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«Elizabeth Blankespoor University of Michigan Stephen M. Ross School of Business blankbe January 2012 Abstract This paper examines the ...»

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6. Conclusion I examine the impact of investor information processing costs on firms’ disclosure choice. Using the adoption of XBRL detailed tagging requirements as an exogenous shock to anticipated investor information processing costs, I find that firms increase their quantitative footnote disclosures upon adoption of XBRL detailed tagging requirements. I use non-adopting firms as a benchmark to control for marketwide changes in disclosure, and I find that the results of increased disclosure hold in this difference-in-difference design. Furthermore, I examine several firm and investor characteristics that cause variation in investor information costs, and I show that the increase in XBRL firms’ disclosure is greater for firms with information that is inherently more costly to process: firms operating in multiple industries, firms with more volatile earnings, and firms with more disperse analyst forecasts.

I also show that the increase in XBRL firms’ disclosure is smaller for firms with a more sophisticated investor base that has inherently lower processing costs (i.e. more analyst following and greater institutional holdings). Together, these results provide evidence that firms increase their detailed, quantitative disclosure in response to anticipated reductions in investor information processing costs.

I make three main contributions to the literature. First, I contribute to the disclosure choice literature by providing empirical evidence of managers adjusting the amount of disclosure they choose to provide because of an anticipated decrease in investor processing costs and thus change in investor response to disclosure. Second, I contribute to the information processing costs literature by showing how investor information processing costs can impact a fundamental disclosure choice of firms. Third, I provide evidence for regulators of an unintended consequence of cost-decreasing regulation.

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