 0.093* 0.037 1.000
Lngrow -0.164* 0.049* 0.235* -0.070* -0.038 0.011 -0.003 1.000
***,** and * indicate statistical significance at the 1%, 5% and 10% level (two-tailed),
respectively.
This table shows the descriptive statistics of variables in CAPM model and pearson correlation
matrix of variables to test the effect of XBRL on the cost of equity capital(CEC).
56
Table 10
Table 10
Effect of XBRL adoption on CEC Measured by CAPM
Variables CAPM model
Const 1.100
(5.82)***
XBRL -1.656
(-47.95)***
Size -2.527
(-3.00)***
Mb -7.761
(-11.54)***
Lev -4.459
(-0.97)
Beta 1.735
(0.48)
Lngrow -1.118
(-1.04)
Lndisp 1.767
(1.73)*
Industry Effects Yes
Years Effects No
Adj.R2 0.578
respectively.
This table presents the effect of XBRL adoption on the CEC with the measure of CAPM. The variables
are from 2005 to 2011. All regressions include the year and industry indicators.
57
Table 11
Table 11
Effects of XBRL adoption on the CEC measured in CPAM model in different
levels of corporate governance(CG)
Variables High CG Low CG
Const 1.322 0.766
(2.80) *** (1.69) *
XBRL -1.855 -1.393
(-19.81) *** (-17.88) ***
Size -3.312 -1.203
(-1.56) (-0.59)
Mb -9.342 -3.634
(-5.79) *** (-2.67) **
Lev .534 -6.463
(0.05) (-0.59)
Beta -12.384 3.654
(-1.38) (0.43)
Lngrow -1.302 -3.361
(-0.52) (-1.29)
Lndisp -1.038 1.190
(-0.42) (0.69)
Years Effects YES YES
Industry Effects NO NO
Adj.R2 0.5611 0.5523
The dependent variables are the cost of equity measured in CAPM model. All regressions include
the year and industry indicators.
58
Table 12
Table 12
Effects of XBRL adoption on CEC measured by CPAM model in SOEs and
NSOEs
Variables SOE NSOE
Const 1.135 3.475
(1.78) * (5.36) ***
XBRL -1.990 -1.929
(-19.48) *** (-19.92) ***
Size -3.658 -11.928
(-1.31) (-4.15) ***
Mb -8.520 -10.961
(-3.97) *** (-4.80) ***
Lev 10.686 29.496
(0.79) (2.31) **
Beta 2.551 49.732
(0.24) (5.44) **
Lngrow -1.562 -6.874
(-0.55) -2.10**
Lndisp .176 3.427
(0.07) (1.10)
Years Effects Yes Yes
Industry Effects No Yes
Adj.R2 0.5493 0.5835

The dependent variables are the cost of equity measured by CAPM model. All regressions include
the year and industry indicators.
59
Table 13
Table 13
Effects of XBRL adoption on CEC on the levels of corporate
governance(Stepwise Regression)
Variable Model
Const 0.124
(2.07)**
XBRL -0.047
(-3.87)***
Sindex 0.001
(4.29)***
Bosunum 0.001
(2.36)**
Lnsalary -0.00
(-2.047)**
Size -0.000
(-0.07)
Mb 0.001
(0.60)
Lev 0.106
(7.55)***
Beta 0.047
(4.20)***
Lngrow -0.008
(-3.02)***
Lndisp -0.009
(-3.21)***
Years Effects No
Industry Effects Yes
Adj. R2 0.064
All variables are defined in Appendix A and Appendix B.
The dependent variables are the cost of equity measured by DH model. All regressions include the
year and industry indicators. The levels of corporate governance are measured by the stepwise
regression.
60

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How XBRL Affects the Cost of Equity Capital?

Evidence from Emerging Market1

Songsheng Chen, School of Management and Economics,

Wenying Li, School of Management and Economics,

Donglin Wu, School of Management and Economics,

Acknowledgements: We thank professor Liyan Wang, Lina Wu from Peking

chain – the intracompany environment – represented by corporate governance (CG)

and the dominant shareholder identity.

State-owned identity has a nonlinear relationship with CG – state-owned enterprises

CG levels reduces more than that of NSOEs.

be extracted automatically or combined into computers and analytical software. Users

standardize the preparation, publishing, and exchange of financial information in the

world (Boritz and No 2008).

XBRL was developed in 1998 by Charles Hoffman, and in 2002, XBRL

Apostolou and Nanopoulos 2009)..

XBRL implementation on IA and thus CEC has yielded inconsistent results.

long-term ,period and to explain these conflicting conclusions. According to the

promotion destination of XBRL implementation, we initially hypothesize that XBRL

adoption decreases CEC.

Prior research has assessed XBRL’s impact on CEC primarily by looking at

effect of CG on CEC is the same as that of XBRL on CEC, we further hypothesize

China has a unique business ownership structure, with many state-owned

non-state-owned enterprises (NSOEs), which impacts investors’ perceptions and leads

government guarantee, which negatively affects CEC, we hypothesize that state

XBRL implementation is significantly different for SOEs and NSOEs.

[Insert Figure 1 here]

To test our hypotheses, we obtain firm-year observations from 2005 to 20111

has a U-shaped relation to CEC. In China, SOEs generally experience a greater

capital asset pricing model (CAPM); a market-based method, to measure CEC; 1)

testing whether XBRL improves FRQ, measured by timeliness, accrual quality,

Section II of our paper introduces XBRL adoption and develops hypotheses;

summarization and conclusions are in Section VI.

II. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

2.1 Why China?

We choose China for our research because it is leading developing countries in

adopting and deploying XBRL in financial reporting, by having a mandatory program

is sure to become increasingly important to global investors.

Supervisory Boards, are often inefficient, with undeveloped operations, providing a

IA. Therefore, the intracompany environment in China provides a representative

perspective to assess how XBRL adoption affects CEC.

2.2 XBRL and CEC

2.2.1 Earnings Quality, IA, and CEC

disclosure quality ((Leuz and Verrecchia 2004).A fundamental role of accounting

information in financial markets is to serve as a basis for capital allocation

established that an increase in information quality leads to a decline in CEC (Lambert

attributes of earnings quality and finds a negative relationship between earnings

consequently reduce the cost of capital (Florou and Pope 2012).

determinant of CEC. In their model, uninformed investors face an undiversifiable risk

that arises from asymmetric information; an increase in the amount of private

only when the reduction in asymmetry is accompanied by an increase in the average

level of information precision.

in their ability to process earnings-related information, poor earnings quality can

result in differentially informed investors and exacerbate IA (Diamond and Verrecchia

document an inverse association between disclosure quality and bid-ask spreads.

trade (PIN) measure.

2.2.2 XBRL Impact

Since XBRL provides investors with an effective way to prepare, publish,

by improving information disclosure quality and decreasing information processing

resulting in more demand from investors. Therefore, if XBRL adoption leads to an

XBRL adoption results in a significant reduction in CEC by reducing investors’

information processing costs. We use China Data to investigate whether, in China,

and hypothesize the following: