How XBRL Affects the Cost of Equity Capital? Evidence from Emerging Market

Abstract

This study, by using a natural link engine-XBRL, examines the direct and indirect linkages between financial reporting quality (FRQ) and cost of equity capital (CEC) and checks how XBRL affects CEC from the perspective of intracompany environment, represented by corporate governance, dominant shareholders identity and firm age, the characteristics of which can further substantiate the direct and indirect linkages between FRQ and CEC. Using a one-group pre- and post-test design and Path Analysis, we predict and find that XBRL reduces CEC and contribute to higher strength of direct linkage between FRQ and CEC by improving FRQ, compared to the strength of indirect linkage that is mediated by information asymmetry (IA) by decreasing IA. This result is verified when we choose intracompany environment to check how XBRL affects CEC. Findings show that high levels of corporate governance indicating good financial reporting quality (FRQ), state-owned enterprises (SOEs) and younger firms indicating high information asymmetry can be observed more reduction in the effect of XBRL adoption on CEC.