Multidimensional Competition and Corporate Disclosure

Abstract

Abstract:In this paper, we argue that the influence product market competition exerts on disclosure is defined by the combined effect of the incentives and disincentives to disclose raised by the multiple competition dimensions. We distinguish between firm-and industry-level competition measures, and we hypothesize that the former raises agency and proprietary costs, whereas the latter creates incentives to disclose either to fulfil the owners' need for information to monitor managers or to deter the entrance of new competitors in the industry. Our research design allows for non-monotonic relationships between competition and disclosure as well as for interactions between competition dimensions. Using a sample of US manufacturing companies, we gather evidence that is consistent with our hypotheses. First, we find an inverted U-shape relationship between corporate disclosure and a firm's abnormal profitability, which is suggestive of firms being reluctant to disclose when they are underperforming (outperforming) their rivals because of the fear of unveiling agency conflicts (raising proprietary costs). Second, we observe a U-shape relationship between corporate disclosure and industry profitability, although this U design evolves to approximate a rising function as the protection provided by entry barriers increases.

Product market competition and earnings management: A firm‐level analysis

“…Muino and Nunez‐Nickel () examine the effects of competition at the firm and industry levels and relate competition to firm disclosure. They focus on the amount of information that firms provide to investors, particularly firms’ decisions on segment information disclosure.…”

“…Muino and Nunez‐Nickel () employ firm profitability (price–cost margin) and industry profitability as competition measures. Firm profitability allows the authors to examine the impact of competition on the amount of segment information disclosed by individual firms.…”

“…This paper is closely related to Markarian and Santalo (), who employ a standard index of industry concentration to proxy for market competition. Another related paper is Muino and Nunez‐Nickel (). They use firm and industry profitability as competition measures and find non‐monotonic relationships between competition and disclosure of segment information .…”

“…Muino and Nunez‐Nickel () is related to our paper in that both papers focus on firm disclosure to investigate the influence of competition. Also, both papers examine product market competition at the firm level and find that competition within an industry could have a different impact on firm disclosure than the industry‐level competition.…”

Industry competition and non-GAAP disclosures

“…The margin evaluates the price output versus factor input, and reflects product substitutability, or the ability of the firm to earn rents above the industry competitors due to a lack of substitute products or successful marketing strategies. Following Muiño and Núñez-Nickel (2016) we compute the firm's price-cost margin as the ratio sales/(sales -operating income). We then standardize the firm's margin by subtracting the industry mean and dividing the difference by the industry standard deviation.…”