Does XBRL adoption reduce information asymmetry?

a r t i c l e i n f o Keywords: XBRL Information asymmetry Corporate disclosure Firm size Korean stock market This paper examines whether or not XBRL (eXtensible Business Reporting Language) adoption reduces information asymmetry in a stock market context. Student t-tests and multiple regression analysis were employed to examine the effect of XBRL adoption on information asymmetry in the capital market. A significant and negative association exists between XBRL adoption and information asymmetry, which implies that the adoption of XBRL may lead to the reduction of the information asymmetry in the Korean stock market. In addition, the effect of XBRL adoption on reducing information asymmetry is stronger for large-sized companies than for medium-sized and small-sized companies. Based on these findings, the demand for XBRL-enabled applications and services in the capital market is expected to grow while governments should promote XBRL adoption for business reporting. Many companies use the World Wide Web (WWW or web) as one of the primary means for reporting corporate information (Debreceny and Gray, 2001). The content of corporate information on the web is not very different from financial disclosures on paper-based documents. This content has been standardized for human review, not for automatic location, acquisition, arrangement and classification. Information is hard to find unless one knows which form to search and the data in those forms cannot be downloaded into spreadsheets or other application software (SEC (U.S. Securities and Exchange Commission), 2006). As a result, corporate information on the web cannot adequately meet the demand of stakeholders for various analyses of corporate data. Additional technical components must be deployed that support the decision-making capabilities of stakeholders and XBRL (eXtensible Business Reporting Language) is an approach to achieve this. XBRL is one variant of XML (eXtensible Markup Language) for business reporting. XBRL defines financial data on the web with explicit semantics in a machine-readable format, making automated data analysis possible. Adopting XBRL facilitates communications among market players and enhances the quality of stakeholder decisions. Business reporting in the XBRL format is also important to filing companies. If a company provides financial reports in a high-quality, standard format, investors are likely to appraise the company as less risky. This could lead to the decrease of capital cost and the increase of the firm's stock price. Diamond and Verrecchia (1991) report that if the level of disclosures is increased, the level of information asymmetry is decreased, …