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

In 2009, the U.S. Securities and Exchange Commission (SEC) mandated all registrants to file their 10-K and 10-Q in an interactive format using the eXtensible Business Reporting Language (XBRL). The SEC adopted a phase-in implementation policy: the first phase started in 2009 and required companies with a worldwide public equity float of at least $5 billion to implement XBRL-based financial reporting; the second phase for all other large domestic filers with a public equity float of more than $700 million took effect in 2010; and the last phase took effect in 2011 with smaller reporting firms required to report financial data in the XBRL format.

XBRL is intended to help external users of financial statements access, extract, compare, and screen financial information in a more accurate and efficient fashion at virtually no extra cost. The SEC claims that the use of XBRL for financial reporting should lead to a significant reduction in information processing costs to a variety of external users of financial statements, including equity investors, financial analysts, credit providers, regulators, and tax authorities.

However, it has been very controversial, from a policy perspective, whether small public firms should adopt XBRL for financial reporting. In 2014, the House Financial Service Committee overwhelmingly supported the bipartisan Small Company Disclosure Simplification Act that would exempt small public firms with less than $250 million in annual revenue (roughly 60% of U.S. public companies) from XBRL requirement for five years. The bill died in the previous session of Congress but was reintroduced in 2015. The U.S. House of Representatives passed the bill in February 2016 but the White House has already issued a veto threat.[1]

Proponents of this bill argue that this is an example of a regulation where the costs of compliance outweigh potential benefits for small, innovative firms. Opponents of the bill disagree and argue that small public firms have been filing in XBRL format for a few years since 2011 which makes them well up the learning curve, and the bill could impede their access to the capital markets, thereby increasing the cost of external financing.

In our recent working paper, we examine whether the XBRL-induced reduction in the information processing costs to outside information users affects managerial decision to engage in aggressive tax avoidance. The use of XBRL for financial reporting makes it less costly for investors and regulators to detect excessive tax avoidance. As such, it increases the detection risk of excessive tax avoidance and thus dampens managers’ incentive to engage in such behavior.

Focusing on small firms and using different econometric methods and research designs to triangulate the results, the authors find that XBRL implementation leads to a significant decrease in tax aggressiveness in the post-adoption period. Although this study alone cannot resolve the policy debate on the cost-benefit tradeoff of XBRL implementation for small firms, its result sheds light on a real effect of XBRL adoption on mitigating small firms’ aggressive tax behavior.

The results further show that the implication of XBRL adoption for aggressive tax reporting is not uniform across small firms. To the extent that XBRL reduces investors’ and regulators’ information processing costs and mitigates the information asymmetry between managers and external users of financial statements, the effect of XBRL adoption on constraining managers’ tax aggressiveness is more pronounced for firms with weaker external monitoring. In addition, information processing costs are more critical in a less competitive information environment. Accordingly, XBRL-induced reduction in information processing costs results in a larger decrease in tax aggressiveness when there is less competition over information among the firm’s investors.



The preceding post comes to us from Jeff Chen, Assistant Professor of Accounting at Leeds School of Business at the University of Colorado Boulder, Hyun A. Hong, Assistant Professor of Accounting at the University of California, Riverside A. Gary Anderson Graduate School of Management, Jeong-Bon Kim, the J. Page R. Wadsworth Chair Professor at the School of Accounting and Finance at the University of Waterloo, and Ji Woo Ryou, Associate Professor at The University of Texas Rio Grande Valley’s School of Accountancy.  The post is based on their paper, which is entitled “Information Processing Costs and Corporate Tax Aggressiveness: Evidence from the SEC’s XBRL Mandate” and available here.