Risk & Compliance

Will XBRL Improve Analyst Coverage?

If more companies filed financial documents using XBRL, analysts would be able to spend less time on data collection and would be likely to ''expan...
Marie LeoneJune 13, 2006

Monday’s Securities and Exchange Commission roundtable on interactive data provided further opportunity for Christopher Cox to support XBRL (eXtensible Business Reporting Language). This method of tagging financial data, said the SEC chairman in a speech last December, “will do for business reporting what bar coding did for product distribution.”

Put another way, XBRL simplifies the manipulation, analysis, and comparison of data in corporate financial reports, helping companies to attract and retain investors and providing comfort to lenders. Roundtable participants — who represented companies, mutual funds and other investors, banks, credit-rating agencies, and analysts — also suggested that more-widespread use of XBRL would help secure additional analyst coverage for small and midsize companies.

If more companies filed SEC documents using XBRL, analysts would be able to spend less time on data collection and would be likely to “expand buy- and sell-side coverage,” said panelist Trevor Harris, vice chairman of client services at Morgan Stanley. Christopher Whalen, managing director of consultancy Institutional Risk Analytics, agreed that XBRL opens up the possibility of more coverage of smaller companies.

Whalen also posited that as more companies adopt XBRL, software vendors will heed the call of the market and develop tools that will encourage investors to perform their own customized analyses. Soon after, he believes, these new tools will be ubiquitous, available through on the web, through investor organizations, even from corporate investor-relations departments.

True, Whalen continued, this do-it-yourself approach wouldn’t offer analyst commentary, but it would provide much more information than currently available outside professional sell-side coverage. “The analyst model is so broken now,” he insisted, that many broker-dealers may “get out of the publishing business” and move analysts into the “transaction business,” where more profits are available.

Harris also mused that when XBRL is fully adopted, retail investors will be able to examine several comparable companies at once and highlight “differences, gaps, and inconsistencies” that previously may have gone unnoticed.

For its part, the SEC is running a pilot program in which 20 companies, including Xerox, Pepsi, and General Electric, are filing their financial statements using XBRL. On Monday, the commission also announced the beta version of a new search tool for its EDGAR (electronic document, gathering, analysis, and retrieval) database. Available on the SEC website, the tool allows users to access up to two years’ worth of corporate filings.