Do Accounting Disclosures Impair Disclosing Firms’ Competitiveness? Evidence from Mergers and Acquisitions

• In Event: Voluntary Disclosure - Non-Earnings Information

Abstract

Do accounting disclosures induce competitors to take actions that impair disclosing firms’ competitiveness? The answer to this question is important because this proposition is the primary reason that some managers oppose (but regulators advocate) the idea of expanding mandatory disclosures, and because it underpins a long-standing literature on the proprietary cost hypothesis of voluntary disclosures. Surprisingly, there is little empirical evidence that directly documents whether disclosure adversely affects firms’ competitiveness. To answer this question, we capture firm-level variation in product market competition by using the product similarity measure developed by Hoberg and Phillips (2016). Using M&A-related disclosures provided by firms that engage in M&A, we find that disclosing firms experience a disproportionate increase in the competition they face as measured by product similarity subsequent to M&A transactions relative to non-disclosing M&A firms. Cross-sectional analyses reveal that the effect of M&A-related disclosures on disclosing firms’ product similarity is more pronounced when the firms achieve greater product differentiation in the year of an M&A. We also document that rivals of disclosing firms are more likely to engage in an M&A transaction in the following year relative to rivals of non-disclosing firms, and that competition between an acquirer and rivals increase both when the acquirer discloses and when rivals conduct M&A. Collectively, our results suggest that M&A-related disclosures have an adverse impact on disclosing firms’ competitiveness in product markets.

Authors

• Jaewoo Kim, University of Rochester

• Daniel W Collins, University of Iowa

• Heejin Ohn, University of Iowa