Product Market Competition and Management Forecast: Evidence from the XBRL Adoption

• In Event: Doctoral Student-Faculty Interchange: Financial Reporting II

Abstract

In this paper, we provide new results on the interplay of product-market competition with management forecast accuracy. The recent regulation regarding the adoption of XBRL (eXtensible Business Reporting Language) is a natural experiment that allows us to investigate a number of interesting questions on management disclosure and product market competition. Using the adoption of XBRL as an exogenous shock to information acquisition costs, in a difference-in-difference and regression discontinuity design framework, we find a number of interesting results about management disclosure decisions. We find that the likelihood of voluntarily adopting XBRL, the accuracy of management’s disclosure, and the percentage of forecasters are higher in less competitive industry due to the relatively small disclosure-related costs and high entry-barriers. We also find that firms with high investment spending and bad news create a better information environment. Overall, our results suggest that a less competitive industry leads to more disclosure and thus a better information environment. Firms in less competitive industry have relatively lower information acquisition costs of outsiders and higher barriers to entry. These results may help to reconcile conflicting views of previous theoretical and empirical research.

Authors

• Joon Ho Kong, Fordham University

• Sris Chatterjee, Fordham University

• Sudip Gupta, Fordham University