The Impact of Competition on Information Transparency: A Study of Inflation Pass-Through

• In Event: Spillover effects on disclosure

Abstract

We show that firms with low monopoly power pass inflation on to customers slowly, which suppresses cost information and exacerbates adverse selection in the financial market. Using detailed industry-level data from the Bureau of Labor Statistics (BLS), we develop a novel measure of the extent to which product prices will be adjusted in response to shocks to input material costs. We document two stylized facts based on this measure. First, competitive industries are much less flexible than monopolistic industries to adjust prices upward. Second, inflation significantly increases the information asymmetry between firms and outside investors in competitive industries. A multi-period model with both time- and state- dependent price adjustments is consistent with our findings.

Author

• Jin Xie, Chinese University of Hong Kong