Validation of an XBRL-based measure of structural complexity: evidence from amendments to Rule 12b-2 of the Exchange Act

Lima e Alves, Denis ORCID:, Gietzmann, Miles and Marques, Ana ORCID: (2024) Validation of an XBRL-based measure of structural complexity: evidence from amendments to Rule 12b-2 of the Exchange Act. In: European Accounting Association Annual Meeting, 2024-05-15 - 2024-05-17.

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Understanding how to identify a robust measure of the the complexity of financial statements is an ongoing research question. Methods that have recently gained some popularity, apply advances in natural language processing. This research shows when such text based methods fail. In contrast, this research builds upon recent advances in digital reporting using eXtensible Business Reporting Language (XBRL) filings and estimates the informational content of financial statements as measured by their entropy levels. Rather than focusing on text, this approach concentrates on the structure of the chart of accounts of reporters. Early research in this area used counts of customized XBRL tags to measure complexity. This research shows why that approach also falls to capture important elements of complexity. The measure proposed here has its origins in Shannon's well known measure of information entropy and accounts for the way XBRL standard setters influence what chart of accounts companies adopt.The way XBRL is implemented to file standardized digital reports determines complexity. We show how our measure of complexity gives rise to empirical support to recent theoretical research that argues that the relationship between reporting complexity and abnormal returns is non linear. To provide further validation for our measure we focus upon the Securities and Exchange Commission's (SEC) 2018 changes to the definition of Smaller Reporting Companies (SRCs). The intended purpose of the regulatory change was to reduce a claimed unnecessary reporting burden on smaller companies. We are able to show that removing the burden gave rise to an opportunity cost. As reporting costs for companies fell the entropy of reported statements rose, meaning that the uncertainty investors faced when valuing those firms increased. Thus although the policy change aimed at decreasing direct reporting costs for companies it is possible that the magnitude of opportunity valuation costs could lead companies to voluntarily continue to report at the higher pre SRC regulatory levels. We report evidence of this effect.

Item Type: Conference or Workshop Item (Paper)
Uncontrolled Keywords: 3* ,/dk/atira/pure/researchoutput/REFrank/3_
Faculty \ School: Faculty of Social Sciences > Norwich Business School
UEA Research Groups: Faculty of Social Sciences > Research Groups > Accounting & Quantitative Methods
Related URLs:
Depositing User: LivePure Connector
Date Deposited: 17 May 2024 15:30
Last Modified: 17 May 2024 15:30

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