Information Processing Costs and Corporate Tax Aggressiveness: Evidence from the SEC's XBRL Mandate

Abstract

Using the SEC’s XBRL mandate as a natural experiment, this study investigates the causal impact of XBRL-induced reduction in information processing costs on corporate tax avoidance. Motivated by the recent debate in the U.S. Congress over the cost-benefit of mandatory XBRL adoption for small-cap firms, our analysis focuses on small firms with relatively high information frictions. We predict and find that XBRL adoption leads to a significant decrease in tax avoidance in the post-adoption period for our sample of small firms. We also predict and find that the effect of XBRL reporting on tax avoidance is more pronounced for firms with higher information asymmetries and with less competition over information among outside stakeholders. Overall, our results suggest that XBRL-induced reduction in information processing costs to outside stakeholders leads to a significant change in the cost and benefit of tax avoidance and this change differs across firms with different information environments.