Reporting Technologies and Textual Readability: Evidence from the XBRL Mandate

Abstract

The eXtensible Business Reporting Language (XBRL) can standardize numerical disclosures and make it easier for computers to process and compare financial reports. This perceived benefit of XBRL has prompted the U.S. Securities and Exchange Commission to mandate that public firms must submit financial statements in the XBRL format as part of their financial reports. Leveraging the research opportunity created by the XBRL mandate, we examine whether financial reporting technologies affect how firms construct textual disclosures. We find that the initial adopters’ HTML-formatted annual reports become harder to read after the XBRL mandate. Further analysis reveals that this effect is concentrated among adopters with more quantitative disclosures, a smaller firm size, or a higher level of financial complexity. Importantly, we show that managers’ reduced attention to preparing HTML-formatted annual reports, rather than increased disclosures, is likely the explanation for this decrease in textual readability. We also find that the negative effect on textual readability persists at least in the subsequent year. Our findings suggest that the XBRL adopters need to pay attention to process optimization and technology enablement to mitigate the possible negative effect of XBRL adoption on the readability of financial reports.