Management Accounting Section Midyear Meeting

Do Mandatory Disclosures Affect a Firm’s Decision to Contract with Outside Suppliers?

• In Event: Cost Structure

Abstract

This study investigates whether disclosure regulation influences firms’ contracting decisions with outside suppliers. When contracting with outside suppliers that provide value through their knowledge or expertise, we expect that firms will consider the potential cost of leaked proprietary information provided on whether to contract with outsiders on professional services or rely on in-house experts. We use contracts between publicly traded U.S. firms and patent law firms to test our hypothesis, using a quasi-natural experiment that influences the costs of contracting with a patent law firm (i.e., potential information leakage) while holding constant the benefits of the contract (i.e., knowledge gained). As expected, firms that face decreased (increased) potential costs associated with the change in the underlying information environment are more (less) likely to contract with a patent law firm. Further, we find that the change in the propensity to contract with a patent law firm is more (less) pronounced for firms facing weaker (greater) technological competition. Taken together, our evidence supports the notion that changes in the information environment due to changes in disclosure regulation affect firms’ incentives to contract with outside suppliers.

Authors

• In Gyun Baek, National University of Singapore

• Mary Lee, University of Utah