Proprietary Costs, Agency Costs, and the Heterogeneity in the Economic Consequences of Mandatory Disclosure

• In Event: Securities Regulation - III

Abstract

Using the change in segment reporting rules from SFAS 14 to SFAS 131 and a sample of lobbying firms, I test the effect of the mandated increase in segment disaggregation on firm profitability to examine whether involuntary disclosure of proprietary information due to regulation affects the disclosing firm’s competitive position. I find that firms that lobby against the new standard on the grounds that “it would put them at a competitive disadvantage” tend to be profitable, small, growth companies and that they experienced, relative to control firms, a deterioration in operating performance after the adoption of SFAS 131. This effect is more pronounced for small firms that have limited ability to aggregate segments and for firms that face high competition. Interestingly, the remainder of the lobbying firms that resist the new rule but do not use competitive harm as reasons experienced an improvement in operating performance and internal capital allocation efficiency after the adoption, consistent with agency costs motivating the segment aggregation under the old rule. The results lend support to concern about competitive harm but also suggest that firms with different motives to withhold information are differentially affected by an accounting regulation once disclosure becomes mandatory.

Author

• Ying Zhou, University of Connecticut