Contracting Incentives, XBRL Adoption, and Accounting Conservatism: Empirical Evidence in a European Context

Abstract

This study aims to explore how XBRL adoption affects conditional conservatism and moderates the financial leverage and conditional conservatism relationship. Using the financial data between 2000 and 2022 for 332 listed firms in Belgium, Spain, and Denmark, the empirical results, first, demonstrate that financial leverage positively influences conditional conservatism. The results also reveal that XBRL adoption has a negative impact on conditional conservatism and negatively moderates the positive effect of financial leverage on conditional conservatism. The results overall imply that XBRL adoption reduces the impact of contracting incentives on conditional conservatism. In this regard, the results suggest that XBRL adoption substitutes for the contractual role of conditional conservatism. The results contribute to the ongoing discussion regarding the influence of technological developments on financial reporting systems, and they are expected to have important implications for managers, potential investors, creditors, and regulators.